 And of course welcome back and thanks so much to President Lagarde for her speech and now I'm joined by Andrea Andrea Thank you so much by the way for putting this conference together You're the host the head of supervision at the ECB. We have a very interesting program today. You brought up some good names So of course I want to thank you for the event itself But in terms of the speech that we just heard from the president There's a lot to unpack and it was clear that she praised the response to the corona crisis She says that this was a from a regulatory, but also the supervision and the response from banks very different to what we'd seen in the past But then she also did say and this really caught my eye that this is a banking Kind of sphere that is stronger than it was before but it's incomplete So I wonder in that respect would you say that banks from where you sit from the supervision have every incentive? That they need in order to create what she says is this leaner stronger pan-European banking sphere Well, I think first of all the President Lagarde was absolutely a spot on I think that there has been I will stress also the fact that for the first time There was a strongly coordinated response from the supervisory side and monetary policy side We came out with our first measures on the same day in March, and I think that was was a first But indeed the the the sector is stronger more resilience exact as a shock absorber not as a shock amplifier There are of course still issues to be to be addressed on the policy side the point which is probably The one on which I feel some regret as a policymaker is that we have We have done the banking union, but it's still an incomplete banking union as President Lagarde refer to so without the third leg of the the policy guarantee scheme and And these means that the European banking market is still segmented into national buckets to a large extent These is some water drag goes on the competitiveness of our banking sector on their ability to Reach a scale that enabled them to compete globally. Maybe so That's an area in which probably there should be some progress to make and and what's preventing that because I know that you've said It's there what's needed is there, but we just need to make it happen The banks say however for us is not that clear and then perhaps the supervision is not that clear either well, I mean on the on the on the On the institutional side that we don't have yet the the policy guarantee scheme at the European level in place Which means that if something goes wrong the eventual impact goes on the national deposit guarantee scheme and this is creating some reluctance From member states which is then crystallizing to the regulation to enable banks to freely move capital and liquidity across member states So for instance if you are a bank and you have a subsidiary in the same member state You can wave capital and liquidity requirements for the subsidiary and look at the group as a whole But if you are If you have your subsidiary in another member state still in the banking union still under the supervision of the ECB You cannot waive the capital requirements You need to have capital locally and also the possibility to waive liquidity requirements is constrained So the math for the banks to really move their business on an integrated basis In the area is still impaired. So you'd say is a liquidity waiver that perhaps is Is is is that final step that could scare an institution? well having having the possibility from regulation to have liquidity capital waivers would of course make groups able to Pull capital and liquidity at the group level and distribute it as they would like as we have seen it during the crisis there were in several member states for instance specific while we had a Constraint on dividend payments that was applied at the group level So basically we didn't want the capital to leave the banking sector, but we were pretty relaxed on the idea that Banks were paying dividends to their parent company for instance within the bank union There have been a number of national measures which have constrained these type of payments of the day So capital was basically not flowing freely and these of course as an impact on the way in which banks plan their their their business and and and You know and develop their franchise across the banking union and mr. Maria not to get too political But it does seem that this conversation at times goes around in circles that there is nothing no new impetus to advance the agenda on Complete in this banking union. Would you say the parameters are changing? I mean, I don't want to get too much into the politics But there's a new government in Germany, of course president like art has been very keen about this pan-European big Institutions, is there something in this whole context that could change and move it forward? Well, you know my my attitude is hope for the better and prepare for the war So I know that the political discussions on this issue are very difficult I hope they will get unlocked because we need a complete banking union to really create a domestic market for for for European banks at the at the euro level But I think that if this doesn't happen We need to do our best to make the banking union work within the current setting I mean the banking union already has a supervision leg that is working effectively we have a resolution leg that is working effectively and We do have some Hooks in the current regulatory framework that could enable banks to move cross-border in a smoother way We have proposed for instance to use the liquidity waivers, which are already available in the legislation By maybe providing intra-group guarantees that could provide sufficiency assurance to the