Angeloni (Ecb): «Banks, new rules only for future NPLs»

di Alessandro Merli

Ignazio Angeloni (Imagoeconomica)

7' di lettura

How do you see the Italian banking system developing?
There's been a marked improvement in recent months. Not all banks are moving at the same speed, but the direction is the right one. Non-performing loans (NPLs) are declining significantly, both across the euro area and in Italy, also thanks to the actions of banking supervision and the economic pick-up. There have been numerous disposals of NPLs, some of them on a large scale. In addition, quite a competitive market is being created for these transactions.

You mention the progress made by Italian banks. However, now that things have finally improved, the new proposals [on NPLs] you made in early October, the addendum to the March guidance, risk adding a new element of difficulty.
I don't agree with that interpretation. In the first place, I have to stress that the addendum only concerns loans which will become non-performing in the future (from 2018 onwards), not stocks. The spirit of the proposal is to prevent banks, the economy, people, from being faced with the costs of a renewed build-up of NPLs. It seems that the problems we had in recent years due to the volume of non-performing loans in banks' portfolios are being forgotten too quickly. And then it should be borne in mind that the time to recovery of NPLs is often increasing as banks are not sufficiently active from the outset in initiating recovery procedures and in realistically assessing their potential. The specification to gradually cover unsecured claims over two years and secured claims over seven years creates incentives for banks to take action promptly. I don't rule out the possibility either that the countries most closely involved are striving to introduce or facilitate more effective and timely judicial and out-of-court procedures for debt collection and collateral liquidation. This action lies outside our competence, but would be a step in the right direction.


From many quarters, and above all from the President of the European Parliament, Antonio Tajani, in a letter that Il Sole 24 Ore published on 10-10-2017, there have been objections that supervision has overstepped the limits of its competence and put forward a proposal which is not in line with the indications of the European Parliament itself and the ECOFIN Council.
Article 16 of the Single Supervisory Mechanism Regulation provides that one of the instruments available under the second pillar concerns the prudential provisioning policy. The ECOFIN, in addition to recommending binding legislative measures, has provided that the supervisory authority may intervene with prudential instruments. According to our proposal, the banks will also have the possibility to explain why they consider it necessary to deviate from the timetable which we have suggested. Therefore, these are not mandatory requirements, but the burden of proof has been reversed. Our proposals therefore fall within our prerogatives and are in line with initiatives of the ECOFIN Council, as the Chair of the Supervisory Board has also made clear in a letter to President Tajani.

The controversy caused in Italy by the addendum is also due to worries that what is proposed for the new NPLs will then also apply to the stocks which, for Italian banks, are heavy. The communication according to which in the first quarter of 2018 you will deal with the treatment of stocks appeared to be evidence of that, and another source of uncertainty.
There is a clear distinction between flows and stocks. We haven't yet taken any decision on stocks. By the end of the first quarter we will make an assessment, which will be based on the still-to-be-completed analysis of the individual plans for the reduction of stocks submitted by each bank. Some of these plans may not be satisfactory. In the next few weeks we will send letters to banks with our evaluations, and this issue will be the subject of a dialogue with the banks themselves, on a case-by-case basis. Only at the end of this process will we see whether, in order to have a level playing field, it is appropriate to clarify our expectations also on the disposal of stocks.

But isn't there a risk of pushing the banks again into a state of emergency?
It's now time to move forward precisely because this phase is less critical and the weaknesses are easing. It is to be expected that, during the recovery, there will be fewer non-performing loans and that the resources to cover them appropriately will be created. More generally, I would like to remind you that the action of European banking supervision in recent years has been designed not only to reduce NPLs but also to increase the banks' capital strength. We did this with the aim of having healthy banks, with clean and transparent balance sheets, able to finance healthy, promising companies.

