Nowotny Says ECB Should Limit Oversight to Major Banks First

The European Central Bank should start with supervising only a small group of major lenders to make sure it doesn’t take on more than it can handle and widen the scope later, Governing Council member Ewald Nowotny said.

Taking on bank supervision in the countries sharing the euro currency and beyond is fraught with risks for the ECB’s reputation, Nowotny said at a conference in Vienna today. To limit the risks and to curb the size of a possible backstop to fund recapitalization measures, the ECB should probe fewer than the around 130 banks envisaged for an asset review scheduled for next year, he said.

“Taking up such a huge responsibility for European banking supervision needs careful preparation, quality being at least as important as speed,” Nowotny said. “It may make sense to follow the advice of some of our German colleagues to start with a smaller number of the major European banks to allow for a staggered approach.”

The ECB is due to take responsibility of banking supervision in the euro area and other European countries in the middle of next year in a first step toward a banking union. It will eventually be overseeing some 130 banks with combined total assets of more than 25 trillion euros ($33 billion), or 80 percent of the continent’s banking sector, Nowotny said.

Plug Holes

The ECB will investigate the asset quality of the banks it will oversee in the first half of next year, together with national supervisors and to some extent with outside auditors, ECB President Mario Draghi said last week. Draghi also demanded that member countries put financial resources in place to plug any holes at banks that might emerge in the exercise, and Nowotny said this too may be easier to fulfill with a smaller group of banks.

“We will have quite substantial challenges already in the preparatory phase,” Nowotny told journalists at the conference, labeling the comments his personal view. Limiting the number of banks covered in the asset review “means that the asset quality review can be handled in a way that is less risky and also for the question of backstops it is easier to find a solution,” because the required volumes will be smaller, he said. Nowotny, who heads the Austrian central bank, declined to say how many lenders would be a more realistic number.

Germany has been spearheading resistance to the scope of the ECB’s bank oversight, which led to the limits to its current perimeter, excluding Germany’s savings and cooperative banks. Under the current plan, about eight Austrian lenders would fall into the ECB’s supervisory realm.

Benoit Coeure, a member of the ECB’s executive board, said at the same conference that he agreed with Nowotny insofar as the quality of the asset review should have priority over the speed.

“At the current stage I don’t see that tradeoff arising,” Coeure said. “I don’t see it now, but if at any point there is a tradeoff of quality or trust and the timeline, quality should be more important.”

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