Yves Mersch: Supervisory action in times of crisis and the limits of
the ECB's prudential mandate
Introductory statement by Mr Yves Mersch, Member of the Executive Board of the European
Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the
Eurofi Financial Forum, Berlin, 11 September 2020.
* * *
Today, I will reflect on two issues: our role in the extraordinary measures taken to keep
economies afloat since the outbreak of the current crisis, and the limits of the ECB's prudential
mandate.
The pandemic has dealt an unprecedented peacetime blow to the European economy. In spring,
a great number of our businesses went into full lockdown. Crucially, however, banks in the euro
area were able to offer vital support. To this end, ECB Banking Supervision provided far-reaching
capital and operational relief, making record levels of lending possible during this exceptional
time.
More precisely, in March we took an unconventional decision: we asked all euro area banks to
restrict their dividend distributions. In July, we extended this recommendation by another three
months until the end of this year.
This was not an easy move. Under normal conditions, profitable and healthy banks should not be
prevented from remunerating their shareholders. Restricting dividends can increase banks'
funding costs, have an impact on their access to capital markets and make them less
competitive than their international peers.
At the same time, I am aware that our recommendation may disproportionately penalise
wellcapitalised lenders and those set up as non-joint stock companies. Nevertheless, I still consider
such an exceptional and temporary "one-size-fits-all" approach to be warranted. Our vulnerability
analysis only produced accurate estimates of capital depletion on a sector-wide rather than on
an individual bank basis. And, while prudent capital planning is the order of the day, the current
economic uncertainty means that banks are simply unable to forecast their medium-term capital
needs accurately. Such an unorthodox move was therefore justified by our ultimate goal to
counteract procyclical developments and support banks' capacity to absorb losses during the
crisis without compromising their ability to continue lending to the real economy.
Nevertheless, this recommendation is, and must remain, exceptional and temporary. We will
review it in December, and unless we conclude that the banks' capital projections remain
clouded by high uncertainty, we will revert to our usual supervisory practice of assessing planned
distributions of dividends on a bank-by-bank basis. We opted to be prudent today to avoid having
regrets tomorrow should overall economic conditions further deteriorate.
The ECB is in good company. Other institutions have joined the effort to keep the financial taps
open for the real economy during this exceptional period. After the "quick fix" to the Capital
Requirements Regulation, the European Commission recently adopted a Capital Markets
Recovery Package to make it easier for capital markets to support the economic recovery.
The proposal to amend the Securitisation Regulation is part of this package. It includes a recital
stating that the requirements on direct risk retention, transparency and the resecuritisation ban
are also prudential obligations and thus specifically entrusted to the competent authorities in
charge of prudential supervision, implying that the ECB has an active supervisory role in these
areas. This, in my view, is problematic.
The ECB recognises its competence to supervise banks' adherence to some securitisation
obligations that are prudential in nature, such as the use of proper credit granting criteria for
exposures to be securitised. However, the other tasks include the supervision of compliance with
direct risk retention requirements, transparency requirements and the ban on resecuritisation.
These tasks fall under the category of product supervision rather than prudential supervision.
They ensure the alignment of interests between investors and originators, and between sponsors
and original lenders. They allow investors to understand, assess and compare securitisation
transactions.
The ECB cannot take on these tasks because they go beyond its prudential supervision
mandate. Article 127(6) of the Treaty on the Functioning of the European Union and the SSM
Regulation clearly define these limitations. A simple recital cannot change these; only a Treaty
change can. Re-labelling financial product supervision tasks as prudential tasks won't do the
trick.
What's more, assigning financial product supervision to the ECB could result in conflicting
responsibilities. In its role as prudential supervisor, the ECB generally wants as little risk as
possible to remain with a bank acting as originator, so as to minimise arbitrage opportunities with
the corresponding reduction of capital requirements. At the same time, the competent authority
needs to ensure that the bank retains a material net economic interest under the risk retention
obligation. This might be linked to the need to preserve proper credit granting standards but might
also create conflict in relation to the ECB's objective as prudential supervisor.
To conclude, I do not see the proposed conferral of tasks as being either a viable allocation of
labour or legally tenable. Extraordinary supervisory action is warranted in times of crisis. But the
ECB cannot take on tasks that go beyond its prudential supervision mandate.