host member states that The local establishment would not be left with the losses if something goes wrong They would be supported by the parent and we all I also argued recently that maybe also the model of Relying on branches Could be used more it is there since 1992 since the start of the single market It has not been used that much because in the past of course if you Transform the subsidiary into a branch There would have been a shift of supervisor Responsibility from the host authority to home authority Now in the banking union the supervision is always with the ECB and nothing would change in terms of involvement of the national authorities in Supervision so the issue could be less sensitive and maybe relying on branches I've seen the banks that have relocated after brexit have to large extent rely relied on On branches incorporating all the subsidiaries into the parent and branching out throughout the banking union So it could be something also for European banks to think about so not to put words in your mouth But essentially what it looks like is to me is that you're saying there's a lot already that you can work with Yeah, then the current framework so don't drag at your feet and don't blame us for and especially don't wait That for again for something to happen that resolves all the problems. I mean sometimes The the the best could be the enemy of the good No, so let's try to do the best what we have right now and to make the banking union progress and you know That's that's on the supervision, but I wonder you know just to go back in time and also add context to The words of President Lagarde with the dividends, of course during the pandemic you decided we're gonna put this in hold And now you're back to business as usual But I wonder having time to go in or the time to go back in hindsight Is that a measure that you say has been vindicated validated approved you wrong because for the banks. It was very painful Yeah, if I yeah, if I were to go back I would say I would do exactly the same choice It was an extremely High level of uncertainty we were facing we didn't know what would have happened in terms of The speed of the recovery whether there would have been a recovery how long the the pandemic would have stayed with us We didn't know that Public support measures would have been effective as they have been It was essentially that moment to preserve capital to let's say to put capital aside to make sure the banks were you know able to Support the economy and also to absorb losses that could become we had estimates of potential non-performing laws that were Also pretty high. So So I think it was the right choice to make It's interesting also to notice that it worked no in terms So there is a an interesting study done by the Bank of Espana that shows because our decision came in the middle of the AGM season in Spain. So some banks had paid dividends some didn't because our recommendation came through and It is clear the banks that did not pay dividends because they were distributed after the decision Have lent more into the real coin. So there is a relevant differential in lending So the the the decision has been important to support lending at that difficult juncture So it was an important decision. Let me take let me say clearly. We say it upfront It was an exceptional measure for exceptional times We don't want this to be an ordinary tools in our box and we are now going back to Let's say business as usual Okay, because that was my follow-up question given that in the time of crisis and again This was a one of crisis that was huge. No one could have imagined a pandemic But you're saying it's this is not the playbook that could be used repeatedly You really view this as one off and that's it I guess because also the shock to a bank's business model is big Yeah, and and generally I mean we as supervisors micro potential supervisors want to intervene Looking at the individual situation of banks these sort of blanket one size fits all interventions I mean, we don't like to take them and we wouldn't take them in If not in such extraordinary circumstances, so that's definitely not something that we want to repeat We are now back to the usual approach of looking at the banks capital plans How they project their capital our robust their capital plans are and if they have capital trajectories that are You know comfortably above our our requirements then we wouldn't interfere at all with With the banks distribution right so you make it clear this that's no precedent in terms of Because some in the industry could have said well given that it was used once it could be a tool that gets repeated But your research is clear that this is a one off for a one of crisis of a magnitude. That's what that was very big Yeah, but there has been also, I mean There have been some members of parliament in that have requested us whether we would like to have a specific legal power to do this again in the future And and we say that we don't need it that we don't plan to To use it again that this was extraordinary and if in the future touchwood there were another pandemic or another difficult situation Let's say we could count on the on the banks following our recommendations. They were all very disciplined And let's really touch with that. We don't get anything of the likes I wonder however, you know the economy right now It's it's very difficult to get full visibility of where this is going You know on the one hand we had the european recovery that was gaining a lot of momentum Now we have the bottlenecks a shortage economy potentially a new wave So this is first of all, it's very difficult to read But then it's also Trigging a lot of talk around however some of the inflationary pressures that we may be