Copying and distributing are prohibited without permission of the publisher.

Watermark

The ECB is already failing as a bank supervisor

Daniele Nouy PA 230x150
By Tom Porter
29 Sep 2015

The European Union’s history is littered with rule breaking in the name of self-interest, and now its much heralded Banking Union is under threat from the same forces.

The Bundestag, Germany’s lower legislative house, last week approved a bill implementing the EU’s Bank Recovery and Resolution Directive, including amendments to give the country’s finance ministry far more power over its banks than the European Central Bank would like.

Italy, too, is acting out. Fabio Penetta, a member of the ECB’s supervisory board, recently warned the ECB over “unwarranted” and “arbitrary” requirements for higher capital at certain banks in the wake of the comprehensive assessment at the end of 2014.

One big sticking point is the ECB’s early intervention powers, which are meant to give it the ability to make important changes, such as ordering capital raises, when things start to go wrong. Sadly the BRRD's criteria for “going wrong” are extremely vague.

Daniele Nouy, the chair of the supervisory board of the Single Supervisory Mechanism, has already voiced her displeasure with eurozone member states making laws in such a way that the ECB's powers are difficult to use in practice.

“In certain cases I don’t quite see how we can take early intervention measures before the bank almost disappears, because it’s so restricted,” she said earlier this month. “This prevents us from taking these additional steps.”

The degree of unilateral decision making which still prevails in the post-crisis European banking framework is demonstrated by the varied reaction of states to the Financial Stability Board’s total loss absorbing capacity (TLAC) rules.

Germany, which is none-too-subtle-y helping its only global systemically important bank, Deutsche Bank, comply with the requirements, is set to alter the debt hierarchy laid out in the (BRRD) by downgrading senior unsecured debt below other senior claims such as corporate deposits, making it TLAC eligible. The bill which passed the Bundestag last week approved this approach.

Italy, meanwhile, is planning to achieve the same result by elevating large corporate, financial and government deposits above senior debt and some other senior claims. French and Spanish banks have been amending prospectuses to allow for the issuance of contractually bail-inable and TLAC eligible “tier three” or “sub-senior” debt.

Europe has been here before. 

The EU had well-meaning, though toothless, restrictions on budget deficits well before its sovereign debt crisis and Mario Draghi’s “whatever it takes” routine.

Armed with hindsight, many castigated the more southern members of the union at that time for flouting the rules and running up unsustainable debts. But the larger members, who tend to set the rules and demand obedience, were at it as well.

But this has always been one of the fundamental failings of the European Union, and indeed the euro. 

National politicians answer to their national electorates, and “pork barrel politics” as it is called in the US is a powerful incentive. Just look at the distinctly un-unified response to the region’s refugee crisis.

Were a major German, French, or Italian bank to get into trouble, a majority of German, French and Italian voters would probably want to know that their own government was able to act in the best interests of that country’s banking system (and its taxpayers) rather than Europe’s as a whole.

The ECB supposedly has the power to force banks under its supervision to exit certain businesses and even change management if things turn sour. The way things are going, it is hard to see how any national government would allow that to happen.

Europe’s banking system is still too fragmented for any “one size fits all” regulation to work. But this is precisely what Banking Union, and the ECB taking over as supervisor of the continent’s largest banks, was meant to address.

It may be impossible for any rational actor to give up a certain amount of national sovereignty for the supposed good of all. Politicians have to live in the world of the possible, rather than the sensible. But don’t expect it to work when it all goes wrong.

By Tom Porter
29 Sep 2015