Dombret: "We will never have certainty"
Interview published in Wirtschaftswoche, Title: "We will never have certainty"
Interview with Andreas Dombret conducted by Cornelius Welp and Saskia Littmann.
Translation: Deutsche Bundesbank
Mr Dombret, for eight years now, you have concerned yourself with the stability of the financial market and of the banks. Particularly the major German institutions are painting a sorry picture at the moment. Where did you go wrong?
German banks are sometimes depicted as being in a worse state than they actually are. Today, even the major institutions are considerably better capitalised and can more easily withstand shocks. When I started at the Bundesbank in May 2010, the Greek bailout was at the centre of attention. At that time, the Lehman Brothers insolvency was only one and a half years in the past. There has been progress since then. We as regulators have contributed to that.
The stock markets are actually valuing German institutions lower than their Italian counterparts.
As supervisors, we have deeper insight than the general public. On that basis, I do not currently have any major concerns about the German banking industry.
Even so, why are the figures from the major German banks so bad?
This also has something to do with the issues and business models of individual institutions, which I will not comment on. German banking supervisors have already indicated multiple times that banks and savings banks need to rethink their business models and increase their profitability. If they do not earn enough money, then they cannot build up sufficient capital. Over the long term, this creates new risks. We need efficient and profitable banks.
Banks are making savings, closing branches, and cutting jobs. What else should they be doing?
Many banks have begun to compensate for lower profits by raising fees. We have explicitly expressed our support for this approach. And the institutions can be even more efficient. They have definitely not fully exhausted the opportunities offered by digitisation. Even mergers are not out of the question any more.
In the past, only few mergers were successful.
I am not only talking about large-scale mergers, but also mergers between small institutions. In this regard, a lot has happened in recent years, such as in the cases of savings banks and people’s banks. Experience shows that mergers in Germany are an effective means of reducing costs.
Should banking supervisors be encouraging large-scale takeovers at the European level?
That is a matter that only the individual institutions themselves can decide. Supervisors should not be setting out any guidelines in that respect.
Would such mergers be able to weaken the overbearing dominance of American institutions at the international level?
The lead held by banks from the United States is in fact striking, and I do indeed view it with concern. The American institutions emerged from the crisis in a better position, which was also due to the decisive action taken by US authorities. Furthermore, banks in the United States benefited from a speedier economic recovery. European banks therefore need to raise their game. The economic recovery in Europe will also contribute to this.
You could also help by reassessing or rolling back regulation, as was done in the United States.
I firmly believe that, overall, stricter regulation has led to a more secure banking system. This should remain fundamentally unchanged in both Europe and the United States. There are, however, many grey areas as well as a lot of scope for discretion. We can and should make use of these to be more lenient in individual cases and thereby make the banks more resilient.
So supervisors should loosen the reins.
In my opinion, it is not a matter of deregulation, but of the practical implementation of the existing rules. There is no reason not to take a moment to examine how all of the new regulations interact with one another and whether they could potentially have unintended consequences. Just constantly introducing new regulations does not seem sensible to me. We can be more accommodating in instances where there is lower risk. Making things easier for smaller institutions comes to mind, as an example.
All of the banks complain that regulation demands too much of them.
Banks and savings banks would not complain if there were too little regulation. The more complex an institution, the more demanding the rules must be. More complexity always means more risk. But you can also overburden a banking system. We would have reached this threshold if, due to regulation, institutions with good business models were no longer able to earn sufficient amounts of money. Some rules, such as in the area of consumer protection, have in fact needed a great deal of time and effort. This should be brought into question.
But you cannot alleviate the banks of their biggest concern – low interest rates.
Unfortunately, this has been a concern for years. But, so far, business models based on interest business have also proven themselves to be sufficiently stable.
Property prices have risen sharply. When will the bubble burst?
We believe that property prices in the cities are 15% to 30% too high. Despite this, 80% of the institutions that participated in our low-interest-rate survey are expecting prices to rise further. So far, I have not seen any evidence of a bubble. For that to happen, growth in lending would need to accelerate, but it has actually slowed down of late. Furthermore, banks have not relaxed their criteria. In the medium term, however, there is the question of whether collateral is valued too high.
And if interest rates were to suddenly rise?
German banks and savings banks are now better prepared for that scenario. According to our surveys, at the end of 2016, a sudden rise in interest rates would have put 55% of small and medium-sized institutions into difficulties. Today, this would be the case for only 44%.
What risk do banks currently underestimate the most?
It is likely that not all institutions are adequately prepared for cyberattacks. A successful attack could cause an enormous amount of distress. I would like to have simulated an attack on the German financial system in order to raise awareness amongst all those involved. Other central banks have done this and learned a lot from the experience.
Political unrest has grown over the past few years. What consequences would a trade war have for the banks?
Today, the geopolitical challenges are greater than they were at the start of my term of office and could also be detrimental to German banks oriented towards the free exchange of goods and finance.
One result of growing nationalism is Brexit. Are European banks now well prepared?
Some reacted quickly and applied for licences from authorities on the continent. A few are doing practically nothing. Most have made significant progress in their preparations, but are making amendments as the news situation requires. These banks preferably want to know exactly what is happening before they take action.
That seems understandable.
We will never have certainty. We do not know if the transitional period that is now being worked towards will actually come to pass. We are therefore urging banks to submit their licence applications to supervisory authorities by the end of June and amend them later if necessary. This is the only way for them to be adequately prepared should it come to a hard Brexit at the end of March 2019. Issuing banking licences is a complex process. If a large number of institutions submit their paperwork at the last minute, there is no guarantee that supervisors will be able to process it on time.
How many bankers will be moving?
All of the major institutions have recognised that they need a base in continental Europe and therefore want to establish a presence here. The degree of presence depends on the volume and complexity of their business. Just intending to set up a token presence is, in any case, not enough. More demanding business models also need adequate risk management systems on site.
You yourself were previously an investment banker and are now highly familiar with banking supervision. In what kind of role do you want to make a living out of this knowledge in future?
For now, I am looking forward to taking a break, which is required by both the Bundesbank and the ECB. Once that has passed, I will be playing an active role again. I am not involved in any talks at the moment. That can easily lead to a conflict of interest, and I will do everything I can to avoid that.
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