getting Whether this is sticky or not and of course it takes you to the interest rate Conversation the market and banks of course are salivating for this the ECB is pushing back Saying this this is not yet and we're not there satisfied with the conditions to hike and lift But I wonder in terms of supervision in terms of what banks may be Thinking down the line in the next year. What does it mean for you? well, first of all We we have seen a a positive Season for profitability profitability of banks bounce back More than everybody expected This is driven to some extent by reduced impairment and release of provisions And of course as a supervisor, we are always, you know inviting banks to caution No, I mean as you say the the macroeconomic outlook is still clouded with uncertainty And we would call on banks to you know remain prudent and cautious in in this in this in this respect because still we have A positive Creatory scout look banks are projecting a continued decrease in non-performing loans in the coming year But we also have the The withdrawal of public support measures that is likely to come in 2022. So we need to see how the Supported customers will will fare once the the support measures will not be there anymore in terms of interest rates, let's say Banks have The impact of the low interest rate environment on on banks balance sheets has been net positive for a while until June of last year the second quarter of last year the positive impact on landing on the landing volumes Had more than compensated for the negative impact on the on the margins, no This has changed recently. So the negative impact on margins has started prevailing and and and has impacted on on the dynamics of the 19 interest interest income But banks have been able to compensate that especially through revenues in trading And net fees and commissions. So It's it's it's an interesting environment and what I what I Say is that it is positive that banks diversify their sources of income But it is especially Important and positive because some banks are starting to do it that they start being more serious about Cost optimization looking to the branch network. They have investing digitalization Maybe considering mergers as potential options to refocus their business model and restore profitability on a more sustainable basis On the basis of your answer I have two questions that I want to follow up with but the first one is Then what would you respond to the many ceo cfo? I know we speak to too many in bloomberg and they come on and they say the negative Interest rate environment has made our business very very difficult. It's not easy to make money So they paint a picture that is not perhaps as as new as that was you described Would they say it's it's very hard out there for a european bank? well, I mean, uh, I The point I'm making is based on Empirical analysis in fact, so it's not let's say a sort of personal opinion that there will be there will be Soon, I think the financial stability review of the ECB will be published where there will be evidence of of this But I understand I mean working in a low interest environment has been difficult for banks. I don't deny that I mean, it's clear that For banks that have Traditionally, you know build their business on on interest margins if you work with With the with the low interest rate environment is more difficult still, I think that the The the the The main point is the structural weakness of the european banking sector. This this is a conjunctural aspect It will at some time, you know be normalized The real point is the structural weaknesses that we have and this means Low cost efficiency a cost to income ratio that is stuck at 65 percent since a long time Return on equity which has been for a decade now below the cost of equity. So the sector on average is burning capital and and you know business models which are In some cases do not look sustainable in the longer term So banks need to work on this. These are the levers that they have in their hands They need to pull these levers and and try to restore profitability on a more sustainable basis and Ms. Henry I wonder given what you say, do you worry that perhaps all this forward looking chat on the rate Side is going to distract banks from what you say is fundamentally a structure issue that that they could be doing already now I I don't know. I'm turning a little bit more positive. I hope that I'm comforted by the future developments I think for a long while banks have been just waited for, you know The interest rate environment to change and their margins being You know beefed up by a change in the in the in the interest rates I think the pandemic has been a turning point to some extent because I I met several CEOs that told me how surprised positively surprised they were by the increase in productivity That was realized in the first lockdowns by starting to distribute their services digitally to their customers And and I think that this has made several bankers boards thinking about you know Biting the bullet and changing their business in a more radical in a more radical way And we see it's still anecdotal. You don't see anything at the level of aggregate data But if you try to look at some specific Let's say cases you see banks that have reduced significantly Their their branch network for instance also banks that traditionally were advocating branches brick and mortar banking as an important brand for them You see that Banks have invested more in digital platforms payments platforms in restoring the in renewing their IT infrastructure You see that Also M&A's besides the overall engagement in in measures of acquisition, which is the most Transformational step in terms of business model that you can take you see