Yves Mersch: Interview in Frankfurter Allgemeiner Zeitung
Interview with Mr Yves Mersch, Member of the Executive Board of the European Central
Bank, in Frankfurter Allgemeiner Zeitung, published on 14 October 2013.
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Mr Mersch, you are responsible for setting up banking supervision at the ECB. That is
a huge task. Are you looking forward to it, or do you also have some concerns about
whether it will all work out?
In the course of my life, I've regularly been involved in such pioneering projects. It's gratifying
when one can look back afterwards and see that it has been successful. Presently, there are
of course moments when we have some concerns about the future.
You don't have much time. The first acid test, the comprehensive balance sheet
assessment, will be held as part of the preparations. Will the process be less rigorous
for being swift?
We had a longer run-up period when we were setting up the monetary union. When I was
involved in founding Banque centrale du Luxembourg in 1998, the run-up period was even
shorter, but the current task is far greater. However, we have the advantage of an excellent
cooperation with the national central banks and supervisory authorities. And we can also
build on the experiences of the European Banking Authority (EBA)....
..which were not altogether positive, however...
I don't want to make an assessment, but we have learned from them. First and foremost,
communication will be essential. Last week, at a meeting with the heads of the national
supervisory authorities, we agreed on key cornerstones, including core elements of the
comprehensive balance sheet assessment.
And how will it proceed?
This plan must first be approved by the ECB's Governing Council. You will be let in on all the
details on 23 October: what form the balance sheet assessment will take; how it ties in with
the portfolio selection, which we will examine in more detail; and how the balance sheet
assessment in turn relates to the subsequent stress tests. It should all lead to a single result,
that will be published in October next year.
What benchmark will this single result represent?
We are not primarily aiming to quantify a capital gap. The main purpose of sifting through the
banks' balance sheets is to restore international market confidence in them. The balance
sheet assessment will hence be carried out in accordance with uniform guidelines. All
institutions will be examined by the same methods. That is why we also have external
consultants on board. Moreover, the supervisory teams in the countries will be linked to each
other.
The benchmark will not be a capital gap, the capital requirement? What else will it be?
We will have a benchmark for the balance sheet assessment. That will be derived from
European regulations, the Capital Requirements Regulation/Capital Requirements Directive
IV (CRR/CRD IV).
Those are the technical names. What do they refer to?
The main issue is the definition of capital that a bank is required to keep on deposit. That is
set down in the CRD IV.
...which is based on the Basel III guidelines .
It contains a minimum percentage of common equity capital that banks, under Basel III, must
keep in proportion to their risk-weighted assets. It also states that banks must maintain a
capital conservation buffer as a further cushion against risks. And since we are dealing with
the most important banks in all Member States, the "significant credit institutions" require an
extra buffer to reflect this significance in a European context. If you add that up, you arrive at
the benchmark that we will use for orientation.
In the final analysis, the most interesting point is the gap between a banks' capital
adequacy requirement and the capital that it has available.
We must apply uniform rules in Europe. It may emerge that a bank does not have adequate
reserves or has not made sufficient provisions. That gap may need to be filled with capital,
but it may also be removed through balance sheet shrinking.
How?
The situation will improve if we restore confidence: a bank will find it easier to raise funds in
the market if there is transparency and certainty about its balance sheet.
It will be difficult if many banks turn to the markets all at once.
Most bankers are forward-looking and are already looking for capital. If private capital does
not suffice, then the European guidelines state that the shortfall must be made up through a
bail-in, with shareholders and creditors bearing losses. The state may not provide any funds
before a bail-in has been carried out. Before any public money flows, however, a decision
must have been taken on whether a bank is viable or not. A bank that is only able to keep
afloat with sustained public support does not belong in our concept of a market economy. If
the bank, or perhaps just one part of it, does have a chance of survival, public funds may be
used as the third line of defence; first at national level, and then - as an ultimate line of
defence - at international level. If a country is unable to cope, a European safety net would
be the last option. So we have a cascade of backstops.
