28 November 2013

Q&A with Danièle Nouy, Chair-to-be of the ECB Supervisory Board

What would be the guiding objectives you will pursue during your five-year mandate as Chair of the Supervisory Board?

First, I will get the management style right from the very beginning, in particular because the SSM requires a much stronger integration of the central and national supervisory teams than the monetary policy or other functions of the ECB. I think that the single supervisory mechanism should start a “new age” for supervision in Europe, acting under the aegis of the ECB, in full respect of the separation principle between monetary policy and banking supervision. The SSM will be staffed with high quality, very European-minded supervisors recruited through a competitive process. This will ensure that the ECB is able to lead the supervisory process and work efficiently with national supervisors, which are a key component of the SSM. And last but not least, I am fully aware that the European Parliament has legitimate expectations, in terms of accountability and transparency. Meeting those expectations will be a very high priority in my agenda.  

How can financial institutions be forced/incentivised to reduce their risk appetite?

The SSM will ensure compliance with the prudential rules for financial institutions as set out in the EU single rulebook. Where deemed necessary and based on these harmonised European rules, the SSM has supervisory powers to require a financial institution to take the necessary prompt corrective measures to address relevant problems at an early stage, thereby reducing a financial institutions risk appetite.

What do you think of the financial supervisory draft legislative proposals currently debated in the European Parliament and the Council on the Banking Union and the single rulebook, namely the Single Resolution Mechanism, the Bank Recovery and Resolution Directive (BRRD), and the revision of the Deposit Guarantee Schemes Directive?

The SSM Regulation, the Single Resolution Mechanism, the Capital Requirements Directive and Regulation (CRR/CRDIV), the Bank Recovery and Resolution Directive  (BRRD) and the Deposit Guarantee Schemes Directive (DGSD) will together lead to the creation of a harmonised framework for supervision and resolution in the EU. These legislative files are at the core of establishing a level playing field in the EU. The establishment of the SSM and SRM are important to reinforce the way both supervision and resolution are conducted. I understand that the trilogue negotiations on the BRRD are progressing well. It is important that these negotiations are concluded swiftly and an agreement is reached by the end of this year. The Directive will provide national authorities with harmonised resolution powers and tools to orderly resolve banks across the EU. , I believe it is crucial to also proceed swiftly to establish a single system, single authority and single fund for resolution, which should be in place at the start of 2015. All legislators must live up to their responsibility to create a well-functioning Banking Union. Although the third element of a fully-fledged Banking Union is the establishment of a common system of deposit protection, realistically this is a more distant goal. A first important step should be taken with the prompt adoption of the Commission’s proposal to amend the Deposit Guarantee Schemes Directive.

What are your views about the proposal for a Single Resolution Mechanism, in particular in terms of scope, decision-making structure, composition and voting modalities of the Single Resolution Board, establishment and financing of a Single Resolution Fund, establishment of a backstop for the Fund, trigger for resolution?

The SRM is a necessary complement to the SSM. It is important that the levels of responsibility and decision-making for supervision and resolution are aligned at European level in order to achieve a well-functioning Banking Union. I welcome the Commission’s proposal for the Single Resolution Mechanism. This adequately reflects Europe’s priority in completing Banking Union. I support a broad scope, for the Single Resolution Mechanism encompassing all credit institutions established in Member States participating in the Single Supervisory Mechanism. The decision-making structure of the “Board” should ensure swift and timely decision-making. In terms of composition, no national authority should have a veto. The establishment of a Single Resolution Fund is essential to the mechanism. This should be financed by ex-ante risk-based contributions and be complemented by ex post contributions where necessary. A temporary, fiscally neutral, public backstop should also be available for the Single Resolution Fund. Regarding the trigger for resolution, the supervisor is best placed to assess if a bank is failing or likely to fail. The same applies regarding the criterion if there is a reasonable prospect that any alternative private sector or supervisory action would prevent the failure.

How will you ensure that monetary and supervisory policies are strictly separated, in particular in terms of staff, reporting lines and career paths in the ECB? What concrete measures will you take in this regard?

The effective separation of bank supervisory decisions and monetary policy is essential. That is reflected in the SSM Regulation, notably through the creation of a separate Supervisory Board. The supervisory departments in the ECB will be separate and dedicated to the supervisory work, functionally reporting to the Supervisory Board Chair. A set of internal rules will separate functions related to the supervisory sphere from thosepertaining to monetary policy also at working level drawing on the ECB’s documents and  records management systems and the ECB’s Confidentiality Regime. Thanks to all these safeguards, the conduct the ECB’s supervisory tasks will not be affected by the ECB’s responsibilities for monetary policy aimed at safeguarding price stability and vice-versa. 

How would you ensure that the planned asset quality review covers the whole part of the banking system under the supervisory responsibility of the SSM and not only the 130 institutions cited in the note regarding the comprehensive assessment?

The comprehensive assessment will cover 128 banks in the euro area covering around 85 per cent of total banking assets as requested in Article 33 para 4 of the SSM Regulation. The ECB is already coordinating closely with the EBA. The EBA issued a recommendation to all EU national authorities on the conduct of asset quality reviews (AQR) in 2013, but will not conduct its own exercise. The exercise is fully in line with the timeline and exercise of the ECB and provides common definitions for example on nonperforming loans and forbearance. On completion of the balance sheet assessment the EBA in close cooperation with the ECB will conduct a stress test.

In the absence of common backstop mechanisms and in order to ensure a smooth transition to a full-fledged Banking Union, do you have any views regarding the measures to be taken in the case that potential needs for capital arise from the asset quality review?

Credibility is crucial to the success of the Comprehensive Assessment. To underpin this, a thorough and robust methodology will be employed. However, carrying out a thorough and stringent exercise will in itself not be sufficient to dismiss the perception that European banks may have losses hidden on their balance sheets. Without credible backstop commitments in place in advance of the conduct of the comprehensive assessment, the outcome of the exercise will almost certainly be negatively perceived by market participants. The 15 November 2013 ECOFIN Council has reiterated the commitment of the June 2013 European Council that "all Member States participating in the SSM implement appropriate arrangements, including the establishment of national backstops ahead of the completion of this exercise". 

ECON-committee's full draft report containing Q&A

Daniele Nouy recommended as head of EU banking watchdog - Committee on Economic and Monetary Affairs

Daniele Nouy got the green light from the Economic and Monetary Affairs Committee on 5 December to chair the European Central Bank's Supervisory Board, the EU's newly-established watchdog tasked with directly overseeing the EU's largest banks as well as the work of national bank supervisors. The appointment of Ms Nouy, currently secretary-general of France's bank and insurance supervisory authority, was approved by 29 votes to 0, with 1 abstention. The committee's endorsement now has to be confirmed by the full Parliament next week.

Press release

ECON-report

Commenting on Nouy's supervisory role, Graham was quoted in the Reuters' article, ECB-supervisor promises to come clean on banks' health:

[Nouy's] job will be as political as it is technical. "She has to be a technical master and speak truth unto power", said Graham Bishop, an advisor to the European Commission.

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