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June 19, 2017

Danièle Nouy, Chair of the Supervisory Board of ECB, gave introductory statement to the European Parliament’s Economic and Monetary Affairs Committee in Brussels. She addressed the key issues in the area of banking supervision in Europe, including the issue of nonperforming loans (NPLs) and the supervisory implications of Brexit. She also discussed crucial issues in the risk-reduction package that is under discussion in the Council and in the Parliament.

With regard to NPLs, she mentioned that ECB is looking into more forward-looking solutions to avoid any build-up of NPLs. "We have highlighted the need to strengthen such powers already to the Commission and the Council and to your Committee most recently during the hearing on the banking legislation package in May." Addressing the issue of NPLs requires determined action from all stakeholders, not only supervisors. Next, she discussed the preparations for Brexit. “First, we are making sure that euro area banks, in particular those with subsidiaries or branches in the UK but also those with other business ties to the country, have adequate contingency plans in place and are preparing for the possibility of a 'hard Brexit.' Second, within the ECB, we are preparing for all operational aspects related to a possible relocation of UK-based banks to the euro area.” The ongoing CRR/CRD review offers an opportunity to legislators for closing the existing loopholes and enhancing supervisory convergence, added Ms. Nouy.

 

Post this, she discussed, from the supervisory perspective, the key issues with the banking legislation package. She explained the need to fast-track the provisions introducing a transitional framework for IFRS 9 and expressed her concern to the EC proposal and the ECON Committee draft report, which would make the transitional arrangements much more complex and burdensome. "This approach would de facto postpone the entry into force of the whole IFRS 9 framework, as it would require banks to continue calculating their provisions and making subsequent adjustments to CET1 [common equity tier 1] capital according to the previous accounting standard for the entire transition period," highlighted Ms. Nouy. She added that the risk-reduction proposal does not provide for an adequate harmonization of certain key supervisory tools at the EU level. She also thinks that "much more progress" should be made in harmonizing member states’ national options and discretions and that supervisors should retain the flexibility and discretion to apply regulations with proportionality. In her view, "it is preferable not to create a separate regulatory framework for small banks." In conclusion, she reinforced that “By continuing intensive work on our supervisory priorities, ECB Banking Supervision is contributing to the mitigation of existing risks and enhancing the soundness of the euro area banking system.”

 

Related Link: Speech

Keywords: ECB, Europe, EC, Brexit, Banking, NPL, IFRS 9

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