ECB Bank Oversight Chief to Banks: Buck Up

Some banks may be happy to hear that 1 in 5 Germans reportedly made it their New Year’s resolution to save more money in 2017, despite the European Central Bank cutting its benchmark interest rate to 0 last year. But Danièle Nouy, chair of the ECB’s supervisory board, thinks European lenders need some New Year’s resolutions of their own — and she has specific ideas about what they should be.

“Three things come to mind: adapt business models, improve risk management, and deal with legacy assets,” Nouy said in a speech in Frankfurt this week.

That’s ECB-speak for “Live, damn it, live!” — a fitting exhortation for a sector that has flirted with disaster in recent months. Bank crises roiling Europe took investors on a roller coaster ride in the last half of 2016, as Germany’s Deutsche Bank teetered on the brink of collapse and Italy’s Banco Monte dei Paschi di Siena went running to the state for a bailout.

Among the ECB’s supervisory priorities this year, Nouy said, is that banks need to shed bad loans and restructure their businesses to stay afloat in the postcrisis world of low interest rates and tougher regulations. Europe’s banks hold roughly €900 billion ($962 billion) in nonperforming loans, according to estimates by the International Monetary Fund.

The linchpin in Nouy’s plan is risk management.

“Banks have been handed a cocktail that is low in profits and high in liquidity — a combination that might tempt them to embark on a dangerous search for yield,” she warned. “It is up to risk managers to take a long-term view and rein in excessive risk-taking.”

These three goals may sound like a tall order, but to Nouy, they are like the basic hygiene requirements that folk singer Woody Guthrie joked were his New Year’s resolutions in 1943.

“This list comprised items such as ‘shave,’ ‘take bath,’ ‘wear clean clothes,’ and ‘wash teeth — if any,’” Nouy said in her speech. “The New Year’s resolutions I suggested to banks are a bit more ambitious, that’s for sure. But just like those devised by Woody Guthrie, they are based on common sense.”