Brexit Fallout

ECB: Watchdog for investment banks?

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Hard to see if we’re making much progress on banking union. Source: Reuters

The top bank supervisor for the European Central Bank, Danièle Nouy, welcomed a recent proposal by the European Commission to widen the ECB’s current surveillance mandate from deposit-taking banks to include large investment banks.

Announced in September, the proposal to expand the authority of the Single Supervisory Mechanism is to be formalized next month. Under current EU law, supervision of investment banks is the responsibility of national regulators. This has the ECB worried, because some countries may be willing to make concessions to the banks in order to lure their EU headquarters, even though they are big enough to pose a systemic risk.

Some 50 banks have already put out feelers to the ECB about relocating, and a score have formally or informally applied for banking licenses, Ms. Nouy said Tuesday at a bank supervision conference in Frankfurt.

ECB supervision of investment banks, however, is one of the few regulatory issues that the ECB and member countries seem to agree on. Other measures sought by Ms. Nouy and her colleagues to foster banking union – such as joint deposit insurance or money for the bank liquidation fund – are meeting with resistance, especially from Germany.

The biggest stumbling block for Berlin is the risk posed by the outstanding €844 billion ($976 billion) in nonperforming loans held by EU banks, fully one-fourth of them in Italy. The banks have been working off the bad loans, but the problem is far from solved. For many banks, the amount of problem loans is too high for the available capital.

“Tackling these problem loans is currently the biggest problem here.”

Mario Draghi, president, European Central Bank

“Tackling these problem loans is currently the biggest problem here,” ECB President Mario Draghi said at the Frankfurt conference. The ECB last month proposed strict guidelines for new loans that risked becoming non-performing, including setting aside 100 percent of the amount for unsecured loans. But there was pushback, not coincidentally, from Italy’s finance minister, Pier Carlo Padoan. He agreed the problem must be dealt with, but only on reasonable terms and appropriate timelines – presumably those decided on by the national authorities.

Germany has resisted any form of joint liability for the banks until these problem loans are taken care of. That goes not only for joint deposit insurance but also for allowing the European Stability Mechanism to loan funds when needed to the bank liquidation fund. The ESM has €500 billion at its disposal, while the liquidation fund only €55 billion – far too little in the view of ECB supervisors if there is a banking crisis.

In this chicken-and-egg dilemma, Ms. Nouy suggested that the unwinding of bad loans and burden-sharing must go hand in hand. It is not an argument that has persuaded German officials so far, and a new coalition government with the Free Democrats calling the shots at the finance ministry – as many expect – is unlikely to move in that direction.

Ms. Nouy had other complaints about the slow pace of achieving banking union. The ECB bank supervisors, for instance, are supposed to have the authority to remove a bank’s board or management if they are deemed to be not “fit and proper.” But what exactly is fit and proper is still determined, somewhat unevenly, by national law. Likewise, efforts to harmonize capital regulations involves 19 euro zone countries weighing in. “You can imagine, just what minimal harmonization means,” Ms. Nouy said.

Nor is Ms. Nouy, formerly the chief bank regulator in France, optimistic that the current effort to have national leaders consolidate some banking provisions into binding law and others into directives, or guidelines, will move things along. “The appetite of those making European law to tackle this topic is not very big,” she said, “even though it is very important.”

Yasmin Osman covers banking for Handelsblatt in Frankfurt. Ruth Berschens is a Brussels correspondent for Handelsblatt. Darrell Delamaide adapted this into English for Handelsblatt Global. To contact the authors: osman@handelsblatt.com and berschens@handelsblatt.com.

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