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In this boardroom dialogue, I want to look back and I want to look forward with you, Andrea. So a very warm, warm welcome and great to have you here. And it’s very strange for me to think that this is the last one. If you remember, your first appearance in the boardroom dialogue was in 2019, so we didn’t know that we would have both a pandemic and a war going forward. It is incredibly important to have an actual dialogue rather than just the sending of messages. And the understanding that you and your colleagues helped to bring helped us immensely. If we look back at your key supervisory task, at cleaning up banking balance sheets and non-performing loans – I see you haven’t forgotten and neither have I, but it seems always far away – is the peak of the non-performing loans a bad memory of the past or is it still simmering?
First of all, thank you very much for your kind words. I am humbled to hear all this positive feedback and I hope the last three months will be quiet. Yes, you are right. I remember when I was starting almost five years ago, there was still quite a significant focus on the need to complete the cleaning of the banks’ balance sheets. And I must say that today we can, collectively to some extent, celebrate the fact that indeed this process has been completed. We started with more than €1 trillion of non-performing loans (NPLs). It took a long time and it was painful. I know that when the European Central Bank (ECB) went forward with quite demanding expectations on non-performing loans, this was not a walk in the park, also in the dialogue with the banks. But eventually, I think that it was the right thing to do. I think that the banks played ball, and we are in a much different place today. We have an NPL ratio of 1.8%. If I remember well, the last figure was a little more than €300 billion. We have really made a lot of progress here. Is it the memory of the past? There were moments during these years in which we feared a new wave of non-performing loans, which didn’t materialise, luckily enough, for a number of reasons. One of these reasons was, of course, strong fiscal support, government guarantees. But I also think it is a lot of work that we have done – in the Single Supervisory Mechanism (SSM) and the banks – to strengthen internal risk controls. And I think that this, in my view, is the best legacy in terms of making sure that the next time around we won’t have the same piling-up of non-performing loans that we saw in the past. So I am quite reassured that this rather surgical work that we have done on internal controls, on different types of risks, will, I think, deliver a much stronger way of addressing these issues going forward.
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I agree with you. But now if we step to internal models and we remember from the Basel discussion that it was, of course, a core part of the discussion. Can we trust our models now? If you look at them all and the TRIM work you have done, do you feel that we are right and that they are close to realism?
It has been a huge work, no denying. It has been the largest project ever done at the ECB, both in terms of staff, resources and a huge effort also on the side of the industry. Very impactful. I have to be honest with you: there was a moment immediately after the great financial crisis when I, as many other people, was asking myself whether to go on with the internal models or not. I mean, they didn’t work well, there was a lot of noise, also on consistency across banks. The investment to repair it, both from the regulatory point of view and from the supervisory point of view, was huge. Now I am glad that we decided to embark on this journey. We did this huge process, and I think that eventually we managed to bring the models onto a much stronger footing. And I think we can trust them. To some extent, I am a bit saddened by the fact that our partners in the United States, our colleagues in the US authorities, decided, for instance on credit risk, not to use and not to rely any more on internal models for the determination of capital requirements. Of course, this work needs to move now to normal business supervision, and we are doing that. There is still a lot of work to be done to implement all the new European Banking Authority repair processes. But we are I think in a very strong place. In terms of engagement from the industry, I sometimes see that banks tend to complain about risk-weighted asset density being more favourable for the competitor or our process being excessively harsh on this bank or that bank. And sometimes I saw remarks that were trying to convey the impression that we were using the internal model inspections as a way to raise capital requirements through the back door. Honestly, I think we need to realise that we have developed a lot of expertise internally. We have on-site teams that go deep into the models. There is no hidden agenda. We are just trying to strengthen this important pillar of supervision. And the last point I want to make, which also requires a commitment from the industry side, is that we need to simplify the model landscape. We have too many models. Sometimes models are put in place just to spare a couple of basis points of capital on minor portfolios. This is huge work on the side of the industry, on the side of supervisors. I think we need to take the implementation of the final Basel package as an opportunity to go further in streamlining there.
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That is a clear message, which leads me to my next question, which can be explained either as a very innocent question or as slightly provocative, depending on how you see it. Because if you look at strengthening governance, do you feel that all the supervisory checks can be done effectively without dragging on business decisions? Some of us have gone to fit and proper tests, so you know where I’m going with this one. So I leave it to you to decide if you see it as innocent or slightly provocative.
I know that this is a delicate issue. But look at the Silicon Valley Bank and Credit Suisse cases. If you take the banks a few days before default, capital ratios were in a pretty decent place. The liquidity coverage ratio was not calculated for Silicon Valley Bank, but also from that point of view it was actually pretty solid. What was really wrong was the governance. If you take Credit Suisse, there was identification of a major failure in internal controls already by the bank itself, in its own independent report on Archegos in 2021. And still in 2023, a few days before the crisis basically, auditors were saying that the internal controls were not supporting the valuations. That was also impactful. It is clear that when you have governance and internal controls that are not in a proper place, there is no level of capital which is strong enough and good enough to prevent a crash. So when we see that, there is a need to do something from a supervisory point of view. But, of course, there is a difference between seeing a weakness in the capital position or the liquidity position and a weakness in governance. Of course, you cannot just intervene. This is something where the management and the boards need to take ownership. So we need to find ways to be effective in this area. It is not easy. We are developing a number of tools and a number of practices. We are trying to be very respectful of the working of boards. But when we see things that don’t work, we need to make clear that change is needed. When we see a business model is not sustainable, again we need to be able to intervene, and sometimes forcefully. And that is not easy, but we cannot avoid it. If you read the report of the Federal Reserve on Silicon Valley Bank, it’s clear that they were identifying one of the major issues, maybe identifying weaknesses, and were not able to escalate to enforcement fast enough. And we have, honestly, very much the same issue. If you look at our Supervisory Review and Evaluation Process (SREP), there have been a lot of findings on governance and a lot of recommendations on governance, and, after years sometimes, you find these recommendations reiterated and not yet properly addressed. We need to find ways to be more effective in that space...
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