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Danièle Nouy, Chair of the Supervisory Board of the ECB
[...] One of the most prominent issues we dealt with in 2016 was non-performing loans, or NPLs for short. And NPLs will remain a top priority for some time to come. So far, the good news is that NPLs in the euro area declined by €54 billion to a level of €921 billion between the third quarters of 2015 and 2016. As a result, the ratio of NPLs shrank from 7.3% to 6.5%. Still, in some Member States, NPLs remain a big issue. They weigh on the profitability of banks and limit their ability to finance the economy. [...]
Another major project that we launched is the targeted review of internal models, or TRIM for short. Many banks use internal models to determine how risky their assets are. Risk-weighted assets in turn form the basis for calculating capital requirements. That makes internal models highly relevant from a prudential point of view.
[...]TRIM will assess how robust and reliable the banks’ internal models actually are. The goal is to ensure that the calculation of risk-weighted assets is driven by actual risks rather than by modelling choices.
To be sure, our goal is not to increase risk-weighted assets across the board. However, we may see risk-weighted assets increase for some banks. Altogether, TRIM will help enhance the soundness of internal models and thereby make them more credible. And it will help to level the playing field for banks in the euro area. At the same time, TRIM will contribute to a more stable banking sector.
[...] Another issue is that, in some countries, banking sectors are still highly fragmented. [...] This is where the banking union comes into play. The aim of the banking union is to provide the foundation for a truly European banking market, one in which we would also see cross-border mergers. [...]
Sabine Lautenschläger, Vice-Chair of the Supervisory Board of the ECB
[...] To ensure stability, we need a global approach to regulation. That’s why the Basel framework is so important. And that’s why we have to finalise the Basel III reforms as quickly as possible.
By now, solutions for many issues have been put on the table. At the end of the day, Basel III can only be adopted as a package – the Basel Committee is close to reaching an agreement, however. In that context, we welcome the G20’s commitment to finalising Basel III.
Going from the global to the European level, we very much welcome the current review of the European legislative framework. The European Commission has made proposals on how to adapt and amend the relevant laws.
The ECB will publish an official opinion on these proposals in May. And personally, I see many good things in the proposals.
First, they are in line with the global approach, as they transpose some global standards, such as the Leverage Ratio, into European law.
Second, they support the idea of the banking union, as they allow for capital and liquidity waivers within a banking group on an EU cross-border basis.
And third, they strengthen the principle of proportionality, as they seek to reduce the regulatory burden on smaller banks.
Of course, there are also things that might need to be reflected on further.
First, while supervisors need to be able to act quickly and flexibly, based on their expertise and judgement, some of the proposals seek to put a tight frame around supervisory actions. That would limit our ability to adapt our actions to the ever-changing financial industry – an industry that always looks for the best deal and seizes any chance to arbitrage the rules – rules that cannot be adapted as quickly as banks test their limits.
And second, there is still room to further harmonise the rules – for instance with regard to national options and discretions.
[...] The EU and the UK have not started negotiating yet. Still, both banks and supervisors must prepare for any potential scenario. For the banks, it is mostly about market access.
Many UK banks rely on the European passport to operate in the single market. The passport gives them access to the entire single market as long as they are established in an EU country. In the event of a “hard” Brexit, they might lose this passport and would have to seek another path into the single market.
The most obvious option would be to obtain a banking licence in an EU country in order to regain the passport. It is the ECB that grants licences in the euro area. And to be clear: we will only grant licences to well-capitalised and well-managed banks.
We will not accept empty shell companies. Any new entity must have adequate local risk management, sufficient local staff and operational independence. To enable banks to comprehensively comply with our requirements, we will grant bank-specific phase-in periods. In doing so, we will take into account the business activities and the risk profile of each bank.
We will be cautious of regulatory and supervisory arbitrage, and we will not take part in a race to the bottom in that regard. That’s why we will keep a close eye on how banking groups structure their euro area entities.
Some banks might want to use a complex and diverse set-up, adapted to the range of activities they plan to pursue in the euro area.
Many incoming banks might plan to establish significant or less significant credit institutions, or to expand already existing ones. These banks would either be directly supervised by the ECB or by the national competent authorities under the common European supervisory approach of the ECB.
Some banking groups might also consider using a third-country branch for part of their banking business. Third-country branches are subject to banking supervision, but at the national level and according to national standards. And these standards can greatly differ from one country to another. Some national supervisors, for instance, oblige third-country branches to have capital and liquidity of their own; others do not.
All this runs counter to the idea of a level playing field in the euro area. It is an invitation to banks to engage in regulatory or supervisory arbitrage. Still, there might be a chance to address this topic as part of the current review of the European legislative framework that I have just talked about.
Brexit will bring major change. That much is clear. One thing will not change, though. The financial sectors in the UK and the EU will remain closely connected.
Ladies and gentlemen, we are prepared for any outcome of the negotiations, and the banks should be too. And let me assure you once again: as supervisors, we will not participate in a race to the bottom. After all, we all share an interest in having a stable banking sector – on both sides of the Channel. [...]