Sabine Lautenschläger has been supervising banks for 20 years, first for the German authorities, now on a European level. Last year, she was appointed to the board of the European Central Bank, with responsibility for banking supervision.
She has been in charge of the Single Supervisory Mechanism, or SSM, since its launch in late 2014. The SSM is the mechanism by which the ECB monitors the financial health of Eurozone banks.
Ms. Lautenschläger’s office in Frankfurt’s Japan Tower is piled high with folders. She has an ingenious system to deal with the mammoth task of bank monitoring, she explains before the interview. On the desk are pending cases, color-coded into urgent and less-urgent piles. More folders are stacked on the sideboard: key background information. Ms. Lautenschläger often moves between this office and the ECB’s other Frankfurt location, sometimes several times a week. When she does, she takes the piles of folders with her in a suitcase.
In her interview with Handelsblatt, Ms. Lautenschläger claims tighter financial surveillance is in everyone’s interest.
Handelsblatt: Ms. Lautenschläger, it’s almost a year since the European Central Bank began formally supervising the financial stability of European banks. How has it gone so far?
Sabine Lautenschläger: It has been a successful year, but a stressful one too. We have come a long way towards better supervision and increased stability for European banks, for example in risk analysis and capital requirements.
How does the new European supervisory system, the “Single Supervisory Mechanism” (SSM) cope with differences in national supervisory regimes?
Every day in my current position, I learn about how European law is being integrated into national legal frameworks, and about how national supervisory bodies are applying European rules alongside national ones. But the differences are larger than I had expected.
The German government has been criticized for its handling of European bank supervision requirements. Is Germany being stubborn on this?
I’ll give you a concrete example. Among other things, “MaRisk,” the “Minimum Requirements for Risk Management” laid out by the German financial regulatory authorities, sets out rules for banks’ internal controls and internal risk management procedures. The German finance ministry will probably reserve the right to convert what were administrative guidelines into German law. Unlike with national administrative practices, we are obliged to directly apply that law, with no leeway to change it. So what were previously just guidelines from the supervisory authorities will now become binding law, but only applicable to Germany. That could make it more difficult for the SSM to introduce a single supervisory regime across the whole euro zone. Things like that send a dangerous signal to other countries.
Is it only the Germans behaving badly?
No, there are a couple of other countries who have turned former supervisory practices into national law. In those cases, it makes a big difference whether national laws were passed before or after the introduction of SSM.
As a leading figure in German bank supervision you strongly supported the separation of monetary policy and banking supervision. Do you still think that’s a good idea?
Yes, I am still of that opinion. However – and I have always said this – without the European Central Bank we would never have established European banking supervision as quickly as we did. A functional administrative system is needed if, for example, you want to deal with 26,000 applications in a short space of time, or if you want to build up an IT system that can access 25 different national supervisory authorities, as well as the ECB. We also shouldn’t forget that the ECB has another big advantage for SSM: independence.
Well, “independence” if you don’t include supervising monetary policy.
Independence in that respect is guaranteed. The principle of separation is being properly complied with.
The crisis with the Greek banks didn’t exactly give that impression.
Separation was also adhered to in the case of Greek banks. But I’m not going to talk about individual decisions. I will say that there is one issue where banking supervision and monetary policy always come into conflict, no matter whether they are separate or under the same roof. And that’s emergency credits for banks. Central banks are always going to need information from the supervisory body about the solvency of the banks in question, in order to decide whether they need emergency credits or not.
The supervisory body thought Greek banks were solvent – but now they are being recapitalized.
Again, I am not at liberty to speak about individual decisions. But aside from that, in the medium term we do have to think about separating banking supervision from monetary policy, to avoid any possible conflicts of interest.
After a year of SSM, how is internal harmony in the ECB supervisory body? There have been stories going around about cultural friction in the supervisory teams.
As a European supervisory body, we have to find solutions that are more or less consistent at a European level, even though these can be based on 19 different legal frameworks and even if we have to upset a few cherished supervisory practices. That’s why there was a lot of discussion and explanation in our first year. Also, as a rule the leaders of supervisory teams are not the same nationality as the bank they are supervising. That was a completely deliberate decision. We wanted to have a fresh view of the institutions, to broaden our supervisory horizons and to be sure that we really were instituting a new model in banking supervision.
And what conclusions have you drawn from it?
First, not surprisingly, that it pays to bring together people with a variety of different experience. In Germany, for example, we are quite well advanced on concentration risk, more so than in many other European countries. German banking supervision also has a lot of experience on an important question: checking if company executives and members of supervisory boards are fit and proper persons. But, for example, other countries have more modern and comprehensive methods when it comes to reducing non-performing loans. On that question, in Germany we have been much less systematic so far.
What will be the priorities for the ECB supervisory mechanism in its second year?
