ECB Faces Defiance on Bank Oversight as Germany Hoards Power

  • ECB said to ask EU to prevent Germany infringing Banking Union
  • Early intervention in troubled banks hampered by German rules

The European Central Bank faces increasing defiance from euro-area governments reluctant to cede control over their lenders, highlighted by a German bill that chips away at the ECB’s supervisory powers.

The Bundestag, the lower house of parliament, votes Thursday on an amendment to Germany’s banking act that would allow the Finance Ministry in Berlin 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 Frankfurt-based ECB, which assumed supervisory powers over euro-area banks last November, is considering complaining at the European Commission, asking the EU’s executive arm to take Germany to court over the legislation, according to a person with knowledge of the matter, who asked not to be identified because the deliberations are private. The ECB declined to comment.

“It will take a long time for euro-area member states to reach full acceptance that banking-sector policy is no longer in their hands,” said Nicolas Veron, a senior fellow at the Brussels-based Bruegel think tank. “National regulations, as in this German case, are essentially rearguard actions. But this kind of skirmish diverts” the ECB’s “attention from its important tasks of ensuring European banks are safe and sound.”

Single Supervisor

Two weeks ago, German Finance Minister Wolfgang Schaeuble chided other countries in the bloc for putting the “cart before the horse” by pushing for a European deposit-guarantee system before they had fully implemented measures already on the books.

At the same time, less than a year into the new era of centralized bank supervision in the euro area, Schaeuble’s ministry is chipping away at the authority of the ECB. The central bank is trying to unify an array of national banking systems with strong historical roots, such as the savings and mutual banks in Germany and Austria. 

And Germany’s not alone in pushing back against the ECB. Fabio Panetta, Italy’s member of the ECB’s Supervisory Board, has warned that the central bank risks criticism for “unwarranted” and “arbitrary” decisions over higher capital requirements for euro-area lenders that could harm the fragile economy.

Intervention Triggers

One point of contention is “early intervention” rules enshrined in the EU’s Bank Recovery and Resolution Directive. The law gives supervisors the power to order capital increases, call shareholder meetings or oust managers in certain cases.

Yet triggers for early intervention vary widely in national laws implementing BRRD. The German rules are cast so narrowly that it’s practically impossible to use them unless a bank is already on the brink of collapse, negating the purpose of the law, according to three people familiar with the matter, who asked not to be identified citing protocol.

This has led Daniele Nouy, head of the Single Supervisory Mechanism, as the ECB’s oversight arm is called, to voice her frustration publicly.

“When a bank is low-ranking and has a lot of weaknesses, and there are some banks like that in the SSM as a matter of fact, we’re obliged to consider early intervention measures,” Nouy said last week. “The conditions are quite different. And in certain cases I don’t quite see how we can take early intervention measures before the bank almost disappears, because it’s so restricted. This prevents us to take these additional steps.”

National Interests

The law before the Bundestag ups the ante because it gives the German Finance Ministry powers that the ECB claims as its own, while giving the central bank the right to be heard on some, but not all, of these issues.

A leading lawmaker dealing with the bill in the Bundestag said that the ECB’s right to be heard is sufficient.

“That way we can weigh justified national interests against our wish to have strong European supervision,” Antje Tillmann, who handles financial policy for Chancellor Angela Merkel’s Christian Democrats, said by e-mail.

The ECB hasn’t minced words in its criticism of the bill.

“The regulations create national competencies that will set an obstacle to the single supervision of significant banks by the ECB,” Nouy’s German deputy Sabine Lautenschlaeger wrote to parliamentarians in July. “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.”

‘Smooth Functioning’

An ECB legal opinion from Sept. 2 says the central bank could ignore the German rules. “The ECB will not be bound by any governmental regulations or similar measures which may affect its independence or the smooth functioning of the SSM,” the opinion states.

“This whole episode is mildly embarrassing for Germany,” Bruegel’s Veron said. “It comes at the same time as a leaked paper from the German Ministry of Finance that proclaims that Germany is committed to completing banking union and putting an end to linkages between banks and sovereigns. But with this legislation, the optics are that Germany is dragging its feet.”

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