Many taxpayers in Germany already fear that, in the last instance through a European
safety net, their money, too, will be used to rescue banks.
The European backstop is the absolute final stage. If a country does not provide the funds, it
must enter into an aid programme. The need to activate the European safety net, the last
backstop, will not readily arise.
But you understand that many taxpayers are concerned.
People in some countries are more nervous than in others. In the "creditor countries", people
now feel that they are being made to pay up. We need to take these fears seriously, while
not failing to appreciate that the interest rates in these countries have been lowered by the
crisis and the flow of capital from the stressed countries. That facilitates investment.
The low interest rates are not welcome to savers in Germany.
No, they are not welcome to savers.
Savers would at least like a real return on their savings.
Real rates come from the real economy. Long-term real interest rates will increase again
when the European economy has re-established a sustainable dynamic.
Getting back to banking supervision in the hands of the ECB. Surely that will lead to
dilemmas and conflicts of interest if, say, the supervisors ascertain the number of
sovereign bonds held by troubled banks. An increase in interest rates could put
pressure on the prices of these bonds and thereby on the banks. The ECB would have
a conflict and could postpone an interest rate increase that may be warranted from a
monetary perspective.
It would be naïve to deny that conflicts might arise in some cases. But in 90% of cases, the
interests of financial stability are identical to those of price stability. To be clear: in the 10%,
5% or 1% of cases in which a conflict arises, our price stability objective will take precedence
in line with our mandate.
The intention is to publish the test results of the balance sheet assessment next
October. Isn't there a danger that provisional results regarding capital gaps might leak
out in advance and unsettle the markets.
That is true, that's why we want to consistently manage the process through effective
communication. We want to prevent people from drawing the wrong conclusions from partial
or inaccurate results. Publication of the final results is the only approach that makes sense.
Constant reports on the status quo are of little value. However, a bank's business model will
also be accorded great significance in a dynamic stress test, which will follow the rather static
balance sheet assessment.
The main promise of euro area policy-makers is that taxpayers will no longer have to
foot the bill for ailing banks.
Some politicians say no more taxpayers' money will flow at all. That seems very optimistic to
me, but I am not a politician. It will be our task to minimise the likelihood that banks run into
difficulties in the first place.
The policy-makers' argument is that there should be no bail-out in future, but rather a
bail-in. But these rules do not take effect until 2018. What will happen in the
meantime?
For the interim period the Commission has drawn up rules for national state aid, which also
follow the principle of bail-in. Besides, the European Parliament is doing all it can to advance
the resolution rules governing the bail-in. In addition, individual countries may bring these
forward independently.
The bank resolution fund should also bear the costs of resolving banks. But this fund,
which should be financed by banks' contributions, so far only exists on paper. The
ECB and the EU Commission have suggested that the European Stability Mechanism
(ESM) crisis fund might provide a loan. Does that mean taxpayers may end up paying
for bank crises after all?
A credit line is conceivable; it would give security. However, that should certainly not be a
permanent loan: it may only be interim financing that will not cost taxpayers anything in the
long run. The credit should be extended on market terms; that might even be a good deal for
taxpayers.
If it is such a good deal, why can't other funding sources be found in the market?
That option is also contained in the Commission's proposal. If the ESM provides a credit line,
the ESM rules would have to be changed. In Germany that would require parliamentary
approval, in other countries that would not be necessarily be the case.
A final question on international monetary policy. In Janet Yellen, the US Federal
Reserve will have a Chairperson who is known as a "dove" and who will probably
pursue an accommodative monetary policy for some time to come. Are you pleased
that you will hence not come under pressure from across the Atlantic to tighten
monetary policy any time soon?
I doubt that Ms Yellen fits into all the slots that people put her in. At the Fed, too, decisions
are taken by a committee. Ms Yellen is highly experienced and has an excellent professional
and academic background. The good cooperation with the ECB will be continued. We, as the
ECB, will fulfil our mandate in line with our established strategy for the euro area.