also that Banks have started selling or buying business lines. So in asset management, custody business Payment platforms leasing Which means that they are trying to rebalance their business model and make it more sustainable in the long term so I think that They are moving towards, you know, really the structural repair that is needed rather than just waiting for interest rates And I hope they don't disappoint me in the coming months You mentioned many good points there the one that that kind of got me thinking With the pandemic and the fallout from the pandemic. Would you say it puts an end to the branch model of banks? Putting an end is is too strong. I would say But indeed Let's say I think that banks have started rethinking. I mean the the the density of the branch network Especially in some countries and some business model has been Very very very very high And and this can be rethought. I mean and maybe also, you know I I made a banker that told that told me and I found that interesting that in the past No, the the customer and and the bank met in the branch Now during the pandemic they started meeting more and more on the on the smartphones on the internet on the on the devices of the customer One development that could be interesting is that the customer and the banks might meet instead also in In virtual platforms like in the places where goods are sold for instance and Providing services directly when you buy Specific goods. So I think everything is changing very fast banks need to be very alert and to and to move Move fast in this in this in this area, but this is this really I think that the highest risk now for banks is just standing still And of course the other risk which you alluded to and also President Lagarde appointed to is the damage that this may do to the real economy and now we're still In a situation where governments to some extent are continuing to support and provide measures to businesses to small medium sized When do you think we get to a point where the full impact of this pandemic is seen in banks? And you really get to have a clear view of the damage that's been done because until now I guess it's fair to say in terms of npl. So it looks better than expected You know, I mean, I I think that I I started very much in this mindset No, that there would have been a significant impact in in npl That I mean this was as president Lagarde said they had the harshest recession in peacetime Europe. No, I mean, so it's It's surprising That so far there hasn't been any almost any materialization in terms of nps and nps started to continue decreasing So It is possible that of course there is a materialization of npl's a cyclical materialization of npl's once the support measures are Are withdrawn and we have been very Very pushy with banks in the in our supervisory cycle this year In asking banks to enhance their risk controls. So to start, you know, managing Great risk deterioration early effectively classifying properly the loans Flagging forbearance. I think we have done an excellent work and this should strengthen the ability of the banks to withstand any potential shock Still coming, but I don't think that the the real issue is The impact of a cyclical downturn. I think that this pandemic has brought about Important structural changes. I mean also the the response to the pandemic the next generation you for instance is very much focused as president lagarde also said on investments in digitalization in In green so there will be an important changes also the way in which We work. I mean, will there be more reliance on remote working? What impact this would have on certain sectors like such as commercial real estate for instance So that there could be the recovery might be less even I mean, we'll not just restore the economy as it was before the pandemic There will be structural changes coming through Which means that there will be winners and losers and the losers will be on the side of the npls in the In the balance sheet of the bank. So we need to be still careful for a while. I think and for a while How long is that? I know it's hard to put a Supervisors we're always We always have to look into creditors. We will never stop doing so But I think it won't only be an issue of months. It will be an issue of years of years Okay, and in terms of an issue of year perhaps this year It is true that we haven't seen and we talked about this before big scandals big problems in the european Banking industry. We did have one or we did have one with the archaegos on the fallout from that Which was pretty significant. Is that a reminder perhaps of the pockets of risk that you may see out there and and in particular When you look at specific pockets, is there anything that would kind of focus your attention? There's been a lot to talk about leverage loans, perhaps Yeah, let me start with your point on scandals. Um, I think there is an important issue in terms of Conduct and culture at banks. Um I remember After the great financial crisis I thought that there had been a lot of episodes of misconduct in the in the past And that these would have been remediated the pipeline would have dried up and the issue would have been You know muted for for and I've seen these episodes coming up and up again So I think that there is a more fundamental issue of culture that has not yet been entirely fixed And the fact that we didn't see many scandals in the last months is not something that I take as a An indication that the problem is solved. Uh, we still see for instance, uh, uh, every time there is a, you know investigative journalists for instance Bringing up issues such as the pandora papers. You always see banks helping maybe Customers evading taxes or or doing money laundering even I mean, this