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«BLUEPRINT SERIES 25 EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS Dirk Schoenmaker and Nicolas Véron, editors Thomas Gehrig, Marcello Messori, ...»

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Dirk Schoenmaker and Nicolas Véron, editors

Thomas Gehrig, Marcello Messori, Antonio Nogueira Leite,

André Sapir, Sascha Steffen, Philippe Tibi, David Vegara,

Casper G. de Vries, Miranda Xafa





MONTHS Dirk Schoenmaker and Nicolas Véron, editors Thomas Gehrig, Marcello Messori, Antonio Nogueira Leite, André Sapir, Sascha Steffen, Philippe Tibi, David Vegara, Casper G. de Vries, Miranda Xafa


Volume XXV European banking supervision: the first eighteen months Dirk Schoenmaker and Nicolas Véron © Bruegel 2016. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted in the original language without explicit permission provided the source is acknowledged. Opinions expressed in this publication are those of the author(s) alone.

Editorial coordinator: Stephen Gardner Production: Michel Krmek Cover: Michel Krmek Bruegel 33, rue de la Charité, Box 4 1210 Brussels, Belgium www.bruegel.org ISBN: 978-9-078910-41-1 Acknowledgements The editors would like to thank Bennet Berger for outstanding research assistance throughout the project. The editors and country authors conducted interviews with supervisors and bankers. We would like to thank them for their insights.

Contents Acknowledgements III About the authors VI Foreword IX 1 Introduction and executive summary 1 2 European overview 7 3 Austria 53 4 Belgium 66 5 France 76 6 Germany 89 7 Greece 101 8 Italy 114 9 The Netherlands 127 10 Portugal 138 11 Spain 152 References 161 About the authors Thomas Gehrig is Professor of Finance at the University of Vienna and a member of the Vienna Graduate School of Finance (VGSF).

He is also head of the ‘Financial Crises’ working group of the Austrian Research Association (Österreichische Forschungsgemeinschaft, ÖFG).

Marcello Messori is a Professor of Economics and Director of the School of European Political Economy at LUISS Guido Carli University in Rome. From May 2014 to November 2015 he was chairman of the board of directors of Ferrovie dello Stato Italiane, the Italian railways company. He has also been the president of an Italian investment fund within the Allianz Group (2010-2014) and a board member and senior advisor to the Sator financial group (2010-2013).

Antonio Nogueira Leite is a Professor of Economics and Business Strategy at Universidade Nova de Lisboa. He is also a non-executive director at EDP Renewables, an energy company, and at HipoGes Advisory, a Spanish asset management firm, and a senior advisor to Incus Capital Advisors, an investment advisory firm. From 2011 to 2013 he was vice chair of the board of directors of Caixa Geral de Depositos in Lisbon.

André Sapir is a Senior Fellow at Bruegel and a Professor at the Université Libre de Bruxelles. From 2011 to 2015, he was a member of the general board and, subsequently, vice chair and then chair of the Advisory Scientific Committee of the European Systemic Risk Board.


In 2015-16, he was the chair of the high level expert group appointed by the Belgian finance minister to make recommendations on the future of the Belgian financial sector.

Dirk Schoenmaker is a Senior Fellow at Bruegel and a Professor of Banking and Finance at the Rotterdam School of Management of Erasmus University Rotterdam. He is also the chairman of the Dutch Securities Institute, a board member of the Dutch Foundation for Banking Ethics Enforcement (Tuchtrecht Banken), and a member of the Advisory Scientific Committee of the European Systemic Risk Board in Frankfurt. From 2009 to 2015, he was dean of the Duisenberg School of Finance in Amsterdam.

Sascha Steffen is a Professor of Finance at the University of Mannheim Business School, and head of the Research Group on International Finance and Financial Management at the Centre for European Economic Research (ZEW) in Mannheim. He is also a research fellow at the Centre for Financial Studies (CFS) in Frankfurt and a research professor at the Halle Institute for Economic Research (IWH).

Philippe Tibi is an Adjunct Professor of Strategy and Financial Markets at Ecole Polytechnique near Paris, a Fellow at Sciences Po Paris, and a Visiting Professor at the University of International Business and Economics in Beijing. He is founder and president of Pergamon Campus, an executive education organisation. Until 2012 he was chief executive of UBS in France, and until 2014, chairman of the French Financial Markets Association (AMAFI).

