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The European banking system is in a better position now than it was ten years ago owing to the fact that it has more capital, higher liquidity, a sounder capital base and fewer non-performing loans (which have been halved in ten years). Can we rest easy?
Until now, the European banking system has held up well, allowing firms to start out along the inevitably rocky path to recovery, but the crisis is still in a delicate phase. As confirmed by ECB staff working on the macroeconomic projections, we are faced with radical uncertainty. The truth is we don’t know what the landing point of the current situation will be or if there will be a second wave of contagion and containment measures. If there is a second wave, it would certainly end up having far greater repercussions on banks’ balance sheets. That’s why we are launching a vulnerability assessment to look at how banks’ balance sheets would be able to perform in different scenarios.
What is the verdict on European banks?
There continues to be structural weakness because the sector has been burning capital for ten years. The reasons for this can be discussed at length. There is definitely a lack of restructuring. I think it's useful to make a comparison with the situation in the US. After the Lehman Brothers crisis, there was rapid consolidation: over 450 banks closed in just four years, with consolidation operations at the federal level. By contrast, in Europe, there has been piecemeal public funding by individual States, some consolidation, but only at the national level. Profitability has remained very low and this has an impact on market valuations, with the listed European banks on average capitalising 30% of their book value.
How can this be addressed?
There are various measures that can be taken and they are largely in the hands of banks’ management. We recommend that banks should go back to attracting investors and boosting their capacity to generate capital. And this applies to all the euro area countries even if situations differ. Some banks are on the right path, while we have asked others to change direction.
Does the Italian banking system rank lower than the European average?
It is not out of step, because it has been strengthened both in terms of capital and non-performing loans (NPLs). In this way, its capital strength has increased, approaching the average for European banks. There are still structural limitations: low profitability, high costs, lack of investment in advanced technologies or reliance on obsolete systems. I’d like to add that the work on cleaning up balance sheets is not yet complete. In Italy, NPLs stand at 6.7%, compared with an average of 3.2% in the euro area.
Will the residual problem of low profitability worsen as a result of this severe recession?
Yes, undoubtedly.
Where have we got to with European banking union?
The cup could be considered half full or half empty. I prefer to see it as half full. It’s true that banking union hasn't been completed, but a lot has been done. Compared with 2009, there has been a considerable leap in terms of quality and timeliness. The European authorities have assured a rapid, effective and unified response to the state of emergency. Banking union is functioning, even if some aspects do not allow for a genuinely European response to the crisis.
Which aspects?
The institutional framework will be complete with the creation of the European Deposit Insurance Scheme and the implementation of the backstop for the Single Resolution Fund. So long as there is no integrated safety net, the market will remain fragmented at the level of individual countries. The majority of assistance in response to a crisis tends to be national in nature, produces local outcomes and contributes to a dangerous dependency between State and banks. In 2010-13 there were situations in which States became distressed as a result of taking measures to support the banks, for example Spain and Ireland, while in others the difficulties were transmitted from the country to the banks, as happened in Greece and Portugal. The dependency between State and banks is a vicious cycle that causes cracks and unevenness in the conditions of access to credit, fragility of the banking system and distortion of competition.
Can you give an example?
Loans to firms with similar characteristics can end up costing more in northern Italy on the border with Austria than they do in Austria itself, even within what is a very small geographical area. Greater integration helps, as it does for example in the United States, where a full banking union redistributes the risks among US states and prevents customers, i.e. households and businesses, being worse off in some states than in others.
Will the post-coronavirus (COVID-19) era present an opportunity for mergers and acquisitions, diversification, cost-cutting and changes to business models, both at the national and cross-border level?
It can be nothing other than this, because the public health emergency has reduced and continues to reduce profit margins.
Will you play a role in this?