is something on which I think we need to We need to continue keeping working at the bank level, especially the top management the boards But also the middle management to get the culture right And on governance for instance, we have we have several Um, findings in our in our supervisory process that take very long to be remediated So I think that there is a need for more focus on these issues in terms of the pocket of vulnerabilities. You mentioned archegos archegos Let me made me thinking a lot because, um, the report that craze swiss wrote, which was I think a very good and candid report um Showed very clearly that there are moments when there is a high competition, uh In financial markets search for yield in which the business prevails on the risk controls And uh, and and this is a concern for me, of course, and it is particularly A concern at this juncture in the cycle because you do have valuations in financial markets are stretched in many segments You see financial fraud here and there as you say you see excessive leverage in some areas the leverage finance segment is one of those on which we have Cold banks to enhance their attention for a while asking them to The prime brokerage in the case of archegos has also been an important case So I I I'm very concerned. I mean you were saying before that banks are salivating for higher interest rates That that's I understand that but if these come through in a sort of sudden unexpected Shock to interest rates cratery spreads. There could be impacts on the market on the market size and losses that Could you know be distributed to the financial sector in very unpredictable way? So banks should be careful what they wish for and And um san rio. We're running uh out of time So I have two very quick questions for you that I'm hoping to fit in one is you alluded to brexit before And you said uh, well, it was it was related to something a bit different to my question But you did say with the moving over to continental europe There was a lot of use of branches that was done here But I do wonder we haven't seen this huge exodus from the city into continental europe Do you think the story has rooms to run it? It is something that could continue years or essentially there's no big exodus The brexit effect is fully priced in already from your supervision perspective. The story is done Look, we agreed with the banks on a target operating model Or now we want them to operate in our in our jurisdiction banks agreed to that There was of course a suspension in the transition to the target operating model due to the pandemic It would have been extremely harsh of us to ask banks to move Stuff from london to frankfort or paris or whatever in the euro area during the pandemic So of course we provide banks some slack in terms of their their relocation plans. We suspended them But now we are re-engaging with the banks in terms of, you know resuming the the transition in terms of assets and stuff And we expect to reach the target operating model According to the schedule that we agreed with them and just the final final one I know I've been saying this for a while now But in terms of the big european mna, you know, this is a big story Who's going to merge with who and when are we going to see this huge giant Emerge. I'm not going to ask you for which bank is going to Get into deal with that. I know you're not going to tell me anyways, but uh, when do you see this happening? I know it's hard to put a date But is this something that we're looking in the next two to three five years or actually this is Store that's way far in the horizon before we get to this point of perhaps fewer much stronger leaner banks cross national Of course, you know, we have had in 2020 320 billions of Value in terms of mergers and acquisitions in banking in the in the in the banking union And and this was the highest value since 2008. So it's already something which is happening I'm not surprised that these full-blown mergers Across banks are now happening mainly at the domestic level because of course the main driver is cost efficiency cost savings And then you you realize the cost savings if you have an overlapping distribution network and you can cut branches so At this juncture it it's natural that it has mainly a domestic a domestic dimension but of course if the Rebound in the economy starts getting strong as we all hope it will get in the coming months I think that the You know the the case for also Looking at mergers as a way for Diversifying revenues and strengthening the the franchise and the balance sheet I think that that could be a case for cross-border mergers mergers to become through and of course if we make progress in Completing the banking union. This would make the case even stronger and but the timing is spending I guess Yeah But anyway, I think that again the the moment I am really convinced that The moment for the structural transformation of the european banking sector is now We have a lot of different elements that are coming into into place and banks need to be Able to capture the opportunities. So well, mr. Andrea. Thank you so much for your time and of course for hosting This conference is the fourth annual supervisory conference at the european central bank here in frankfern Stay tuned. Stay with us because there are many Good panel ceo's policy makers all joining us to discuss what is a moment of big change for the european Banking industry connie. Thank you, maria And thank you to president lagarde, of course and to the chair andrea and ria for those first insights And those will be carried over into the discussions that are to come We will now take a short break and we will resume at 1500 central european time So stay tuned and we'll see you in a bit. Thank you