Guntram B. Wolff
Director and CEO, German Council on Foreign Relations
Chair of the Supervisory Board of the Single Supervisory Mechanism,
VIDEO & AUDIO RECORDINGS
At this event Danièle Nouy and Guntram Wolff discused the main operations and political challenges that the Single Supervision Mechanism faced since its birth five years ago.
As a starting point, Danièle Nouy recalled the start-up style take-off of the SSM, with the ECB has a kind of ‘incubator’. The building of the new institution has not been easy, but is gained respect and effectiveness thanks to its fair approach. Beyond the operation side, the SSM was set up in a time where the European banking system was still considered as intrinsically fragile. At the same time, many legislations were implemented to consolidate this banking system, that help the SSM in his supervisory task, notably towards the most reluctant entities. International regulation for governance had to be implemented amid this challenging environment. What is more, political pressure to clean up the European banking system was important. Danièle Nouy conceded that she was not accustomed to, and did not expect such a resistance from the industry side. However, she righteously mentioned that the actors of the banking system now should judge with gratefulness the work done by the SSM. One difficult challenge was to deal with the too fragmented regulatory framework: the SSM had to wok on harmonization, notably thanks to its tools.
Ms Nouy did a balanced analyze of the current state of health of the European Banking system, mentioning some strong improvements, such as the high and rising reserves held by the European banks (14% of CET1 in 2018, higher than the 12% they held two years ago and 11% in 2015). However, she underlined that some clouds remain. The profitability of European bank clearly appears as the weak point (with a Return On Equity as low as 7%, due to non-performing exposure and losses to clean the balance sheets. The banks use now their buffer to clean their balance sheets, which is a good thing.
Regarding the overall evolution of the European banking system, Ms. Nouy is concerned by the fact that certain actors feel that some deregulation is needed, which she disagrees. The rigor of the regulation on the supervision should not in any case by lowered. Credit risk, leverage finance behaviors are rising, and this has to be closely monitored. Regarding the profitability of the banks, it can be due to an excess of offer in banking services, and that’s a bit worrisome. Fintechs can take part of the market, which is not a good news. Guntram Wolff recalled that Amazon and other actors did not yet really took a significant share of the market, but both agreed that their extent is credible. Therefore, a definition of a bank is essential. Consolidation-wise, the SSM does not see it for the moment, since risk-appetite form successful bank remain low. However, Ms. Nouy is convinced that there will be some consolidation at some point. Operations submitted for approval to the SSM have to be closely assessed, notably regarding possible externality to the stability of the European Banking system. The framework for the SIFIs, that use size as a defining characteristics, can also play a role in refraining bank in their appetite to acquire competitors. While answering to the question of the audience, the speakers mentioned the particularly challenging experiences with the Greek crisis, and the Latvian money-laundering scandal. In the Latvian case, the national judge did not have enough ground to interpret the EU directive and therefore to liquidate the given bank.
As a conclusion, questioned on the suitable enhancement of the SSM, Ms. Nouy would welcome to have delegation framework in regulatory texts, since at the moment the SSM is one of the few regulation agencies in the world to not have delegated powers.
Event notes by Antoine Mathieu Collin