Banks often fight with regulators but rarely does it spill out into the open. Most financial institutions have too much respect – and perhaps fear – of their supervisors.
Not so L-Bank, a state-owned development bank from the western German state of Baden-Württemberg, which took legal action to free itself from supervision by the European Central Bank. Axel Nawrath, L-Bank’s combative chief executive, wanted to free his institution from the eagle eyes of the ECB and be covered by German bank regulators BaFin and the Bundesbank, Germany’s central bank, instead. A preliminary court ruling has disagreed.
Since 2014, the ECB has directly supervised the euro zone’s 125 most important financial institutions. It was one of the key lessons of the euro zone’s debt crisis, where problems in the banking sectors of individual countries like Greece and Ireland nearly brought down the entire currency bloc. The ECB’s victims are chosen by the size and importance of the banks, as well as being partly measured by assets. Banks that hold more than €30 billion ($33 billion) are automatically added to the group. That includes L-Bank, which has assets worth €70 billion.
The bank’s beef is the paperwork: For L-Bank, a relatively small development institution, being supervised by the ECB means major bureaucracy and higher costs. The rules do allow for special exceptions, however, and L-Bank thought it had found a loophole. L-Bank argued that it is a regional bank whose debts are secured by a guarantee from the state of Baden-Württemberg. The ECB should be busy keeping an eye on more complex, international banks, as L-Bank sees it.
The EU’s top court for corporate law, the General Court, has quashed this hope for the time being. The judges in a preliminary ruling said the bank’s business model is irrelevant: Exceptions can only be made to the classification by assets if a bank would be better off supervised by national regulators rather than the ECB. They said L-Bank hadn’t actually argued that supervision by the German authorities would be better, just that it was good enough.
The judges also made a broader point: The ECB is actually responsible for supervising all institutions in the euro area. It merely chooses to delegate the supervision of smaller banks to national authorities like BaFin and the Bundesbank. In other words: The ECB has free reign when it comes to which banks it wants to watch over itself.
L-Bank’s Mr. Nawrath, the chief executive, said his bank was disappointed with the ruling, especially as the judges acknowledged that his bank had a low-risk business model.
The judges’ verdict has a signal effect, according to Kristin Wahlers, bank and capital market lawyer at FPS, a law firm. She said it hadn’t been clear until now where exemptions from ECB supervision could be made. European judges have clearly taken a narrow interpretation of the rules, she said.
While L-Bank may be the first bank to to take legal action against the ECB’s supervision, it bothers a slew of other financial institutions too, especially in Germany, which has more banks per head than any other country in Europe. Those mulling their own challenges include other development banks like NRW Bank and Landwirtschaftliche Rentenbank, as well as the savings bank Hamburger Sparkasse, known as Haspa. Many more are likely to be disappointed by the outcome.
The ECB’s supervision is not necessarily bad news for all financial firms. It helps banks that operate across borders by functioning as a central point of contact for business in the euro zone. It also seeks to ensure equal regulatory conditions across all euro zone countries.
But the bureaucracy is a plague for smaller, nationally-active banks. The ECB requires lots of information from its subordinate banks. And then there’s the language: While German banks are technically allowed to communicate with the ECB and file their documents in German, everyone knows that the ECB’s regulators prefer English.
Plus, euro zone banks have to pay for the ECB’s supervision. This year they will pay €425 million in total, up 10 percent from last year.
For L-Bank and other banks, the question may still be open as it can appeal the decision. Mr. Nawrath, a feisty expert with a law doctorate, plans to make a detailed review of the judges’ findings.
Handelsblatt’s Yasmin Osman writes about banking and finance from Frankfurt. To contact the author: firstname.lastname@example.org