Wednesday 18 July 2018

Sharon Donnery in the mix to replace top bank regulator

Central Bank deputy governor Sharon Donnery
Central Bank deputy governor Sharon Donnery

Ferdinando Giugliano

Central Bank deputy governor Sharon Donnery is being tipped as a possible replacement for Daniele Nouy when she retires as chair of the European Central Bank's supervisory board at the end of the year.

The race to replace Nouy is wide open. Possible candidates include Ms Donnery, deputy governor at the Central Bank, Andrea Enria, EBA chairman, and Ignazio Angeloni, who sits on the supervisory board.

In the past three and a half years Mr Nouy has played a decisive part in setting up Europe's "single supervisory mechanism" - which transferred oversight of the region's biggest lenders from the national to the European level.

The ECB's first task as supervisor-in-chief came toward the end of 2014, when it had to organise a Europe-wide asset quality review and a stress test together with the European Banking Authority and relevant national authorities.

In retrospect, it was probably too lenient. Several Italian banks failed but the capital increases demanded by the supervisors proved to be insufficient.

Still, Mr Nouy helped the ECB cement a reputation for toughness. In particular, she targeted the non-performing loans that accumulated on bank balance sheets after the financial and sovereign debt crises.

Mr Nouy went head to head with national supervisors, not least in Italy, to get banks to be more honest about losses on their books.

The sales of non-performing loan books have speeded up subsequently. Alongside the stronger economy, these disposals have helped cut bad loans from €1trn in early 2015 to €721bn at the end of last year.

Banks hold much more capital too (and of better quality) than before the crisis.

The priority for whomever wins the EBA job must be to keep the pressure on banks to reduce their stocks of bad loans.

The Eurozone economy is recovering, so this is the time to ensure banks will enter the next recession stronger.

Other dangers lurk. Take the so-called Level 2 and Level 3 assets sitting on bank balance sheets. These instruments aren't traded on financial markets.

Unlike most non-performing loans, there's nothing wrong with banks holding them but their lack of liquidity gives lenders the ability to mask their valuations. The ECB has launched a project to assess their riskiness, including on-site inspections. Many are being conducted by national authorities because the ECB is overstretched. (Bloomberg)

Irish Independent

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