David Vegara is a Lecturer in Economics and international Finance at ESADE Business School in Madrid. Until 2015 he was a deputy managing director for banking at the European Stability Mechanism in Luxembourg. He is a member of the board of directors and chairs the


board’s risk committee at Banco Sabadell. He is also a board member and advisor at Equilibria Investments, a Spanish investment firm, and has international consulting clients outside of Spain.

Nicolas Véron is a Senior Fellow at Bruegel and a Visiting Fellow at the Peterson Institute for International Economics (PIIE) in Washington DC. He is also an independent board member at the derivatives trade repository arm of DTCC, a financial infrastructure company, and a member of the Scientific Advisory Council of France’s securities regulator (AMF).

Casper G. de Vries holds the Witteveen chair of Monetary Economics at Erasmus University Rotterdam and is a fellow of the Tinbergen Institute. He is a member of the Dutch Scientific Council for the Government (WRR), and an advisor to pension funds UWV and ING.

Miranda Xafa is the founder and principal of E.F. Consulting, a Greek advisory firm whose clients are non-Greek investment managers. She is also a senior fellow at the Center for International Governance Innovation (CIGI) in Waterloo, Ontario, Canada.

Foreword On 29 June 2012, the euro area’s heads of state and government decided to create a European banking union. European banking supervision, established within the European Central Bank is one of the essential elements, the others being European bank resolution and European deposit insurance (Pisani-Ferry et al, 2012). European banking supervision became fully operational on 4 November 2014.

Eighteen months on from its creation, the time has come for an initial assessment. This Blueprint provides the first in-depth review.

Looking back at the first eighteen months, I would identify three major debates around banking supervision. The first concerns non-performing loans in Europe’s banking system. The ECB’s asset quality review and stress tests prior to the establishment of European banking supervision uncovered large amounts of non-performing exposures in Europe’s banks. Those loans were a major concern for banks’ profitability and their ability to fund new profitable investments (Acharya and Steffen, 2014a). In particular, medium-sized banks were identified as a concern (Mody and Wolff, 2015). More recently, the debate has crystallised around non-performing loans in Italian banks and the question has arisen of why this issue was only raised in early

2016. A recurring question in policy circles was therefore whether or not European banking supervision was forceful enough in addressing the problem and whether its strategy for addressing it was appropriate.

The editors of this volume conclude that European banking supervision is tough and broadly fair – but they also acknowledge that Europe is still far from addressing all its banking problems. The chapter on Italy provides a detailed analysis, but it might still be too early to reach


a final conclusion.

The second big policy discussion evolved around the Single Supervisory Mechanism’s handling of the Greek situation in 2015. In particular, based on the ECB’s handling of Greek banks, concern was voiced that banking supervision within the ECB was not sufficiently independent from monetary policy decisions. The chapter on Greece in this volume provides a nuanced description of the unfolding of the stand-off between creditors and Greece and the difficult role that European banking supervision had to play. The fast-deteriorating economic situation in Greece during the stand-off certainly left a gap in the balance sheets of Greek banks. But the size of the gap depended on what the final resolution of the conflict would look like – it was hard to assess it in real time. In my view, any European supervisor would have had a very difficult time taking decisions on Greek banks in such a situation that would have precluded their access to funding. Rather than manifesting a conflict of interest with monetary policy, the political stand-off in an incomplete and fragile monetary union made this supervisory decision difficult.

The third policy debate is more generally about the further institutional development of banking union. One important aspect is the separation of banking supervision from monetary policy. There are many good arguments for and against the central bank being in charge of banking supervision. It is fundamental that supervisory decisions should not be unduly influenced by monetary decisions and vice versa. In the euro area, it was only possible to establish European banking supervision so quickly because of the institutional and legal infrastructure of the ECB. Another aspect is how a centralised supervisor operates in a union, in which the resolution framework is not fully integrated and deposit insurance is still national. Can it and should it end ring-fencing of capital and deposits? What degree of independence does it have to take decisions that ultimately could imply fiscal costs at national level? How should sovereign debt be treated?

European banking supervision in a fragile monetary union with an


incomplete banking union will remain a special and daunting task.

The overall tone in this Blueprint is one of appreciation for how well the ECB has met this challenge. But we cannot content ourselves with the present situation and I would call on the European political system to finish the work started in June 2012.