Among other things, we will continue to develop our supervisory methods, for example on banks’ liquidity management. We are also going to be working on new requirements for banks’ internal capital calculations and capital management. And of course, we’ll be tackling the issue of business models even more intensively.
Are low interest rates a systemic risk?
Banks can cope with a short phase of very low interest rates. But if it goes on like this, it may call into question the viability of some institutions’ business models, and how well they can handle a collapse in their interest income. In that case, it is very important to see what provisions the bank has made, if they can cut costs and adapt their business model.
In a case like that, would you impose extra capital requirements on individual banks?
Absolutely. Another important thing is the decision whether, in view of future challenges, profits are kept in the bank or paid out to shareholders. But low interest rates don’t only affect the question of capitalization. They can also impact liquidity, when very short-term deposits are counted against long-term lending.
In those kind of cases, will the ECB intervene in the business decisions of individual banks?
We are not superior bankers who always know best. It is not our job to decide how a bank acts in a particular situation. But it is our job to demand that they do act, and to make sure they have a Plan B for potential risk situations. If we think risks have not been adequately planned for, then we’re going to want to see that Plan B.
How far along are the banks with cultural change in thinking about risk?
They’ve all made progress. Many of them have gone a long way to implement cultural change, others still have quite a way to go. Ultimately, it is important that banks remember their core functions – providing households and businesses with credit in a reliable, long-term partnership. But for a genuine change in culture, you don’t just need rules and structures, you need role models and practical experience.
Do we need even tighter rules on bonuses?
There is already a lot of regulation around remuneration. At the moment payments are being spread over longer periods, a minimum of three to five years. In many parts of the banking industry, an even longer period could be tried out, at least in areas where longer-term profitability can be estimated. A minimum period of five years could be considered.
You are not short of work. You are hiring another 200 supervisory staff.
We calculated what we need over a two-year period. For 2016, an increase of 160 supervisory staff has already been decided. For 2017, we know roughly what we need, but that has to go through the normal budgeting process next year.
What areas do you want to strengthen?
Basically we need more supervisory staff to cover smaller and medium-sized banks under our direct supervision. For the smaller institutions we cover, we often have less than one full-time staff member on hand. But a small institution under our direct supervision could well be the largest bank in its country, and very important for national financial stability. We also underestimated the work we have in hybrid and crossover financial sectors.
The ECB is building a central credit register, called Anacredit. Are banking supervisors such insatiable data hounds?
Wait a minute, so far Anacredit has nothing to do with banking supervision. When work started on Anacredit in 2011, nobody had any notion of common European banking supervision. The first stage of Anacredit won’t include any regulatory requirements from banking supervision. Not one. Although of course supervision institutions will use Anacredit information alongside all our other data. It was the central banks that were the driving force behind Anacredit, because they needed better, more detailed information to work with.
But all this obsessive data collecting is a bit disconcerting.
Among other things, we need Anacredit for good monetary policy. If we want to know whether our monetary policies are having an impact on private households, we need to have information about household loans. A minimum reporting requirement of €1million, as we have now in Germany, is not nearly enough. Loans to private households are a lot smaller than that. That’s the reason for a reporting requirement on loans of €25,000. That figure is not important for a banking supervisor, but it is important for people concerned with monetary policy.
In the next stages of Anacredit, banking supervision will be directly involved.
We want to be efficient, and we have to be. That’s also for the sake of the banks – if we are going to collect data, then the second and third phases of Anacredit should take supervisory requirements into consideration. It is in the banks’ interests not to be presented with extra data demands from the supervisory authorities. This is also an important question in terms of global regulation.
You mean the Basel Committee on Banking Supervision, for example?
For example, in regulatory discussions I need data to show that on many risk issues, we are better or differently situated than other global regions. That’s true for European and for global discussions. But I am at a disadvantage in those discussions if I don’t have quantitative data. For example, if I want to prove that some risks are different in a European context because of our specific legal situation. Suppose you are discussing risk weightings for smaller businesses or private customers in connection with capital requirements: you have to be able to show information. Unsupported claims are not enough. Proof is what wins in those discussions.
You complain that there is a lot of false information going around about Anacredit. Why don’t you set the record straight by doing public consultation?
We have been speaking with all the industry associations in private. So have the national central banks. We also consulted the EU data protection authorities and took their observations into account. The first stage of Anacredit only relates to central bank issues, so a public consultation isn’t required. As soon as the supervisory authorities get involved, at the second stage, then the situation is different. But we haven’t got that far yet. The ECB will continue to talk to all affected parties on this. But Anacredit is in everyone’s interest: good decisions need good statistics.
Yasmin Osman covers the banking sector from the Frankfurt bureau and Daniel Schäfer is head of the finance pages, also based in Frankfurt. To contact: firstname.lastname@example.org, email@example.com.