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State Banks Bristle Under ECB Scrutiny

ECB Marc Steffen-Unger
The ECB is drawing the ire of regional German banks.
  • Why it matters

    Why it matters

    Publicly-owned banks are rebelling over efforts by the European Central Bank to exercise greater control over everything from their business plans to their dividends, which they say will create a single banking culture that is more susceptible to risk.

  • Facts

    Facts

    • The European Central Bank in November took over monitoring the largest 120 banks in Europe, including 20 in Germany.
    • Germany’s Landesbanken, a network of state-backed regional banks, have come under special scrutiny for their business models and the state support they receive.
    • Savings banks, state banks and lending societies have long implemented a cross-guarantee policy, but its future is in doubt as the banks quarrel over who should pay the most into a common fund.
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    Audio

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Gunter Dunkel, the chairman of Norddeutsche Landesbank Girozentrale, or NordLB, knows all about ships. His bank is one of the three largest financiers of ships in Germany.

The captains of giant ocean liners and the heads of banks have much in common these days, Mr. Dunkel said last week at Handelsblatt’s annual conference for savings banks and state banks in Berlin. The fortunes of both are increasingly being driven by forces outside their control.

In the case of banks, Mr. Dunkel was referring to the rigorous monitoring of financial institutions by the European Central Bank, which took over the job of regulating the largest banks in Europe in November 2014. Mr. Dunkel went on to use the maritime metaphor to launch a frontal assault on the new European financial watchdog.

“It could, in the worst case, result in a run on the banks.”

Andreas Dombret, Bundesbank

These days, the captain of a ship is under constant supervision – any deviation from course has to be immediately corrected. Mr. Dunkel, who also is president of the Association of German Public Banks, VÖB, noted: “We are now in the process of similarly automating the banking world.”

Germany’s “Landesbanken,” a series of state-backed banks that are spread across the regions of Germany, have been in sharp focus ever since the 2008 financial crisis, when some collapsed and others had to be bailed out by the German government.

To critics, they are an unprofitable legacy of a time when Germany’s regions controlled banking practices. Regional politicians still sit on the bank’s non-executive boards, and their lending is often aimed at furthering the goals of the community. This overt state backing has also allowed them for years to escape closer scrutiny of regulators in Germany.

This has now changed. A few months ago, the Frankfurt-based European Central Bank assumed oversight for the 120 largest banks in the euro region. The goal behind a pan-European supervisor is to better catch risks to the entire financial system and avoid governments bailing out banks with tax money in the future.

The European Commission is also getting in on the act, questioning whether the practice of states saving their Landesbanken by investing capital amounts to unfair state aid. A decision on state aid for HSH Nordbank, another northern state lender, is pending in Brussels.

Mr. Dunkel sharply criticized the intention of the ECB to subject the business models of banks to an in-depth review and said Germany’s regional banks were receiving particularly special attention. He argued such an approach will lead to the business models of all banks becoming increasingly similar.

“There will no longer be any competition for the best model,” he said, “since deviations would probably be considered to be difficult and problematic.” Such a monoculture, he says, would make many banks more susceptible to risks.

There was an immediate reply from the ECB, which stressed that it is not singling out an any particular banks. “We have always said that we will take a precise look at the business models, but will not dictate certain business models,” a spokesperson said.

For Mr. Dunkel and fellow board members of these state-backed banks, the ECB’s approach to regulation is far too invasive, and doesn’t take into account the history of the Landesbanken and their connection to the communities they serve. They feel their model is being unfairly targeted.

Mr. Dunkel considers it a typical gaffe that no board member at a large bank can be appointed if the ECB’s governing council, which consists of the heads of the national central banks, hasn’t given approval. The problem likely will solve itself, since there are reportedly over a thousand such decisions a year. “It will quickly get to be too idiotic for them,” Mr. Dunkel said.

He  also see problems with the ECB’s right to intervene in the dividend policies of the banks. If the banks don’t have the necessary capital ratios, that is understandable, he explained, “but I am afraid it goes considerably further.” Sometimes, he said, he wonders whether a covert nationalization of the banking system may be taking place.

The attention of regulators extends to the wrangling over a common support system that for decades has served as a security blanket over the country’s network of state-backed banks, as well as the smaller savings banks that serve individual communities.

With the eyes of Frankfurt and Brussels on them, the banks are quarreling over what the future support system – whereby savings banks promise to step in if one of their more than 400 members is in trouble  – should look like in the future.

Andreas Dombret, a board member of Germany’s central bank, the Bundesbank, urged at the Handelsblatt conference that the future guarantee system must remain credible. Failure to keep the system going “could, in the worst case, result in a run on the banks,” he warned.

 

Gunter Dunkel Mchael loewa
Gunter Dunkel Source: Mchael Loewa

 

Mr. Dombret said he doesn’t want to interfere with the running of individual institutions, but one of his proposals could be seen as supporting the savings banks over the state-owned regional Landesbanken. He suggested the contributions of each bank to the collective guarantee system should be based on risk, and not just on the overall size of the balance sheet.

Until now, savings banks and Landesbanken haven’t agreed how much they will additionally deposit for the guarantee system. The savings banks want to focus on the risks in the balance sheets, which would shift more of the burden onto the Landesbanken. The latter, however, consider the high deposits at savings banks to be the more important criteria.

 

Handelsblatt’s Elisabeth Atzler writes about banking in Frankfurt; Frank Drost covers banks and politics from Berlin. To contact the authors: atzler@handelsblatt.com, drost@handelsblatt.com 

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