Some people in Italy think that Italian interests are not being defended with sufficient vigour in Europe. Who defends the interests of Italy at the ECB?
That's an issue that I understand was raised recently with regard to supervision, and I am surprised at how this is addressed, sometimes in an erroneous way. All the elements of the ECB's decision-making bodies – the Supervisory Board and the Governing Council – are bound by their mandate to pursue European objectives and interests. So if someone were to defend their national interests in those bodies, they would be breaking the law. Ensuring that the interests of all parties taking part in the Single Supervisory Mechanism (participating countries, banks) are properly taken into account, countering all risk of bias, is another matter altogether. This is a duty to which we are all bound. The best way to achieve this objective is to avoid nationalistic or antagonistic positions taken on principle, which involve a loss of credibility, and insist instead on decisions and rules that are transparent and balanced for all. Agreeing on the rules by working from the inside is also the best way to have an opportunity to change them, if necessary.

The Vice-President of the ECB, Vítor Constâncio, has said that when the new IFRS9 accounting rules enter into force in January [2018], any additional requirement based on the proposals in the addendum will however be limited.
The new accounting rules examine future developments in credit quality erosion more rigorously, taking expectations of deterioration into account. They are more stringent and more compatible with the addendum's prudential approach. But accounting standards are one thing, supervisory expectations another. We have asked banks to make full use of the scope provided by the accounting rules, and to adopt further capital measures if necessary. What actually happens will depend on individual cases. Constâncio has reiterated that the spirit of the proposal is not to put forward unrealistic and counterproductive expectations. But he himself underlined, in a speech he gave in February, that reducing NPLs is a priority from both a micro and a macroprudential perspective.

In Italy commentators have complained that less attention is devoted to equally serious problems, such as derivatives, in the balance sheets of other banking systems.
We'll never tire of saying that we're not just looking at NPLs. We pay a great deal of attention to market risks, including those posed by less transparent assets, and closely monitor exposure to level 2 and level 3 assets. However, if a bank holds an illiquid asset, or a derivative of that asset, it assumes risks that it must be able to manage, without necessarily viewing these exposures as non-performing. It seems to me that there's some confusion on this aspect too. It is not correct to equate non-performing exposures to other financial assets presenting varying degrees of risk that must in any case be managed. There are rules in place that make it possible to use risk assessment models to calculate the necessary coverage. For that reason, we're devoting increasing attention to risk models, with the targeted review of internal models (TRIM) and related inspections. We also need to remember that some of these instruments are used to hedge customer risks, and that's a service that banks provide for the economy.

Banking supervision is being criticised also for a lack of transparency and communication.
I think there is progress still to be made on this front. The problem concerns supervisory practices at the global level, not European practices in particular. Supervisory authorities in all countries have gained greater independence in recent years and it is natural that this entails a high degree of transparency and democratic accountability. Just a few years ago, supervision was conducted in absolute secrecy, in an exclusive bilateral relationship between the authority and the bank. But the world has changed and public scrutiny is now constant. For example, European banking supervision is required to report frequently to the European Parliament on its activity and decisions. And it is increasingly committed to explaining them to the public and to the markets. Transparency will be one of the central challenges of global supervision in the coming years. The European banking union, a recent creation whose regulatory structure is still being developed, is in a favourable position to follow this strategic direction effectively.

In the meantime, the banking union does not yet have its third pillar, the Common Deposit Insurance Scheme.
I found the European Commission's latest proposal, which in effect abandons the last stage – a single insurance scheme – disappointing. There is a risk that the scheme will be born defective and incomplete – co-insurance is not sufficient. But the completeness and soundness of the resolution mechanism is no less important. The Single Resolution Board should have at its disposal all of the instruments it needs to take action, including sufficient funding, not least so that it can extend the procedure if necessary and thus obtain the maximum value from the bank undergoing resolution. In the US, resolution can take a number of years, as the Federal Deposit Insurance Corporation (FDIC) has the appropriate tools and sufficient funding. Sadly, the discussion currently taking place on these and other aspects of the reform of the euro area looks set to be difficult. The best way to foster progress is to speed up the reduction of banking risks.

The ECB has been pushing for some time for a concentration process in a sector that has too many banks.
In some countries that process is already under way, especially among smaller banks. Here too, efficient resolution measures are vital. Without them, banks must necessarily look for a partner; this might solve the problem in the immediate term but risks creating a burden for healthy banks. The aim should be to have efficient procedures in place to help troubled banks exit the market, while minimising costs and negative repercussions for the economy.

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