HANDELSBLATT EXCLUSIVE The State of Europe's Banking Union

Danièle Nouy, the euro zone's top bank supervisor, said European banks are more resilient and better prepared to deal with another crisis, though they continue to struggle with bad loans and low interest rates.
Danièle Nouy, chair of the ECB's supervisory board. Picture source: Reuters.

Danièle Nouy, chair of the ECB's supervisory board, said she cannot rule out another financial crisis, but she believes Europe’s banks are more resilient today than they were in 2007.

“Of course, there will also be crises in the future,” Ms. Nouy told Handelsblatt. “But I hope we will be better prepared then. The consequences would certainly be less dramatic, not least because we have more useful tools to defend ourselves with than at that time.”

Ms. Nouy is also responsible for the Single Supervisory Mechanism, a body launched in 2014 to take over monitoring the 126 largest banks in the 19-member euro zone from national regulators. Under the umbrella of the European Central Bank, it also serves as an early warning system for the financial sector.

And indeed it has become clear that this early warning system is still needed.

Non-performing loans remain a key priority. They weaken the banking system. Danièle Nouy, Chair, ECB Supervisory Board

Deutsche Bank gave markets a scare last autumn as rumors circulated that it would need a bailout to afford a multi-billion-dollar settlement with the U.S. Justice Department over its involvement in selling junk mortgage-backed securities. While Deutsche has managed to meet its obligations through a restructuring program and a capital hike, banks in Italy are struggling to stand on their own two feet. Monte dei Paschi, the country’s third-largest lender, has had to ask the Italian government for assistance.

The problem, however, isn't restricted to Italy. All told, banks in the euro zone are saddled with €921 billion ($976 billion) in bad debts. The ECB has placed a priority on disposing of these debts, known as non-performing loans.

“They weaken the banking system," Ms. Nouy said. "When a bank has too many NPLs, being profitable is difficult. The economy also suffers because it’s hard for banks with high NPLs to make additional loans available.”

As bank supervisor, we indeed try to step in early, preferably before anything happens. Danièle Nouy, Chair, ECB Supervisory Board

Ms. Nouy welcomed the idea of a pan-European bad bank to dispose of non-performing loans, an idea that Germany has rejected. It’s no panacea, she said, but struggling banks would have an easier time disposing of bad debts if they had a common asset manager.

“When so many banks want to sell their NPLs, they are not in a strong negotiating position,” Ms. Nouy said. “It’s a buyer’s market. It would be different with a common European asset manager.”

Bad loans aren't the only drag on bank profitability. Rock bottom interest rates have also put downward pressure on margins. Ultimately, banks might have no choice but to merge in order to emerge from the doldrums.

"Consolidation is absolutely necessary, and the sooner it comes the better," Ms. Nouy said, even suggesting more pan-European banks would be a "logical step" as rules, regulations and supervision across the European banking sector have become increasingly unified.

A major test of the European banking sector’s resilience will come whenever the ECB finally decides to wind down the emergency measures it took in the wake of the financial crisis and raise interest rates. As inflation increases, the ECB is under growing pressure to boost rates, which could rattle banks that have spent years adjusting to low rates. In lieu of a stress test this year, the SSM is conducting a risk analysis to ensure banks are prepared for a rate hike.

“As bank supervisor, we indeed try to step in early, preferably before anything happens,” Ms. Nouy said. “And that’s why we have just started to analyze how vulnerable banks are to interest rate risk in their banking books.”

Read the full Q&A on Handelsblatt Global.


Michael Maisch is the deputy chief of Handelsblatt's finance desk and based in Frankfurt, Germany's financial capital. Yasmin Osman is a financial editor with Handelsblatt's banking team in Frankfurt. To contact the authors: [email protected], [email protected]