My question is how banks should react to that, in your view. I have two, in fact. It's for the budget holders to decide. We will now report on the outcome of the meeting of the Governing Council, which was also attended by the Commission Executive Vice-President, Mr Dombrovskis. To some degree, the lag in the reaction of non-performing loans (NPLs) is to be expected, and the increasing cost of risk, a measure of provisioning, is a sign that banks are preparing for asset quality deterioration. The implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential, reduce structural unemployment and increase resilience. My first is regarding credit risk. Uncertainty has been the defining feature of this unprecedented shock. We know that the absence of a deposit guarantee scheme, of a European deposit guarantee scheme, is still a concern in a number of quarters, and will impede a faster move in that direction, but I think there is, as we mentioned also in the paper with Edouard that you refer to, I think we should try to make the current framework work at its best as far as we can. They suffer from insecure pensions; what should they do? Note: Sample comprises 110 SIs at the highest level of consolidation in Q3 2020 and 113 SIs in Q4 2019. Do you think they will be useful in cleaning up banks’ balance sheets, and do you expect to see them operational in the short term? For instance, is the view that the ECB can't or won't raise or cut interest rates as long as the review is being discussed, justified? Introductory statement Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. It was one of the areas of focus of our letter in December. provisions via model overlays). Source: Supervisory reporting for Q4 2019 and Q3 2020; IFRS 9 transitional arrangements and dividend distributions: ECB estimates; Pillar 2 requirements and Pillar 2 guidance pre and post COVID-19 relief measures: 2019 SREP decisions applicable in 2020. We will now report on the outcome of the meeting of the Governing Council, which was also attended by the Commission Executive Vice-President, Mr Dombrovskis. Note: Sample comprises 112 SIs. And compared with what happened during the great financial crisis, last year banks reported a much more moderate tightening of credit standards. Are you worried in some way for that? The way in which banks are preparing for asset quality deterioration varies widely and could, in some cases, be insufficient. Let me now explain our assessment in greater detail, starting with the economic analysis. A value of 2 means a 100% increase in CoR in Q3 2020 compared with Q3 2019. This will sustain the euro area expansion, the build-up of domestic price pressures and, thus, the robust convergence of inflation to our medium-term aim. I mean, for some, very close to 100%, which means that they’re basically not generating sufficient capital. Source: COVID-19 supervisory reporting as of Q3 2020. For some banks we are, but not for all the banks, so that’s an area on which we are focusing a lot of our attention. All of that is going to be part and parcel of the strategy, so it's a broad exercise. This gave us access to real-time information about the effects of the pandemic on the banking sector and enabled us to optimally prepare ourselves to address concerns. I have a question on the strategy because at the beginning of your tenure you said, “I want to dust off the language of the Bank to help the citizens to understand what the Bank is for.” Now, most citizens, whether they are savers or borrowers, they have just one thing in mind; when will the ECB raise the rates? The exchange rate of the euro is determined by market forces, which is consistent with the long-standing commitment of the international community to market-determined exchange rates as reiterated both at the G7 and at G20. What can you do in that situation? This year’s press conference will naturally be rather different, due to the unprecedented events that have been affecting all of our lives since the beginning of last year. So there could be justifications for this adjustment, but it is so massive that we think we need to look more into that. The introductory statements made by the ECB are some of the most important sources of insight into the central banks’ policy goals. We have said, of course, that we will give time to the banks to rebuild the buffers, so at least until the end of 2022. Things are actually happening. Supervisory priorities for 2021 focus on the impact of the crisis and structural weaknesses, Note: Other priorities include: Improving climate-related and environmental risks management, Basel 3 finalisation preparedness. I'd like to know what the ECB has learned from its experiment with tiering so far since September, whether you're satisfied with the impact on bank profitability and lending and money market rates, and whether what you consider the costs and benefits to expanding the pool of exempted deposits or raising the rate on them. Overall, our accommodative monetary policy stance will help to safeguard very favourable bank lending conditions and will continue to support access to financing across all economic sectors and in particular for small and medium-sized enterprises. Jump to the transcript of the questions and answers This pattern of moderate growth reflects the ongoing weakness of international trade in an environment of continued global uncertainties, which has particularly affected the euro area manufacturing sector and has also dampened