The euro zone's new chief banking regulator has warned that some of the region's lenders have no future and should be allowed to die, heralding a far tougher approach to the supervision across the currency bloc.
In her first interview since taking charge of the euro area's new banking overseer, the Single Supervisory Mechanism, Danièle Nouy also signaled she wants to weaken the link between governments and the bloc's banks that lies at the core of the region's crisis by breaking with tradition and demanding lenders hold capital against their sovereign assets.
"One of the biggest lessons of the current crisis is that there is no risk-free asset, so sovereigns are not risk-free assets. That has been demonstrated, so now we have to react," Ms Nouy said. "What I would admit is that maybe it's not the best moment in the middle of the crisis to change the rules – that's possible. This being said, there is the possibility to do more and some countries are applying stricter rules."
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Global rules set before the financial crisis allowed lenders to hold no capital against their government bond portfolios, at the discretion of national regulators. But, despite the region's crisis exposing the depth of the interconnections between the sovereigns and their banking systems, Europe's lenders have been buying government bonds in increasing amounts.
Ms Nouy agreed with Mario Draghi, the president of the European Central Bank, that the ECB's upcoming health check of the region's biggest lenders would need to see some institutions fail to be credible. "We have to accept that some banks have no future," she said, parrying speculation that a wave of consolidation could save the currency bloc's weakest lenders. "We have to let some disappear in an orderly fashion, and not necessarily try to merge them with other institutions."
The appointment of Ms Nouy, who joins the SSM from the helm of France's banking supervisor, comes at a crucial time for the region's embattled lenders. Her first task as Europe's chief regulator is to oversee the health check, which will include an asset quality review and stress tests, before overseeing their supervision towards the end of this year.
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Ms Nouy said that, on the whole, European lenders were in a better state than investors thought and hoped that the health check would prove this by providing more transparency on banks' assets. Her readiness to countenance bank failures will trigger alarm among national politicians reluctant to see local lenders go to the wall. Italy has moved to reject the idea of setting up a "bad bank" for fear that it will focus market attention on the exposure of Italian banks to a rising level of non-performing loans and put the country's credit rating at risk.
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Ms Nouy expressed consternation at the recent probe into allegations that banks fixed foreign-exchange rates, along with doubts that lenders were following the spirit of new EU rules on bonuses. "From the point of view of governance and internal controls, it's quite shocking to see banks acting this way. It's not only a matter of capital requirements," she said.
"Human nature being human nature, I don't believe that the lessons are learned forever. So we have to be cautious and vigilant supervisors because, after a certain period of time, the lessons are forgotten. That's for sure."
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The SSM, which will operate as the supervisory wing of the European Central Bank (ECB), will open its doors in November, when around 800 staff will take on the task of keeping the euro zone's 130 largest lenders in check. Responsibility for the thousands of other smaller lenders in the region will remain with their national regulators. However, Ms Nouy was adamant the SSM "will not be shy" about grabbing power from them if necessary.
"All the banks will have to be supervised from the same manual, the same rules ... and the ECB can take supervision directly of a small bank. It's difficult to say how often we will exercise this kind of power, but we are fully committed to do it as often as needed," she said. "If we have a doubt, if we believe that it makes sense, we will just do it. You have to demonstrate that you are serious about it."