Banking Supervision

Bank boss faults ECB's conflict of interest

dunkel
Gunter Dunkel has some harsh words for the ECB.
  • Why it matters

    Why it matters

    The challenges roiling the German and European banking sector, particularly low interest rates, have put pressure on the industry to find new ways to shore up struggling lenders.

  • Facts

    Facts

    • The Association of German Public Banks, or VÖB, has 63 members, 13 of which are subject to oversight from the ECB.
    • Its preseident Gunter Dunkel has also served as chief executive of NordLB, a regional German bank.
    • NordLB agreed to fully take over a state-supported subsidiary, Bremer Landesbank, earlier this year.
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    Audio

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When Gunter Dunkel leaves not one, but two high-profile posts in Germany’s banking sector later this year, it will be with mixed feelings.

The 63-year-old is planning to step aside as chief executive of NordLB, a regional bank backed by the state of Lower Saxony, later this year. Before that, he will leave his post as president of the Association of German Public Banks, also known as VÖB, which has 63 members, among them 13 of the 21 German banks overseen by the European Central Bank.

“On one hand, I have a good feeling because I gave it my all and a lot was achieved – more couldn’t have been done,” he told Handelsblatt. “On the other hand, times are more than challenging for credit institutions, and will undoubtedly stay that way in the future.”

During his tenure, the banking chief has seen much of the blame for his industry’s woes directed at the ECB, with its ultra-easy monetary policy. Those who fault the ECB alone, however, aren’t seeing the whole picture, Mr. Dunkel told Handelsblatt.

There are conflicting interests within the ECB. That has to do with the fact that the ECB isn’t just responsible for monetary policy - it’s also in charge of overseeing the large banks.

“Any business model has to be able to withstand a long period of low interest rates,” he said. “A model that only works with a steep interest rate curve is not an effective model.” The banking sector, Mr. Dunkel argued, must come to terms with the new financial landscape – and adjust its models accordingly.

“Because of low interest rates and the stiff competition among banks in Germany, we have to brace ourselves for lower returns on equity,” he said. “That means investors’ readiness to invest in banks will be limited.” As a result, banks today are often only able to free up equity by generating profits or selling off capital-backed portions of their businesses.

Despite the banks’ own responsibility for improving their fortunes in the current financial climate, Mr. Dunkel argued that there is room for reform of the ECB.

“There are conflicting interests within the ECB,” he told Handelsblatt. “That has to do with the fact that the ECB isn’t just responsible for monetary policy – it’s also in charge of overseeing the large banks.”

It follows that the Frankfurt-based institution sometimes finds itself at cross purposes. “One part of the ECB wants banks to grant more loans to expand their balance sheet totals and promote growth in Europe,” Mr. Dunkel said. “The other part of the ECB wants smaller banks, because they are considered more secure.”

The solution, he said, is to separate oversight functions from monetary policymaking. Mr. Dunkel proposed that the ECB’s regulatory arm be consolidated with other European oversight agencies – among them, the European Banking Authority and the European Securities and Markets Authority.

As head of NordLB, at which he first became a board member nearly two decades ago, Mr. Dunkel has experienced the problems plaguing Germany’s banks firsthand. The bank is forecasting significant losses for 2016, after posting a profit  last year.

NordLB, like other regional banks in northern Germany, has been hit hard by the crisis in the shipping industry. But Mr. Dunkel rejected the idea that the extent of the slump caught him by surprise.

“We never underestimated the shipping crisis, but it’s gotten considerably worse again in the meantime,” he said. “Ship financing providers have to respond – that goes for us, too. We will make the proper and necessary provisions – and we can do that.”

“NordLB is strong enough to overcome this crisis,” Mr. Dunkel added. Moreover, his bank has kept its capital ratio at a healthy level, even after it acquired the shares it did not already own in struggling Bremer Landesbank. “That only worked because we did our homework,” he said. “NordLB has regularly achieved good results in recent years and continuously strengthened its capital.”

As for the future of banking in Germany, Mr. Dunkel said consolidation in the sector won’t be as intense as it has been in Britain or Spain. “Savings banks and cooperative banks won’t disappear,” he said. He described the merger trend as more of a “creeping process.”

Meanwhile, Mr. Dunkel said it is unlikely that the future will be defined by pan-European banks, as envisioned by the ECB – particularly in light of the regulatory hurdles such mergers would face. It may be “desirable,” he said. “But I can’t see it happening.”

 

Frank Drost is a correspondent for Handelsblatt in Berlin. To contact the author: drost@handelsblatt.com

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