Failing banks

Stress Tests Stressing Out Regulator

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They stop the steam coming out of his ears.
  • Why it matters

    Why it matters

    The European Central Bank and European Banking Authority are conducting a comprehensive assessment of Europe’s banks ahead of the ECB assuming supervision of them. If the EBA is not fit for purpose, failing banks may not be identified, leaving the ECB exposed.

  • Facts

    Facts

    • The ECB and EBA are stress-testing 130 European banks and will publish their results later this month.
    • Andrea Enria, the EBA chief, believes that some will fail the tests.
    • The EBA is also seeking to clamp down on bankers’ bonuses.
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    Audio

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Andrea Enria isn’t one to beat around the bush. The chairman of the European Banking Authority, the continent’s chief banking regulator, openly complains that there are both insufficient funds and a notable lack of personnel in his London office at a time when the EBA is assuming one of the most important roles in the financial industry.

“Our offices embarrass me in front of my staff,” said the Bank of Italy’s former head of bank management, speaking at the annual regulatory conference of the Austrian Financial Market Authority in Vienna this week.

But this is only a minor problem at a critical time for the EBA. On November 4, the European Central Bank will take on the role of chief superviser of financial institutions in the euro zone, part of a major overhaul of the banking regulation landscape away from national supervisors and to the European level. This shift has seen the EBA’s role as an enforcer of regulation rules expanded as well.

To avoid inheriting problems in banks’ balance sheets, the European Central Bank has for months been conducting a thorough investigation of the 130 most important banks in the European monetary union. It has been billed as the most important look into European bank balance sheets since the 2008 financial crisis, and is being done in conjunction with the EBA and national regulators.

Mr. Enria fears that not all major European financial institutions will pass the stress test, the results of which will be announced toward the end of this month.

“There will be banks that fail,” he said bluntly. But, in the EBA’s view, the focus should not be on the number of banks that fail, rather it should be on the measures banks have taken before and after the so-called stress tests to increase capital reserves and become stronger institutions.

“There will be banks that fail.”

Andrea Enria, Chair, European Banking Authority

Mr. Enria is keen to ensure his own house is in order, too. “There is a tsunami of jobs” facing the EBA, he said, but they cannot be accomplished without a higher budget. Last year, the regulator’s budget was just €26 million ($32.73 million). But the European Commission, the European Union’s executive arm, wants to slash it by 10 percent. “We must make do with a very tight budget,” said Mr. Enria, who has led the regulatory agency since its founding in 2011.

He is also unhappy about staffing levels, arguing that they are much too low to accomplish the agency’s many responsibilities. According to the guidelines of the European Commission, the agency can have only 111 employees until the end of 2014. “We simply do not have the resources to perform our tasks,” Mr. Enria said.

The beleaguered banker is not only calling for more money and more manpower. He is also seeking more power for E.U. financial supervisors so they can more thoroughly test the strength of European banks. To do this, “we need more legal options,” he said. Specifically, he wants the Commission to quickly implement regulatory initiatives that affect the financial markets. This, he said, is not an issue of power but of fairness.

“We simply do not have the resources to perform our tasks.”

Andrea Enria, Chair, EBA

Since the start of the financial crisis, almost 500 banks have gone bankrupt in the United States, while in Europe the figure has been closer to 40. Now, smaller banks in southern Europe are most likely to fall foul of the stress tests, analysts say. For example, it’s widely accepted in the banking sector that the partly nationalized Austrian bank, Österreichische Volksbanken-Aktiengesellschaft, is likely to fail as the Vienna-based company capital reserves fall as much as €800 million ($1.01 billion) below the minimum required.

In Germany, some experts are concerned about the prospects of state-backed banks HSH Nordbank, the Norddeutsche Landesbank, and Commerzbank. All of these have a lot of shipping credits on their books that have suffered as the shipping industry turned sour following the financial crisis. But just a few days ago, in a speech before Germany’s parliament, Finance Minister Wolfgang Schäuble appeared confident that all German banks would pass the stress test without any major problems.

The EBA is also charged with another sensitive task – supervising the controversial issue of bankers’ bonuses.

The EBA is also charged with another sensitive task – supervising the controversial issue of bankers’ bonuses, which have come under heavy fire in past years because of their generosity. Mr. Enria takes a tough line. “The law is clear,” he said. “There is a clear ceiling.”

Such a statement would indicate that the financial regulator is opposed to nullifying the new limits set for bonus payments in the financial sector, which since the beginning of the year have been capped at a maximum of twice the fixed salary.

British banks, particularly heavyweights such as Barclays and HSBC, are attempting to get around this ruling. They are seeking to pay a fixed bonus allowance to top executives along with the conventional salary, but would prefer to award performance-based bonuses under a separate category labelled compensation. Mr. Enria is unmoved by the argument. “There is no third salary component,” he said.

The issue won’t end there. The EBA has asked for detailed reports on bank bonus structures by the end of October.

 

The author became Handelsblatt’s correspondent in Vienna in 2013 after 13 years writing about companies, media and telecoms in Germany. To contact the author: Siebenhaar@handelsblatt.com

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