investment growth. Then the second one is about the nine banks that are indeed tapping their capital buffers, maybe you could tell us a little bit about how that has been seen by investors? The first is about SREP requirements. Taken together, and excluding the flexibility on the CCB, these measures almost doubled banks’ capital headroom, from 2.8% to 5.3% as of the third quarter of 2020. These developments are also visible in the results of the euro area bank lending survey for the fourth quarter of 2019, which indicate weakening demand for loans to firms, while demand for loans to households for house purchase continued to increase. In order to make banks part of the solution, a wide range of public policy measures were adopted to motivate adjustments in behaviour. As I said very clearly I think in the introductory statement, the Governing Council is going to be very attentive to any and all developments in all directions, both in terms of growth but obviously in terms of inflation, which is our measurement of price stability, and will take whatever measures are necessary, as appropriate, in order to respond to our imperative to deliver on our mandate of price stability. Then a question on the risks: you said that the risks remain tilted to the downside, but less so; was there some discussion about maybe saying that risks are now balanced? If I remember well, it’s around 65%, 66%, and it’s been stable for some time now. What kind of things do you have in mind? Let's hope we don't have to do that, because growth doesn't slow and growth continues to not only stabilise but accelerate in the going future. The latest observations are for August 2020. In a similar vein, banks may draw on the experience they have gained from managing their staff and premises during the lockdowns. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union. Do you agree with your predecessor that the inflation target should be viewed as symmetric? What I tried to do when describing for you what we were already doing was to show that, while we might not be ahead of the curve yet, we are not sitting on our bottom doing nothing. We will continue to benefit from the work of the researchers, of the top-notch economists, of the academics and, yes, their views will be harnessed at various events that will take place in the course of 2020. The narrow monetary aggregate M1 continues to be the main contributor to broad money growth on the components side. That’s fine. So for these banks, for this tail of banks, efforts on the side of cost-reductions and staff costs, so staff cuts, also will be absolutely necessary. Speeches. Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 21 January 2021. There has been an extensive concern that buffers were not being used, that there was a lot of reluctance from banks to use buffers. I think there was a misunderstanding about the way in which the ECB was looking into consolidation, there was an impression that we would have increased capital requirements as soon as a business combination was proposed to us. There can always be a risk somewhere, but I think that in good conscience, we have looked at everything that we thought was necessary. The first one, would European banks be more profitable without negative interest rates? Now, on the credit risk models, manipulation is a big word, right? The low and negative interest rate environment has of course exercised a negative effect on interest margins, but at the same time it has exercised a positive effect on lending volumes, and also for some time on the trading book asset. President Lagarde, you've said before that the review will last until the end of the year. Learn more about how we use cookies, We are always working to improve this website for our users. What is the base case? Read about the channels of accountability, decision-making and the ECB’s new organisational structure. You very gently nudged me into having a view as to whether there should be a band, as to whether there should be this, that or the other. Do you not fear that it will be difficult to deliver on that? Credit risk, profitability and internal governance are the predominant areas of supervisory concern. Having national asset management companies would also be a positive way forward if we go into a situation in which bad loans start piling up. I think one critical development since our last meeting in late December has been the conclusion of phase one of the negotiations between US and China. The last strategy review addressed an era where inflation was hard to tame, not hard to stimulate. All in all, it’s difficult to assess the impact on profitability. Notes right-hand chart: Sample comprises 106 SIs. We know it’s going to keep rising in 2021. You will see that as part of our strategy review, we are going to look at the potential side effects of the current circumstances, which are low rate – let alone negative – but we have had low rates for a period of time. We will see whether next year or the year after and so on and so forth, whether we need to reorganise a timetable, but at this point in time, frankly I think it would've been unwarranted, to say the least, to change anything. I know that some commentators would love me to disclose my principles, my views and my philosophy. Should they buy shares, real estate, or should they spend their money? Personally, I believe that nothing conclusive can be said until the pandemic-induced losses start materialising. We have a strategy that was defined and that has inspired the policy decisions that were made and that have been made up until this day. Notes right-hand chart: Credit-wide processes refer to a wide range of issues related to credit risk management, including credit approval process, risk appetite, back book management. Let me also stress that, with asset quality becoming more visible and capital projections more reliable, ECB Banking Supervision will, as announced last December, return to the ordinary supervision of dividend distributions and share buy-backs in 2021. We recently issued a guide to clarify our supervisory expectations. Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. On staff policies, the cost-to-income, on average, is very high. Moratoria is a peculiar area of concern, because of course, the delays in payments are one of the main indicators the banks use to classify their customers, and moratoria generate a sort of blindness, lack of visibility in terms of payments. It certainly has slightly reduced, if not vanished, but it also has consequences in terms of international trade at large, and indirect consequences for those regions or countries around the world from which trade will be diverted in order to deliver on that phase one. Source left-hand chart: Supervisory reporting. We published a study just before December that takes stock of the last 20 years of euro use and implementation and monetary policy delivery. All governors have their space and time in order to share their perspective and submit their views. We have been focused on the risks in the leveraged loan markets for a while. Is there something more efficient, different that the ECB could do or influence in order to catalyse fiscal expansion? Clearly, the issue of housing and the distinction between the owner occupancy versus the non-owner occupancy, the reality and the perception, the difference between large urban centres and rural areas; all of that is infinitely difficult to apprehend and to calculate. It is going to be an important matter that will be debated during the strategy review. FRANKFURT--The following is the full text of Draghi's introductory statement to the press, as provided on the ECB website: Mario Draghi, President of the ECB Frankfurt am Main, Sept. 4, 2014 A quick second question. Our staff were subject to the same constraints as many people across Europe as we had to implement wide-ranging teleworking arrangements. Could you clarify when they will come back to normal, so they will not be pragmatic any more? Governments with fiscal space should be ready to act in an effective and timely manner. Well, we have done a number of on-site inspections which have focused explicitly on leveraged finance, and in many cases we have asked for adjustments in the prudential treatment of these exposures, which has indeed reflected into capital impact. Please note that related topic tags are currently available for selected content only. There are sectors which have been heavily hit by the crisis, and other sectors which have been instead even benefiting from the distancing measures and the behaviours that these distancing measures have triggered. Euro area annual HICP inflation increased to 1.3% in December 2019, from 1.0% in November, reflecting mainly higher energy price inflation. Introductory statement by Ms Christine Lagarde, President of the European Central Bank, and Mr Luis de Guindos, Vice-President of the European Central Bank, Frankfurt am Main, 11 March 2021. Finally, we relate the tone shock to future ECB monetary policy decisions. Banks have increased their exposures, and in particular there are also indirect exposures through the guaranteed loans that have been granted in the response to the pandemic. Blue lines represent December 2018 values, yellow lines represent values from June 2020. My first question is in relation to monetary policy’s impact on the banking sector. Now in Italy there is a new CEO at UniCredit, Andrea Orcel. We expect them to remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics. In general, as supervisors, the concern we have with deposits is when they become too volatile, and that’s not the case at the moment. Introductory statement by Andrea Enria, We will monitor these efforts closely and expect them to be reflected in the data for the fourth quarter of 2020 and going into 2021. The probability of that scenario has reduced according to the most recent forecasts. So there is an increase in the exposure. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. If you focus on others, you could be a little bit more downside. On the basis of current futures prices for oil, headline inflation is likely to hover around current levels in the coming months. Then we will draw our conclusions, which will be independent from the strategy review that we're conducting separately. I was personally very pleased to see that the private sector is actually also taking action in that respect, and certainly would welcome the involvement of other operators including their accounting firms and those that are setting the international accounting standards as well as the large asset managers, as we've seen. Is that your main area of concern, so these loans that are subject to forbearance and moratoria could transform into NPLs? IFRS stage 2 ratio = ratio of stage 2 loans to total loans subject to staging at the end of the quarter. In view of the weak economic outlook, the Governing Council welcomes the Eurogroup’s call in