We can do, but we need to take a broader view to see how much can be done in the legislative domain and by other authorities, in particular for cross-border mergers. The regulatory impediments to an integrated management of capital and liquidity at the European level should be removed. We are about to launch a public consultation on the way in which we assess mergers. In particular, we will set out how we assess the sustainability of the business model, the system of governance and the management of risks, the capital that the new entity will be required to hold compared with the merging entities, and the treatment of any badwill arising from the operation. I noticed that there was a widespread belief that the ECB was negatively disposed towards consolidation, with some suggesting that we would discourage merging parties by imposing higher capital requirements. This is not the case, as will be confirmed by guidelines that we plan to issue soon. They will clarify a number of fundamental issues and ensure transparency and predictability.
What is your view of the offer made by Intesa Sanpaolo for Ubibanca?
The ECB gave a preliminary green light to the operation a few weeks ago, because in our view it meets the criteria that we were called upon to assess. Since this is a process that is ongoing and is subject to the assessment of other authorities, I can’t say any more on the subject, although in general we take a favourable, albeit cautious, view of mergers.
How do you view a situation in which a private shareholder holds a large percentage of the capital of an investment bank? Could this be a factor contributing to instability?
You are referring to another assessment that is currently under way. In this case, our evaluation has only just started and it will take us some weeks to complete the process. We look carefully at any significant change in the ownership structure of a bank, always with a view to the sound and prudent management of the bank.
Does the ECB think there is a risk of some Italian banks ending up in foreign hands in this period of economic weakness?
I don’t think this is specific to Italy. Consolidation at the national level is viewed positively, but there may, and should, be mergers at the cross-border level, making the European banking system more integrated.
How do you view the biodiversity of the banking system? Is it important that small and medium-sized banks survive? What role should they play?
Don’t misunderstand me: we are not pushing for consolidation at all costs. The biodiversity is a strength, provided that there is adequate competence, technology and profitability. No one is planning to push for a single model or for scale.
As part of the set of measures to counter the coronavirus crisis, prudential requirements have been relaxed with regard to the granting of credit. Is this proving to be effective?
Our first impression is that it is. In both March and April, banks tightened their credit conditions to a much lesser degree than they did during the 2009 crisis, also owing to timely support measures on the part of monetary policy and banking supervision.
Nevertheless, some banks are not increasing their lending to firms because they don’t know when the supervisory authorities will tell them to return to the prudential requirements applicable to normal lending activities. Can you say anything on that?
We have said clearly that we will allow sufficient time. But it’s true that banks are asking for clarity on the timing of a return. It’s likely that we will give an indication of the path to post-crisis adjustment sometime in July.
Will you also give a time frame for the suspension of dividends and share buy-backs?
Yes, the banks have asked us to provide clarity on this as soon as possible. These are temporary and exceptional measures that are designed to be removed as soon as there is greater certainty.
Is it possible to give a first assessment of the decisions relating to dividends?
I think this measure was absolutely necessary, and if it hadn’t been in place, we would have seen around €30 billion of capital leave the banking system at a difficult time.
The prudential rules imposed on banks (requiring higher capital and lower NPL ratios) have been one of the factors constraining lending in recent years. These rules have now been relaxed or suspended, precisely to encourage lending in this period of emergency. Will everything go back to the way it was before, or has Europe learned that too many rules weigh on lending?
I think the opposite is true. The response to the pandemic crisis has demonstrated that the rules introduced since 2009 have worked, and they are working well. Their effect has certainly been positive. It is because of these rules that the system is now in a position to withstand a crisis of such proportions.
Will the pandemic-related recession result in an increase in NPLs? Is there really a risk that they might double, rising from €500 billion back up to €1,000 billion?
It is difficult to make any kind of prediction at this point, but it is inevitable that the situation will deteriorate. The banks will need to be careful, especially those that haven’t had major problems with NPLs over recent years and don’t have experience with the guidelines applied by the ECB.
Could the increase in NPLs after the crisis re-emerge as a problem for certain countries, or are we likely to see isolated cases affecting individual banks?
The pandemic is a symmetric shock that has affected all European countries, and the support measures at the European level have been the same for all banks. At the national level, by contrast, the subsidies and guarantees offered to banks’ customers have varied significantly from country to country, ranging from 2% to 40% of GDP. The divergence in the support provided will thus mean that the impact on banks will differ from one country to the next. Without integrated policies at the European level, there will be further market fragmentation, contrary to the objectives of banking union.
