ECB's New Empire Digs in for Second Year of Banking Battles

  • ECB reaches first anniversary of pan-European bank supervision
  • Draghi, Nouy spoke Wednesday at ECB forum on supervision

When Daniele Nouy moves her 1,000-strong team of European Central Bank supervisors next year into Frankfurt’s Eurotower, the former bastion of the region’s monetary-policy makers, she’ll gain a permanent base from which to fight her battles over the region’s struggling lenders.

A year to the day since the ECB became the chief overseer of more than 120 banking groups across 19 countries, Supervisory Board Chair Nouy convenes with President Mario Draghi and other officials on Wednesday for a conference to mark the anniversary. While some self-congratulation may be in order for the achievements of an institution built in less than 30 months, proponents of Europe’s banking union are focusing on what could be substantial challenges ahead.

Daniele Nouy speaks in Frankfurt
Daniele Nouy speaks in Frankfurt
Photographer: Martin Leissl/Bloomberg

The 65-year-old Frenchwoman has already helped to keep Greece’s banking system from collapse while working to increase capital levels, standardize rules and strengthen governance in the region as a whole. Yet amid concern that bank profitability is being weakened by ultra-low interest rates emanating from the ECB, her chief obstacles may be political inertia and national lobbying.

“The amount of progress made in such a short period of time is definitely impressive,” Nouy said at the opening of the conference. “I believe we have taken a giant leap toward ensuring consistent supervision in the euro area. But we still have a lot to achieve.”

According to Draghi, that includes completing the banking union and creating a capital-markets union. To implement those fully and as quickly as practical, he has already identified a strategy: “Specify what we want to change, clarify the calendar to do it, and then just do it.”

Not Shy

In supervision, Nouy has always pledged to be “tough and intrusive” with banks, and so far hasn’t been shy. After 2014’s Comprehensive Assessment uncovered a capital gap of 25 billion euros ($27 billion) across the region, 2015 has seen a further push to ensure lenders have suitable reserves to withstand any turbulence. That has ruffled feathers.

“No one could have anticipated some of the strengthening of the capital requirements that the ECB is adopting,” John Cryan, co-chief executive officer of Deutsche Bank AG, said on Oct. 29. “We could anticipate strengthening, but I think it has surprised the industry, frankly, about how much more capital is needed for normal credit business.”

Political Pushback

The ECB’s aggression is now starting to meet more resistance from politicians pleading special conditions for their own lenders.

“Banking in Germany, in Spain, in France, in Italy, is almost a national treasure and is protected by politics,” said Henrik Enderlein, professor of political economy at the Hertie School of Governance in Berlin. “Over the next years, we’ll see whether the ECB is really ready to pick a fight with supervisors, banking institutions and national authorities on controversial matters. The jury is still out.”

Before meeting Nouy and Draghi in Frankfurt on Oct. 26, French Finance Minister Michel Sapin said it was “legitimate” for French lenders, and for him, to make the case for rules that take into account the unique setup of the country’s financial system. Germany is another case in point. It sparked ire by writing some elements of previous supervisory practice into national law, limiting the ECB’s freedom of action.

The Sapin meeting coincided with the final stages of the ECB’s annual supervisory process, or SREP, in which capital levels for each bank are set. That process, the first to be run completely under the ECB’s auspices, was marked by Italian complaints over the methodology and persistent reports that capital targets had been reduced after lobbying. The ECB declines to comment on any bank-specific aspects of the SREP process.

Lot of Fun

In some ways, Nouy and her Vice Chair Sabine Lautenschlaeger are constrained. As they push to harmonize the 19 sets of national banking rules they’ve inherited, they must secure consent from the national authorities represented on their board.

“It is fun to work with them, particularly if we don’t agree,” Felix Hufeld, president of Bafin, Germany’s bank regulator, said at an event in Frankfurt on Nov. 3. “And we have a lot of fun.”

A major project to eradicate national exceptions to European banking rules has taken place against a backdrop of power struggles. ECB officials say the initiative has made great strides, with a legal text ready for consultation this month, and the board operates in collegiality and cooperation.

As they guard against the repatriation of the powers granted to them in a process that started in 2012, supervisors at the ECB are also struggling with the legal and procedural framework they inherited. The 25-member Governing Council, as the institution’s highest decision-making body, had to sign off on all of the 1,200 supervisory decisions taken last year as well as dealing with its more prominent role of setting monetary policy.

Capital Charge

“Imposing a central bank’s decision-making process on a supervisory body does not strengthen supervision,” Hufeld said. “I very much hope that the review of the SSM which is scheduled to start at the end of the year, will deliver sensible results in this area.”

The key to allowing the ECB’s supervisory arm to actually focus on the banks it oversees will be delegation of more minor tasks, such as the “fit-and-proper” tests on the suitability of bank executives to hold their posts. About 1,000 people were vetted under that rule in the last year.

In Nouy’s sights for 2016 are a multiyear project to harmonize the models banks use to calculate risk weights, work through bad loans, and even make progress on the thorny topic of imposing a capital charge on sovereign debt.

“Every reasonable person agrees that banking union is a huge policy shift and requires a lot of work, and for a lot of new things to get to a steady state,” said Nicolas Veron, a senior fellow at the Brussels-based Bruegel think tank. The new body “has had a considerable impact and will lead to a lot of harmonization -- some of that will happen quickly, some of it slowly.”

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