December for differentiated fiscal responses and its readiness to coordinate. Such a unified and prompt supervisory response would have been unthinkable before the banking union and European banking supervision were set up, when supervision was segmented across national lines. I think one of the key considerations we had on our mind was indeed the change in the level of uncertainties about trade and trade relationships, and the expectations we have that those uncertainties will be dealt with, hopefully in the future with the same type of approach… negotiations rather than adversarial positioning. Does the ECB have enough powers to act in that area? Then the financial crisis was the pivotal point at which eventually inflation was too low. See what has changed in our privacy policy, Jump to the transcript of the questions and answers, I understand and I accept the use of cookies, See what has changed in our privacy policy. Banks were able to ensure continuity of business despite lockdowns, with limited disruptions. If banks follow up on our 2020 letters on credit risk and qualitative measures under the SREP, the credit risk picture will clear up in 2021. I have a question about deposits. Since the third quarter of 2020, banks under our supervision have been well capitalised. I would be surprised if they were very much against that position. You had a second question, yes, the tiering. Several authorities and standard-setters, including ECB Banking Supervision, have stressed that moratoria and other forms of COVID-19-related forbearance should not be taken as justifications to postpone the assessment of unlikely-to-pay conditions. As to liquidity waivers, again, we have a setting within the legislation which is, in my view, pretty restrictive, but we still try to give guidance on ways in which we could strive to better manage, also from the supervisory perspective, liquidity on a group-wide basis within the banking union. But it might also have some disadvantages like group think or the ECB might be vulnerable for mistakes. European banks were in much better prudential shape when the pandemic shock hit than they were going into the great financial crisis. The experience of other jurisdictions, for example in the United States following the great financial crisis, is instructive here. Source: SREP 2020 values based on 112 SREP decisions applicable from 1 January 2021.Note: Total SREP capital requirements and guidance” refers to: 8% Pillar 1 + Pillar 2 requirement in total capital + capital conservation buffer + Pillar 2 guidance. The provisioning needs that have so far been acknowledged as a result of the pandemic represent the main negative driver in the outlook. Could you maybe explain right now in simple words to these people; why is it so important to review a strategy, because maybe it's not very evident for them to understand this long-distance exercise? Since then, technology, globalisation, even European integration have added an efficiency, but have undermined the inflationary pressures. Consolidation may help address structural problems of overcapacity and depressed profitability and could be particularly beneficial in the aftermath of a recessionary shock. Any anecdotal feedback on that? Lockdown measures imposed across Europe forced the banking industry, as well as other businesses, to implement remote working measures. I think the overall view – I think it was unanimous, actually; I didn't hear anything to the contrary – the unanimous view is that the tiering system is operating extremely well. This left all economic agents, including banks, virtually unable to make projections one or two years into the future. President Lagarde: Am I concerned? My second question is about tiering, especially since the next reserve maintenance period is in six days. President Lagarde: You know, I have a very simple-minded approach to your first question. A lot of hard work is going to be put into the exercise, but I would not exclude, preclude or anticipate how we are going to deliver, because that's the point of our strategy review exercise; it's how we deliver. Drawing on the lessons learned during the pandemic, banks are becoming more alert to the need to enhance cost efficiency and invest in new technologies. We have not seen sufficient loans being reclassified as forborne, and we were concerned because the indicators showed that this was not reflecting the reality on the ground. Okay, on the trade front, I think you're quite right in signalling that trade is actually an important element in our considerations and particularly in assessing the downside risks. It will really encompass the entire communication approach when it comes to decision-making, to publication, to the use of language that we have, to the outreach, to the engagement with all stakeholders. On dividends, it’s a bit early days. Disclaimer This is something that our teams are looking at very carefully to assess exactly what will be the impact on the net basis for the euro area. Our hope is that we can agree on that new strategy of the European Central Bank around November/December. As we have always said in the past – and this is, by the way, my strong conviction – the point is not so much the relevance of the size of the exposures; the point is the concentration of the exposures on the domestic sovereign. These two avenues will help restore acceptable levels of profitability. They lost billions of euros. Note left-hand chart: Sample comprises 104 SIs.