Are the smaller banks the ones that will have the biggest problems?
It depends. Generally speaking, the smaller European banks have strong capital bases and higher liquidity levels. The impact they feel will depend on their degree of exposure to the sectors most affected by the crisis, such as the tourism, catering and transport sectors, rather than on their size.
Is it true that exposure to the credit card business has been affected more by the pandemic in terms of defaults on loans to small and medium-sized enterprises?
Consumer credit is one of the most affected segments worldwide. In the United States, a lot of attention is being paid to the risks being run by banks with greater exposure to the credit card business, with the authorities having asked for more robust provisioning. In Europe, the segment is less significant and concerns are not as great, but we are still keeping an eye on it.
To what extent are government loan guarantees working?
This was the right choice to make which, combined with the other support measures introduced by the monetary and supervisory authorities, has sought to avoid the destruction of production capacity.
Is a European bad bank needed to offset positions?
It is too early to discuss this. I am still convinced that the measures taken in Germany, Spain, Ireland and Slovenia after the 2008 crisis have been particularly helpful in enabling banks’ balance sheets to be cleaned up more quickly and effectively. Among other things, if properly managed, bad banks don’t generate losses. Better still, they can even make a profit. Everything depends on how the crisis develops. We hope there won’t be a need for a European bad bank.
Is it true that Brussels is pushing back against the creation of a European bad bank? Is Germany against it?
There is a lot of misinformation around. The truth is that it is not being discussed.
Will asset management companies at the national level be used to clear the spike in NPLs after the pandemic?
I don’t feel able to make any predictions at the moment. To have a clearer overview of the impact of the crisis on banks’ balance sheets, we are conducting a vulnerability assessment, the results of which will be published next month.
Another outstanding issue is system modernisation, from the technologies in use to digitalisation. The pandemic has shown that, thanks to remote working and branch closures, the most technologically advanced banks have an extra gear. What position are the Italian banks in?
It’s not a question of nationality. There are banks that have invested and others that are lagging behind. Banks with board members with a higher level of IT expertise have made more progress. We are putting pressure on other European banks that rely on old and obsolete IT systems to change them.
Is cyber security becoming more of a problem?
We are focusing a lot of energy on it, running targeted inspection programmes. There is no evidence that the pandemic has made things worse. The banks have been successful in working remotely without any significant increase in cyberattacks. Outsourcing services are a source of particular concern; they are concentrated in the hands of a small number of operators, and are often decentralised in emerging economies. The lockdown has not made as much of an impact as we feared it might, although it remains a hot topic: we will continue to look at it closely and discuss it with the banking community.
Money laundering remains widespread. How are you dealing with it?
We are not responsible for anti-money laundering controls. But it is also true that such illicit flows of money have led to bank failures, such as in Latvia. Money laundering, which benefits from the fragmentation of national authorities, can compromise banking stability. We are in favour of greater integration of the rules and of allocating the related supervisory tasks to a European body.
The German savings bank system is based on a network of mutual guarantees between participants, which are sometimes unsatisfactory. At what stage are the measures you introduced?
We are always reluctant to discuss specific cases – and, talking of which, letters that should have remained confidential have appeared in the press. We are holding talks with the umbrella organisation and asking for a series of adjustments to be made to their system, because compliance with certain requirements is a prerequisite for obtaining the benefits deriving from exemptions from some of the rules. The final assessment of the ECB and the national competent authority (BaFin), which oversees the smaller banks, is expected in July.
Italy has not yet fully transposed into national law the European legislation on the fit and proper assessment of members of a banks’ management body and their possible dismissal. The implementing regulation is missing. How long is this expected to take?
That’s not a question for me. We have asked the Italian authorities on numerous occasions to address this issue, but to no avail. It is a major cause for concern, because Italian law has not been in line with European regulations for many years and it lacks the solid foundation required to ensure that a bank’s board members are fit and proper, which is an essential safeguard for sound and prudent bank management. This makes our job more difficult and is a gap that must quickly be filled.