ECB Headaches From BNP to Dexia Multiply for Daniele Nouy

Daniele Nouy is coming face to face with the awkward side of Europe’s banking union.

More than halfway into her preparations to lead the European Central Bank’s management of financial oversight in the euro area, the former French regulator is facing down threats from the storm over BNP Paribas SA, a key lender she supervised, to confusion over moribund Dexia SA and stumbles in a health-check of other large banks. Nouy will chair a board meeting of the ECB’s Single Supervisory Mechanism this week.

Criticism of the ECB-designed scenarios for a stress-test this summer, delays in hiring officials, and the postponement of a part of the so-called Comprehensive Assessment are adding to the reputation risks the central bank faces as it evolves from euro-savior to financial overlord. A pillar of the nascent European “banking union” conceived to prevent future crises, the SSM will start wielding power over banks on Nov. 4.

“It’s not a perfect process, to say the least,” said Nicolas Veron, a fellow at the Bruegel institute in Brussels and the Peterson Institute for International Economics in Washington. “There are errors being made, and the important thing now is to correct them while favorable market conditions last.”

Such conditions have benefited European bank stocks enough to push the 43-member Bloomberg Europe Banks & Financial Services Index up more than 6 percent this year. The gauge was down 0.5 percent today.

Fanning Out

First on the list of threats to the smooth handover of oversight of the euro area’s biggest banks from 18 national authorities is the potential $10 billion fine demanded by U.S. authorities against BNP Paribas, one of the systemic institutions to be directly monitored by the ECB in Frankfurt.

That danger for Nouy comes in the middle of the Comprehensive Assessment, a 12-month probe into 128 of the region’s biggest banks. About 6,000 supervisors and auditors have fanned out across Europe to check about 160,000 individual credit files and assess the ability of the industry to weather further shocks. Even with that manpower, the ECB might be struggling to achieve what it wanted to in the time available.

The first part of the process, known as the Supervisory Risk Assessment, is on hold until 2015. A new technical tool for the SRA, originally planned to allow the ECB to assess the risk profiles of banks across the 18 countries in a standardized way, is now unlikely to be ready until next year.

‘Almost Impossible’

Nouy’s institution is conducting the two key parts of the assessment, the asset-quality review and stress test, almost in parallel instead of consecutively. Dutch banking regulator Jan Sijbrand says that the timetable overlap between the two is less than ideal.

“You need time for such a thorough asset review,” Sijbrand, who sits on the SSM board, said in Amsterdam on May 26. “It’s almost impossible, what was asked from the institution and from the regulators.”

Nouy stresses that the review is on track, while acknowledging some issues are not fully nailed down yet.

“This is still a work in progress, this join-up process,” she said in Helsinki on June 5.

A central bank spokeswoman declined to comment on the challenges facing Nouy and the SSM.

No Casualties

Nouy, 63, took up her post in January, after a career policing France’s banks. Having helped pilot her country’s lenders through the financial crisis without a major casualty, her task now may involve deciding the fate of wounded lenders elsewhere.

In coming months, she will acquaint herself with banks in countries worst-hit by debt turmoil including Spain and Ireland before touring other member states. While there, she can navigate a push-pull relationship with authorities that are ceding power to the ECB while also providing manpower for it to conduct its task. The ECB is hiring 1,000 new staff, but most supervisors remain with local central banks.

At a senior level, appointments have been slow and a seat on the SSM board, one of four in the gift of the ECB to name, remains vacant. For the wider institution, officials were inundated with more than 10 resumes for every post. Nouy has pledged a “critical mass” will be in place by November.

More than half of the institution’s positions are now staffed, according to information provided by the ECB.

It’s Working

If the Comprehensive Assessment aims to get banks to plug holes in capital ratios, it seems to be succeeding, whatever the organizational glitches, said Huw van Steenis, an analyst at Morgan Stanley in London.

“All four Greek banks that are being tested are raising capital, nine of the 15 Italian banks have raised, six out of 16 in Spain -- we are actually seeing quite a lot of progress,” he said. “As we go through that process, it should restore market confidence in the banks.”

For situations where lenders require emergency euro-region funds to plug capital holes, governments today reached a “political understanding” on an operational framework, according to Jeroen Dijsselbloem, who chairs meetings of euro-area finance ministers. He said the European Stability Mechanism’s direct recapitalization tool should be ready in time for the ECB to start supervision in November.

Other outstanding issues include a gripe by Erste Group AG Chief Executive Officer Andreas Treichl about the downturn scenario his institution will be pitted against in the stress test. Meanwhile, French-Belgian lender Dexia SA has been exempted from that health check because it’s being wound down, raising the question of why it was included in the first place.

Policy Spillover

The ECB will have to decide before November if it should continue to directly supervise Dexia. That issue illustrates one of the biggest long-term challenges for the institution: how its supervisory judgments impact the rest of its policy portfolio.

“Dossiers like Dexia can be dangerous for the reputation of the institution,” said according to Alan Lemangnen, an economist at Natixis in Paris. “The Governing Council will always have to take these sorts of concerns into consideration in its monetary policy. They will have to be very careful about this in the future.”

Before it's here, it's on the Bloomberg Terminal.