 So, without further ado, I will give the floor to Mr. Enria. Thank you, Conny. Welcome to our press conference on the supervisor review and evaluation process, this rep. I remember last year, a colleague asked me, what would I have answered to a question on the potential impact of this virus that was developing in the Wuhan region in China. I say, I hope that they don't put the question because I don't know how to answer. And luckily enough, there was no question, but that's what the issue, of course, we were grappling with for the full year. That's Andrea Enria, the head of the ECB's banking supervision arm, thanking journalists for not asking about coronavirus a year ago in early 2020. One year on, and the virus has changed everything. We've learnt to live under lockdown, to work from home, parents have learnt to oversee homeschooling, and everyone, hopefully, to wear face masks. Remember how recently so much of this was hardly imaginable. And because the measures to contain the virus have affected the economy, the pandemic has also profoundly affected monetary policy and banking supervision. Welcome to the ECB podcast, bringing you insights into the world of economics and central banking. My name is Michael Steen. In the last episode, we spoke to our chief economist, Philip Lane, about the monetary policy response to this health crisis. In this episode, we wanted to look at the other half of the ECB's work, supervising banks. Now, banks are central to our economy, and the teams under Mr. Enria are working to ensure that banks can continue playing their role as lenders in the wake of the biggest economic collapse since the Second World War. So what are banking supervisors worried about for the year ahead? I should say that we don't actually have a guest this time. Instead, we're going to be dipping into the recent banking supervision press conference to hear more from Andrea Enria, as I said, the chair of the supervisory board, and we'll also play a few clips from other board members. The key word since the beginning of the pandemic has been uncertainty. So uncertainty has been the defining feature of this unprecedented shock. In the initial phase of the pandemic, macroeconomic uncertainty reached levels never before recorded. With fast implementation of social restrictions and economic support policies, implementing levels of business and consumer confidence. These left all economic agents, including banks, virtually unable to make projections one or two years into the future. So there was a scramble early on to understand what the implications of this health emergency would be. How long would we need to live with social restrictions? A question we still can't answer. And how deep and how long lasting would the economic downturn be? What would it mean for different sectors and also for banks? Many have compared the shock to the great financial crisis of 2010, especially when it came to the situation of the banking sector. But there was one major difference this time. And many have pointed out that this time banks are not part of the problem. But there was a serious risk that they could aggravate the problem, that they could react to the shock with a sort of knee jerk reaction, with a spiking risk aversion, a sudden tightening of great conditions that could have aggravated the recession. So in order to make banks part of the solution, a wide range of public policy measures were adopted to motivate adjustments in behavior and avoid prosyclicality. This time banks were not to blame for the economic crisis. The virus is. So while banks are not part of the problem, they do have to be part of the solution. And the good news was banks were in a much better position when the pandemic hit than they were before the great financial crisis. So how can banks be part of the solution and why is that important? Well if you're in charge of a bank when a big economic crisis hits, a very natural reaction is to stop or slow down lending, because you wonder what if businesses and households can't repay these loans? This is what Andrea Enria describes as a knee jerk reaction. In order to counter the effect of the COVID-19 shock, national governments and the EU authorities deployed measures of unprecedented nature and magnitude to support banks and the economy, including large and coordinated fiscal and monetary expansion, as well as long moratoria and public law guarantees. If lending stops or slows sharply, you can quickly get into a so-called credit crunch where everyone finds it hard to borrow. That can lead to a downward spiral when even sound businesses cannot finance themselves. And that's what Europe's response avoided. Looking at banks, governments and regulators took some steps to ensure credit could continue to flow. Governments created public guarantee systems so that certain loans would be repaid whatever happened. Supervisors allowed banks to dip into their capital buffers, which basically means that they could offer new loans or cover potential losses from existing ones. Loan moratoria or payment breaks were introduced, which means that borrowers who are in trouble because of the pandemic can postpone payments for some time. So moratoria are helpful to get over an immediate shock, but of course there's a risk that you're storing up problems for later, so banks need to be wary. Moratoria is a peculiar area of concern because delays in payments are one of the main indicators the banks use to classify their customers. And moratoria generate a sort of blindness, a lack of visibility in terms of payments. So as Andrea Henry explains, while the loan moratoria certainly helped borrowers to deal with the impact of the crisis on their lives and their businesses, they made the job a little harder for the banks. For them it got more difficult to judge whether a borrower will eventually be able to repay their loan or not. And if they cannot do that, they are also not able to plan ahead and set money aside in case a loan becomes non-performing in the jargon, in case it can't be paid back. And this brings us to the second point. Banking