ABLV was a good test of our capacities, says European Central Bank

The next crisis in Europe and the world might be brought about by developments connected to the real estate market and mortgage lending, Daniele Nouy, Chair of the Supervisory Board of the European Central Bank (ECB), said in an interview with LETA. In the interview, she also mentioned now-defunct ABLV as a good test for the bank's regulatory capacities. 

“Growth in the real estate market, the commercial property market, is very substantial in terms of both price and volumes of transactions. In my opinion, the use of variable interest rates poses a risk, as there is no guarantee that, when interest rates go up, companies’ profits or people’s wages will increase; but payments on their loans will do so. We will closely follow developments in the real estate market. This affects not only Latvia and the Baltic States, but also other countries,” Nouy said.

The ECB official emphasized the necessity to be prepared for a crisis, adding that banks have to be safe and sound. That means they need to have enough capital and good quality capital. At present, the average CET1 ratio of euro area banks stands above 14 percent, which is much higher than before the crisis

“We will nevertheless carry out liquidity stress tests next year. Although liquidity is ample and money is cheap, some banks have not been successful enough in mobilizing collateral and acquiring additional liquidity in the market when under pressure. Banks have to be ready for possible liquidity constraints,” Nouy said, noting that the Single Resolution Mechanism is now in place, which helps a lot.

“This means that we are much better prepared for a crisis because the crisis management mechanism is fairly strong,” she said. “Thanks to Latvia, we underwent a good test, as the ABLV Bank incident came out of the blue.”

“It was a good test of our capacity and ability to take the right decisions within a short time frame. In no more than a few days, all the necessary actions had been accomplished. So, I would indeed say that we are much better prepared now,” the ECB representative said. “What is still lacking is a European deposit insurance scheme - EDIS,” she added.

“The only thing we know for sure is that there will be a new crisis. But we don’t know when or why it will emerge,” Nouy concluded.

The European Central Bank implements the Single Supervisory Mechanism, intended to ensure the security and resilience of the European banking system and promote financial integration and stability in Europe. As part of that mechanism the ECB in cooperation with the Financial and Capital Market Commission (FCMC) supervises Latvia’s three largest banks by assets: Swedbank, SEB Banka and Luminor Bank.

The ECB also used to supervise ABLV Bank whose license was withdrawn on July 12, 2018 after the bank was hit by US sanctions and folded itself earlier in the year. 

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