The effort to establish a euro-area banking regulator in Frankfurt is exposing deepening fault lines among the city’s banks as policy makers jostle over the shape of the industry.
Deutsche Bank AG co-Chief Executive Officer Juergen Fitschen, an advocate, is among top executives and officials meeting at the Euro Finance Week conference in the currency union’s financial capital today. At the center of the debate is how much power the European Central Bank, based in Frankfurt, should be allowed to wield.
The argument pits Fitschen, who favors centralized ECB regulation, against more than 1,500 smaller banks who lend more cash to Europe’s biggest economy than he does. The discord over banking union mirrors a wider dispute between politicians, regulators and central banks across the continent that has led the Bundesbank, also based in Frankfurt, to lock horns with the ECB. At stake is a revival of last year’s bank share sell-off, prompted by foot-dragging on steps to stem Europe’s debt crisis.
“The path to banking union leads through Frankfurt and that’s where the conflicts will be focused,” Markus Rudolf, a professor of banking and finance at the WHU Otto Beisheim School of Management in Vallendar, Germany, said by phone. “Frankfurt is the site of very different competing opinions.”
Frankfurt, a city of more than 700,000 people, has about 74,500 bankers. Dubbed Mainhattan by locals because of the skyscrapers lining the River Main, the birthplace of the euro is home to about 260 banks, of which approximately 200 are foreign-owned.
Break the Link
European leaders in June agreed to hand oversight and the authority to wind down failed banks to the ECB as a precondition for the European Stability Mechanism, the 500 billion-euro ($638 billion) permanent rescue mechanism, to lend directly to financial institutions. The policy is designed to help break the link between states and lenders.
There’s “little readiness” to find a balance in new banking rules and a level playing field should be secured, Fitschen said in a speech at the conference.
It doesn’t make sense for the ECB to monitor thousands of small lenders that don’t pose a systematic risk to Europe’s financial system, Uwe Froehlich, head of Bundesverbank der Deutschen Volksbanken & Raiffeisenbanken, an association representing Germany’s cooperative banks, told the conference.
‘Quality Not Speed’
German Chancellor Angela Merkel has joined the country’s savings and cooperative banks in opposing ECB President Mario Draghi’s plan for a regulator that oversees all of Europe’s banks. Merkel wants ECB supervision limited to the continent’s largest lenders. Last week, the Bundesbank questioned the legality of the ECB supervising euro-area banks.
“Quality comes before speed and we won’t be rushed by others,” German Deputy Finance Minister Steffen Kampeter said in a speech at the conference. “The German government and the Bundesbank are very close on the banking union.”
Shares of European banks slumped last year on concern the excessive government debt levels would lead to huge losses at the lenders, the largest investors in the bonds. The Bloomberg Europe Banks and Financial Services Index lost 25 percent between July 21 last year and Dec. 7, the day before the ECB said it would offer banks unlimited cash in three-year loans.
While Deutsche Bank’s balance sheet of 2.2 trillion euros equals that of Germany’s 1,544 savings and cooperative banks combined, the latter contribute 505,600 jobs to the German economy compared with 47,262 at Deutsche Bank’s offices in the country, according to data from company filings and groups representing the lenders.
Germany, joined by the Netherlands, Luxembourg and Finland, sought to limit the ECB’s planned supervisory role to the largest banks, according to a Nov. 6 document obtained by Bloomberg News. The approach contrasts with European Union Financial Services Commissioner Michel Barnier’s call for the ECB to be put in charge of all euro-area banks, a plan backed by Italian Prime Minister Mario Monti and his Spanish counterpart Mariano Rajoy.
Deutsche Bank and other European lenders such as Societe Generale SA and BNP Paribas SA have a stake in backing Europe-wide regulation by the ECB. While savings banks in Germany and elsewhere are focused on their local markets, larger banks’ operations and financial risk spans across borders into the troubled economies of Spain, Italy and Greece. Germany’s smaller lenders may also find added scrutiny by the ECB a challenge, said Reint Gropp, a professor at the Goethe University in Frankfurt.
“For banks like Deutsche Bank and Commerzbank, one European regulator may even be an improvement as they currently have to deal with many different supervisors,” said Gropp, who is the chair for Sustainable Banking and Finance. “There is no such advantage for savings banks, which may be concerned about losing their currently very cozy relationship with the local regulator.”
The savings banks use that scale to lobby lawmakers, said Rudolf, who is also associate dean at the WHU.
Georg Fahrenschon, the president of the savings banks association and former finance minister of Bavaria, said in a Nov. 9 interview that “the German government supports our position.”
Fahrenschon’s efforts may be paying off. German Finance Minister Wolfgang Schaeuble has said the regulator should only oversee the largest banks while Europe’s leaders have largely scrapped plans for joint deposit protection, which Germany’s savings banks association has rejected as damaging to its clients.
“It is stupid that we in Germany show that as our first reaction,” Fitschen said at an event in Frankfurt on Nov. 15. “It invites all other countries to also say they only have small problems and the rules shouldn’t count for them. Europe can’t work like that.”
Meanwhile, ECB President Mario Draghi has endorsed Barnier’s plan for the ECB to oversee all banks, saying it would offset a tendency for banking problems to be “hushed up” by national regulators. On another pillar of the banking union plan, a joint deposit guarantee, he said he was ready to make concessions.
“Financial union does not have to imply the pooling of deposit-guarantee schemes, an issue that I know is of concern in this country,” Draghi said in a speech in Frankfurt on Nov. 7. “Organizing and funding deposit-guarantee schemes can remain a national responsibility, with comparable effectiveness.”
The watering down of European policy on the banking union suggests Europe’s small banks will escape supervision by the ECB, said Andreas Plaesier, an analyst at M.M. Warburg & Co. in Hamburg.
“We’ll probably end up moving towards a system where big banks are supervised by the ECB and smaller ones stay under their national regulators,” Plaesier said.
The bank supervisor must be able to assert control over all banks in participating countries, even if the system is set up “in a very decentralized way,” ECB Vice President Vitor Constancio told EU finance chiefs in Brussels Nov. 13.
Barnier proposed a system under which the ECB would have final say over all banks within its remit on issues that could affect financial stability, while working closely with national authorities on day-to-day issues.
Bundesbank President Jens Weidmann, a vocal critic of the ECB’s pledge to prop up euro states with unlimited bond purchases, has also called for a strict division at the ECB between bank supervision and monetary policy to avoid conflicts of interest.
While the ECB will rely on manpower and expertise at national regulators, its approach will be different to that of German supervisors, said Kai Schaffelhuber, a Frankfurt-based lawyer with Allen & Overy.
“The ECB has distanced itself from much of what the Bundesbank stands for, so I wouldn’t assume that the central bank will take on characteristics of the German banking regulator,” said Schaffelhuber, who has published papers on the regulation of banks and other financial institutions.
At the conference this week, Fitschen is rubbing shoulders with ECB and Bundesbank officials as well as representatives of Germany’s savings and cooperative banks.
“Everyone’s looking out for their own interests,” said Plaesier at M.M. Warburg. “Each bank is trying to make sure that they’re the least affected by the regulation to limit any effect on business.”