supervisors need to ensure that banks do not become part of the problem themselves. For example, by piling up bad loans, non-performing loans and eventually running into their own financing difficulties. After all, this is the core business of banking supervision to ensure that banks are safe and sound. So what does all this mean for this year? Every year banking supervisors set priorities. These supervisory priorities help shape their work and they let the banks know what they're looking at with particular interest. When we planned our supervisory focus for 2021, we looked at two things. We mapped the remaining risks that banks are facing and the weaknesses that make banks vulnerable to these risks. The greatest risk is that the economic downturn gets prolonged and leads to rising credit losses and the rolling bank capital. This year, the analysis was influenced by the pandemic and by the uncertainty about the effect on the economy. That led to four priorities for 2021. The first two priorities are banks' credit risk management and their capital strength. As we have found weaknesses in banks' management of credit risk, it will be our key priority to improve it, together with ensuring that banks' capital positions are strong enough to absorb the increase in credit losses. So this means that banking supervisors would like to see banks develop new ways of looking at their borrowers to differentiate between those that can repay loans and those that won't or can't. Supervisors will check if banks have appropriate practices in place that allow them to detect, measure and mitigate their credit risk early on before loans become a problem for them. That helps avoid a situation where banks start piling up bad loans which would create even worse conditions for the banks and the overall economy. One of our main priorities in 2021 will be to ensure that banks' capital positions are strong enough. There is still substantial degree of uncertainty surrounding the economic outlook and the related effect on banks' balance sheet coming from the corona crisis. It is likely that the quality of banks' assets will deteriorate particularly once the governmental guarantees will be withdrawn. That's Kirsten Afjochnik, one of the ECB supervisory board members, talking about the second priority, capital strength. Inevitably, of course, some loans go bad, a business that seemed to be running very well for whatever reason suddenly finds itself in difficulties and can't repay a loan on time. That's one of the reasons why banks must always keep a sufficient level of capital which is set by the supervisor and the greater the risk, the more capital is needed. We will try to detect the weaknesses of each bank as early as possible and take action if necessary. Now, not all issues that banks face are caused by the pandemic. Some weaknesses already existed before. For example, some banks have been struggling to make a profit which poses big challenges to them in the long run and this brings us to the next priority for this year, a sustainable business model. The business environment is competitive as always. Currently, many banks suffer from low profitability and cannot earn the cost of capital for several reasons. Some of the reasons may be cyclical and temporary but many factors are structural. So that's another voice there from Pente Hakerainen, another ECB supervisory board member, talking about the third priority. Now, of course, what business model a bank chooses is naturally up to that bank but ECB banking supervisors want to make sure that the business model, whatever it is, is sustainable over the long term. One of the silver linings, arguably, of the pandemic is society embracing digitalisation. Now, that means that we've seen people working a lot more from home but it can also have an impact on, say, a bank if it means that people are doing their banking sitting on their living room sofa rather than trying to go to an actual bank branch somewhere and that the bank might then decide, well, we need fewer branches. Simply having too many banks is another challenge that isn't new. Access capacity is what supervisors talk about in this context. One way to tackle that is through consolidation, one bank taking over another or merging with a competitor. But don't forget... I don't think it's the business of supervisors to, let's say, organise weddings between banks and to organise business combinations. I think that the point on concentration, on consolidation that we have made strongly is that there is a concern on business model sustainability across several banks in the banking union and consolidation could be an avenue. Introducing priority number four is Edward Fernandez Bolo. Sound governance practices and internal controls are indeed key to mitigating the risks that banks face even more so in times of crisis. Therefore, we will focus in our supervisory work on the adequacy of banks' risk management frameworks and their ability to adapt and operationalise them in a crisis context. So that's the last priority for this year, governance. Accurate information is key to making the right decisions. Supervisors will challenge banks on how they collect and aggregate data around their risks and that includes their IT and cyber risk management as Andrea Enria explains. Last but not least, banks continue having shortcomings in their governance frameworks and IT security. This makes them vulnerable to misconduct and money laundering and also cyber crime and IT failings. Our priority will therefore also be bank governance and digital resilience. So by focusing on these four priorities, credit risk management, capital strength, business model sustainability and governance, supervisors ensure that banks can stay financially healthy and that will help sustain the economic recovery. This brings us to the end of today's episode. Do as always look in the show notes for links to related papers and publications from the ECB. We'd also love to hear your feedback and thoughts for future episodes via social media. 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