The Blueprint provides an excellent review of the first 18 months of European banking supervision. It reviews the overall situation and the situation in a number of euro-area countries. In doing so, it provides important insights into the start of a new policy regime that involves profound change for the European banking landscape. Certainly one of the most important common themes is just how profound the regime shift from national supervision to European supervision is. The greater distance between European banking supervision and banks comes out strongly in all the chapters – and the greater independence is often highlighted, as is the fear of ‘one-size-does-not-fit-all’ The.

volume does not attempt to evaluate all the specific decisions of banking supervision. Arguably, such an evaluation is hard to do because it critically depends on assessing the information available to banking supervisors and forming a view of a counterfactual. The volume is therefore a critical review of the overall situation and outlines the emerging new European banking landscape under uniform European banking supervision.

The volume was edited by Bruegel scholars Dirk Schoenmaker and Nicolas Véron and I want to express my gratitude for their hard and successful work. Country chapters were mostly written by non-Bruegel scholars from nine countries who could offer deep insights into their respective countries. The scholars involved also acted as a group and discussed their findings. Let me thank them for their timely and insightful contributions, and for the collective work that makes for an insightful reading of the emergence of a new European banking landscape.

Guntram Wolff, Director of Bruegel Brussels, June 2016 1 Introduction and executive summary Dirk Schoenmaker and Nicolas Véron European banking supervision (also known as the Single Supervisory Mechanism, or SSM1) is, in many ways, the cornerstone of Europe’s banking union, itself arguably the most ambitious European structural reform project of the past ten years (Véron, 2015; Schoenmaker, 2015a). The first firm policy announcement to initiate banking union was made on 29 June 2012. It was, in the words of European Central Bank President Mario Draghi that same day, “the game-changer we need” to trigger the ECB’s Outright Monetary Transactions (OMT) programme and end the most disorderly phase of the euro-area crisis (Van Rompuy, 2014). On 15 October 2013, the enactment of the SSM Regulation (Council Regulation (EU) No 1024/2013), unanimously adopted by all EU member states including those outside of the euro area, for the first time enshrined the vision of banking union in EU legislation, followed by the Single Resolution Mechanism (SRM) Regulation ((EU) No 806/2014) on 15 July 2014.

European banking supervision was a logical first step for banking union because key stakeholders, not least the German government2, 1 We follow the ECB’s recent practice of generally referring to the new bank supervisory policy framework in the euro area as ‘European banking supervision’, and to its own supervisory arm as ‘ECB banking supervision’: see ECB (2016a), page 4, footnote 1.

2 On the German finance minister’s key role in introducing European banking 2 | BRUEGEL BLUEPRINT saw a neutral and central point of oversight of all banks in the system as a prerequisite for any further steps that might involve financial risk-sharing. It may thus have been inevitable that the second big policy announcement of 29 June 2012, on the possibility of direct recapitalisation of banks by the European Stability Mechanism (ESM), was made conditional on the first, and framed as only possible “when an effective single supervisory mechanism is established”3. While the prospects for ESM direct recapitalisation were later shrunk to the point of near-meaninglessness, and the emphasis shifted to bail-in rules to minimise the public cost of future banking crises, it remains appropriate to see effective European banking supervision as the key to unlocking other advances towards a more complete banking union, including in the context of current debates about the European Commission’s proposal for a European Deposit Insurance Scheme (EDIS)4. In Mario Draghi’s words, European banking supervision “was an essential precondition for the other pillars of banking union” (ECB, 2016a, foreword).

It matters greatly, therefore, to what extent the new European banking supervisory system can be considered ‘effective’ Some.

18 months after its official start on 4 November 2014, now is the right time for an early assessment – not of the legal framework, on which there is already a burgeoning literature (eg Busch and Ferrarini, 2015), but rather of how it works in practice. To achieve this, we observe the SSM’s early development here, not only from the European (namely, euro-area5) perspective, but also closer to the ground at the level of

–  –  –

individual member states. This two-level perspective is justified by the fact that banking supervision used to be almost entirely national until 2014, and national idiosyncrasies will continue to shape the system for a long time, both in terms of banking models and structures and in terms of perceptions and politics – not to mention enduring differences in bank and corporate insolvency laws, tax, accounting and other key aspects of the banking policy framework.

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