If it ain’t broke, don’t regulate it
The European Securities and Markets Authority’s (ESMA) decision to fine five Nordic banks last week has raised two questions: just how consistently will rules be applied across Europe, and is it even appropriate that they are?
In this case, when the Nordic banks were fined for breaking European regulations, logic leads one to wonder whether German Landesbanks might fall on the same sword. But it would be a shame if they did.
ESMA is demanding Danske Bank, Nordea, SEB, Svenska Handelsbanken and Swedbank cough up €495,000 each for issuing credit ratings that broke the rules set out in the Credit Rating Agencies Regulation (CRAR).
The five firms described the credit opinions they gave clients as “shadow ratings”. They contained credit opinions on different borrowers and instruments, as well as rating scales.
But if that is against regulations, it will cause some concern in the Schuldschein market, which has relied for years upon arrangers making similar sorts of credit assessments to provide to investors.
BayernLB, Helaba, LBBW and NordLB provide similar analysis and opinions to the German co-operative and savings banks who invest in Schuldscheine. It is hard to find cast iron distinctions between what the Nordics and the Germans do in this regard.
But whether or not the Landesbanks are in danger of catching a bullet from ESMA’s regulatory revolver — and likely they are not — enforcing this regulation would be far more trouble than its worth in the Schuldschein market, and likely damage a functioning and flourishing market.
German co-operative and savings banks are the lifeblood of the Schuldschein market. Though German regulation commits them to conduct their own credit research, it is no great secret the smaller bank lenders rely a great deal on the internal ratings of the Landesbanks.
The maxim “if it ain’t broke, don’t fix it” should carry some weight. Indeed a more appropriate derivation would be “if it ain’t broke, don’t break it”.