On a summer day on a hotel terrace in the former German capital of Bonn, Mr. Hellwig spent two hours discussing disincentives that have been created in the European financial system. He accused the European Central Bank of bending to politicians’ will and being too easy on banks in its ongoing “stress test” examination of their balance sheets, creating “zombie banks” in the process. He is skeptical of the ECB’s latest efforts to revive lending to the euro zone economy, and fears the ECB will be open to a conflict of interest as it adds responsibility for supervising banks to its existing role as the guardian of monetary policy.
Handelsblatt: Mr. Hellwig, Mario Draghi, the president of the European Central Bank, has announced new offensives in the fight against the credit crunch and deflation. One of his proposals is a large-scale purchase of asset-backed securities. How do you feel about the idea?
Mr. Hellwig: I’m not familiar with the details, but I’m skeptical. The ECB wants to relieve pressure on the banks’ balance sheets so that they can issue more loans. This kind of balance-sheet relief has existed before, in the years leading up to the crisis. Mortgages were securitized and the resulting asset-backed securities were sold worldwide. The mortgage banks had no reason to pay attention to the quality of borrowers, and as a result, billions in subprime mortgages were issued, securitized and brought into circulation. The loans were taken off the mortgage banks’ balance sheets, and the result was a crisis in the financial system.
Now the ECB apparently intends to purchase only highly rated securities, and the banks are to be liable at least for initial losses associated with the securities.
But that leaves the bulk of the risk with the bank, and the bank isn’t truly receiving any relief. Actually relieving the banks of risks reduces their liability and adversely affects the quality of lending. It’s an unavoidable dilemma. The proposal that countries guarantee the risks isn’t helpful, either. It would relieve the ECB of its burden, and yet taxpayers would end up being liable for the banks’ faulty decisions.
Was it the right decision to make the ECB the supreme supervisor of Europe’s largest banks?
Transferring bank supervision to the ECB means more power and responsibility for this institution, but without any real discussion of the pros and cons of this approach. When the decision was made in June 2012 to Europeanize bank supervision, the only objective was to make it happen as quickly as possible. This is why the Europeans sought to avoid amending the EU Treaty and used Article 127 of the existing treaty instead…
…which permits the European Council to assign, by decree, “special duties in the realm of bank supervision” to the ECB…
This approach made it possible to avoid any discussion of the issue of whether the ECB or a separate agency was to be charged with European bank supervision.
A complaint has now been filed against this approach in Germany’s Federal Constitutional Court. How do you feel about that?
I agree with the plaintiffs that the assignment of total responsibility for bank supervision is not covered by the treaty. In my view, “special duties” are not the same thing as general responsibility. In principle, I think the Europeanization of supervision is necessary, but I fear that it destroys the public’s faith in democracy when these kinds of decisions are made on weak legal grounds.
Aside from legal issues, we’d like to know whether it makes fundamental sense to combine monetary policy and bank supervision within the ECB. Something that seems necessary in terms of monetary policy can harm financial stability.
Indeed. Conflicts over objectives are especially likely when both the economy and the banks are ailing. In that case, monetary policy may focus on maintaining a high level of lending to businesses and private households, while precisely the opposite is needed for financial stability.
So you favor a separation of monetary policy and bank supervision?
Yes, in principle. However, the central bank always has to be kept informed of how banks are doing. Banks are an important part of the monetary system. The central bank has to know how banks, which contribute to the application of monetary policy measures to the real economy, are doing.
But receiving information doesn’t mean performing a regulatory role…
That’s true. Incidentally, monetary policy can also be corrupted by supervision. If regulators sanction developments that lead banks into crisis, the central bank will be tempted to provide the banks with low-interest loans to help them get back on their feet. The temptation is even greater when this enables the central bank to cover up mistakes in its supervisory duties.