Andrea Enria of ECB Speaks on Principles of Banking Supervision

Andrea Enria mentioned the benefits of integration in EU market and highlighted that banking union was launched to address the adverse feedback loop between banks and their sovereigns and to ensure that banks more effectively meet the needs of corporates and households throughout a crisis. However, despite the progress achieved, the European banking sector is still fragmented, as the restructuring process has taken place mainly along national lines. Mr. Enria pointed out that many of the decisions required to advance the integration of European banking markets lie outside the remit of supervisors. Despite the progress toward a much more harmonized regulatory framework and a single rulebook directly applicable across EU, in certain important areas the progress is falling short of what is needed. If the aim is to have a truly European banking sector, banking groups should be allowed to freely allocate their regulatory capital and their liquidity within the euro area. However, there is still reluctance to remove existing barriers.

Mr. Enria added that important priorities for the Single Supervisory Mechanism, or SSM, have been well-defined and call for continued focus and effort on the part of both supervisors and firms. The cleaning-up of balance sheets must be completed, the issue of high levels of non-performing loans (NPLs) needs to be resolved, the new BCBS framework for market risk might have to be implemented in a period of heightened volatility, and the robustness of internal risk measurement and management must remain a central focus of the supervisory work. The review of internal models—known as the TRIM project—will be completed this year, but the follow-up to its findings, coupled with the implementation of the standards and guidelines developed by EBA, will keep supervisors and banks busy for quite some time. He emphasized that greater consistency and reliability of risk-weighted asset calculations is needed to foster good risk management practices and fully restore the credibility of the regulatory and supervisory framework. He then discussed how Brexit will change the shape of the banking sector. He said: "To me, one thing is clear: post-Brexit, withholding cooperation is no solution. UK and EU supervisors must find ways to work together toward a safe and sound banking sector. And I can reassure you that constructive solutions are being found.”

Next, he discussed the ECB approach to supervision and highlighted that ECB decisions are based on both rules and judgment. He also added that European banking supervisors must be accountable and transparent. Banks, investors, and the public must be able to understand banking supervisors' principles and policies. Only then will they be able to anticipate supervisors’ actions and expectations. Take the supervisory review and evaluation process (SREP), for example. The SREP is ECB’s core tool for assessing the risks of each bank and determining its Pillar 2 requirements. He believes that ECB has made a commendable effort to become more transparent on its SREP methodology. Also, he noteed that practices on the disclosure of Pillar 2 requirements vary widely. In some cases, no information is disclosed, even though it is essential for determining the triggers that may lead to suspending coupons or to converting Additional Tier 1 instruments into equity. Breaching Pillar 2 requirements can also trigger a “failing or likely to fail” assessment, with direct consequences for all categories of investors and possibly even for uninsured depositors. Thus, greater transparency would be warranted.

Related Link: Speech

Keywords: Europe, EU, Banking, Stability and Integration, NPLs, SSM, Banking Union, Banking Supervision, ECB