European banks have had an extremely tough year to date, with shares plummeting across the board. One reason for the unease might be coming from Europe’s banking supervisors, who are imposing tough new regulations on the biggest banks in Europe.
Some of those tough regulations aren’t even made public, making it tough for investors to decide whether its worthwhile to stick money into the banking sector. The European Central Bank is considering giving the public a better window into how it regulates Europe’s largest banks, and how it hopes to prevent a future financial crisis from spiralling out of control.
The debate involves how much capital the continent’s largest banks should hold in reserve. The ECB has set an additional risk buffers for each of the major banks in the 19-nation euro zone. Those buffers, which have been shrouded in secrecy until now, could soon be made public.
At a professional conference hosted by the German central bank, the Bundesbank, the question was raised whether this key figure should be published. Two senior representatives of the ECB bank regulation committee, Klaas Knot, governor of the Dutch central bank, and Felix Hufeld, head of Germany’s BaFin financial regulator, spoke out in favor of the idea.
The ECB bank regulators are under pressure. Although they determine for each bank individually how much capital beyond the legal minimum they must keep on reserve, they have balked at publishing these ratios. This troubles investors, in particular, because banks can only distribute dividends or interest on certain high-risk bonds if they adhere to these ratios.
“Investors are asking a simple question: Is the bank sufficiently capitalized that I can expect a dividend? ... In terms of stability, it would therefore be helpful to publish the ratios before 2019.”
Mr. Knot would like to take a little more time before launching the transparency offensive. He argues that Europe’s banks are still in the midst of a phase of introducing stricter capital rules. The current transition requirements vary within the euro zone. Mr. Knot would like to wait until this introductory phase is over.
“After that, I can see no reason why it shouldn’t be published,” he said.
This is too long for Commerzbank Chief Executive Martin Blessing, especially as the transition phase only ends in 2019. Waiting that long would mean keeping the capital markets in the dark for three more years.
“Investors are asking a simple question: Is the bank sufficiently capitalized that I can expect a dividend? Or should I expect a capital increase?” he argued. “In terms of stability, it would therefore be helpful to publish the ratios before 2019.” This step would give investors a clearer idea of whether investing in European banks is worthwhile.
But investors should not expect overly lavish profits. As defensive as the Dutch central bank governor Mr. Knot becomes when asked about transparency, he is explicit on the subject of yield.
“Double digit returns on equity should be a warning sign for a regulator,” he said. Such yields could only be achieved, he added, if banks took higher, and unnecessary, risks.
He believes that single-digit yields are both realistic and suitable. After all, he explained, it is customary that yields are smaller but also more stable in highly-regulated sectors of the economy.
“Perhaps banks should send a clear message to the investor community, stating that this is indeed the case in a regulated industry like the banking sector,” he said.
Yasmin Osman a Frankfurt correspondent for Handelsblatt, covering banks and their regulators. To contact the author: email@example.com