Germany Defies ECB by Fortifying National Bank Control Rules

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Germany is resisting the European Central Bank’s drive to smooth out Europe’s “supervisory patchwork,” retaining the right to make rules on how banks are managed.

In an amendment to the nation’s banking act, the Finance Ministry in Berlin will be able to issue rules on banks’ recovery plans, risk management and internal decisions under a bill implementing European Union rules for winding down failing banks. The ECB criticized a previous draft for fostering fragmentation and undermining its authority. The tweaked version seen by Bloomberg makes only minor concessions, granting the ECB the right to be heard in some cases.

“What member countries sometimes name transposition of an EU directive sometimes goes beyond transposition of a directive,” the ECB’s supervision chief Daniele Nouy said this week, without explicitly referring to Germany. Lawmakers will “use the opportunity to put differences into this new banking law. So all of a sudden something that’s supposedly our territory is transposed into a national law and we have to go through the national authority, or ask the national authority to do something.”

The ECB began overseeing the euro area’s biggest lenders last year as part of a “banking union” that’s meant to end fragmentation of financial conditions in the currency bloc. The central bank’s Single Supervisory Mechanism, led by Nouy, has made it a top priority to end national exceptions and discretions, sometimes running into opposition from member states keen to retain competences and shield their lenders.

Insolvency Code

The German amendments are part of an overhaul of German banking law, adapting national legislation to implement EU rules for resolving failing banks. Changes are also made to the insolvency code, making it easier to impose losses on senior bondholders.

Germany’s Federal Financial Supervisory Authority, known as BaFin, imposes rules and standards by circulars that aren’t formally binding. Under the new law, the Finance Ministry will assume this role, its decrees will be mandatory and the supervisor will have the power to punish violations. For the German banks it supervises directly, the ECB will have to apply the rules issued by the ministry.

With respect to risk management, the ministry has to consult the ECB before it issues decrees but isn’t bound by its opinion. On banks’ recovery plans, the ministry can delegate the power to issue decrees to BaFin and there is no requirement to consult the ECB.

The ECB came down hard on this aspect of the bill in a previous version, while praising changes intended to make bail-in easier as a possible blueprint for Europe.

Lautenschlaeger Letter

In its so-called MaRisk and MaSan circulars, BaFin has been setting rules that frequently deviate from EU-wide rules, Nouy’s deputy Sabine Lautenschlaeger said in a July letter to the Bundestag, the lower house of Germany’s parliament. For example, BaFin allows netting of certain risks that aren’t permitted under the ECB’s methodology, resulting in lower capital requirements, she said.

By making such rules legally binding for German banks as the law stipulates, the ECB would have to apply them even if they contradict standards applied to other banks it oversees, she said.

“The regulations create national competencies that will set an obstacle to the single supervision of significant banks by the ECB,” Lautenschlaeger wrote. “That would cement the ‘supervisory patchwork’ that significantly contributed to the emergence of the financial crisis. It would contradict the spirit of the banking union.”

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