«BLUEPRINT SERIES 25 EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS Dirk Schoenmaker and Nicolas Véron, editors Thomas Gehrig, Marcello Messori, ...»
Much of this Blueprint is descriptive. The dawn of European banking supervision has shed a new light on the euro-area banking sector and created a new environment with its own conventions (eg the distinction between significant and less significant institutions), its own jargon (of which there is no shortage) and its own politics. Instead of benchmarking themselves only against national competitors, banks in the euro area are increasingly compared to peers across the area’s countries. Our European overview and country chapters examine Europe’s highly diverse banking landscape in this new light.
For reasons of practicality, we have selected nine euro-area countries which together represent more than 95 percent of the euro area’s total banking assets: Austria, Belgium, France, Germany, Greece, Italy, the Netherlands, Portugal and Spain. This selection is somewhat arbitrary – one obvious shortcoming is that it includes none of the thirteen EU member states that joined the European Union in 2004 and after, of which seven are now in the euro area. The selection is tilted towards larger countries, or more specifically those with the largest banking sectors. Among the smaller countries, we have given priority to Greece and Portugal given their ongoing transition out of situations of severe banking-sector fragility. For each of these, we have selected an author who is both well-informed and suitably independent. While we made join it under the procedure known as close cooperation. No country, however, has so far taken this step. The Danish central bank has publicly recommended it for Denmark: see Danmarks Nationalbank, ‘Participation in the Banking Union is in the interest of Denmark’ 10 December 2014.
, 4 | BRUEGEL BLUEPRINT suggestions of themes to the nine country-chapter authors, they have been left free to focus on the issues they deemed important in their respective national contexts6. Their chapters, and our own overview section, are based not only on publicly available information but also on many conversations with a broad range of stakeholders including national and European policymakers, bankers and other market participants.
Summarised findings We find the new European banking supervision system to be broadly effective and, in line with the claim often made by its leading officials, tough and fair. These are remarkable achievements given the complexity of the transition from the previous regime. That said, we also identify significant areas for future improvement. ECB banking supervision still lacks transparency, and there is evidence that the supervisors still have much to learn about the banks they oversee in order to better accomplish their mission. Mistakes have been made along the way. Perhaps most importantly, European banking supervision has not yet achieved the objective of creating a level playing field for banking in the euro area and decisively breaking the vicious circle between banks and sovereigns.
• European banking supervision is effective. Supervision of cross-border banking groups in the euro area is conducted in a joined-up manner that contrasts with the previous fragmented, country-by-country practice. The key mechanism is the operation of Joint Supervisory Teams (JSTs), which for each supervised banking group enable information sharing between the ECB and relevant national supervisors while providing a clear line of command and decision-making. The size of JSTs (up to several dozen examiners) also allows for specialisation on topics such as capital and governance.
6 A coordination workshop planned for 23-24 March 2016 in Brussels had to be cancelled because of the attacks of 22 March; the meeting was held via conference call instead.
5 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS
• European banking supervision is tough, at least when it comes to significant (larger) banks. It is generally more intrusive than previous national regimes, with supplementary questions during investigations and more on-site visits. The ECB is less vulnerable to regulatory capture and political intervention. An early quantitative indication is that the ECB has not shied away from increasing capital requirements by imposing higher capital add-ons under its Supervisory Review and Evaluation Process (SREP). Fewer changes have been introduced so far for the supervision of less significant banks, which still varies significantly in different countries but appears generally less demanding than that of significant banks.
• European banking supervision appears to be broadly fair, at least for significant banks. Among these, we have not found compelling evidence of country- or institution-specific distortions or special treatment by the ECB, for example in the determination of SREP scores. The situation is more complex when it comes to less significant banks that remain subject to national supervision, including those tied together in what EU legislation calls Institutional Protection Schemes.
• European banking supervision makes mistakes. There have been cases of overlapping and redundant data requests. The ECB’s communication on maximum distributable amounts was ill-prepared and contributed to volatility on bank equity markets in early
2016. The Supervisory Board appears to act as a bottleneck in some procedures and does not optimise its use of delegation for day-today decisions.
• European banking supervision is insufficiently transparent.
The ECB’s Supervisory Board and SREP process are seen as a black box by numerous stakeholders. Banks complain about the opacity of the determination of SREP scores, which are based on multiple 6 | BRUEGEL BLUEPRINT factors. European banking supervision still provides pitifully little public information about all supervised banks, in stark contrast to US counterparts.
• European banking supervision has not yet broken the bank-sovereign vicious circle and created a genuine single banking market in the euro area. Many lingering obstacles to a level playing field are outside European banking supervision’s remit, including deposit insurance, macro-prudential decisions (beyond banking) and many other important policy instruments that remain at national level. But even within its present scope of responsibility, European banking supervision maintains practices that contribute to cross-border fragmentation, such as the imposition of entity-level (as opposed to group-level) capital and liquidity requirements, or geographical ring-fencing, and the omission of geographical risk diversification inside the euro area in stress test scenarios. It has not yet put an end to the high home bias towards domestic sovereign debt in many banks’ bond portfolios. Nor have many cross-border acquisitions been approved by ECB banking supervision so far.
Overall, we are impressed by the achievements of European banking supervision during its first 18 months. However, what remains to be done to achieve the vision of European banking union is daunting.
Much of the work ahead is beyond the remit of European banking supervisors’ authority, but materially depends on their ability to establish credibility and trust. Almost four years after the inception of banking union in late June 2012, these are still very early days in a momentous transition. On the basis of the assessment presented in this Blueprint, we find grounds for cautious optimism.
2 European overview Dirk Schoenmaker and Nicolas Véron The new European banking supervisory framework Advocacy in favour of a shift of banking policy to the European level long predates the euro-area crisis7. It was this crisis, however, and specifically what is now widely known as the bank-sovereign vicious circle, that forced euro-area leaders to jointly decide to initiate banking union in late June 2012 (Véron, 2011; Pisani-Ferry et al, 2012). This inevitably entails considerable risk-sharing, if only implicit, because systemic banking crises can happen and governments cannot leave them unaddressed. To contain moral hazard, a precondition for this risk sharing is the organisation of banking supervision at the euro-area level.
The European Commission’s proposal for the SSM Regulation was published on 12 September 2012, less than three months after the initial political impetus of late June. It was adopted in Council on 13 December 2012 and, after some stalling in the European Parliament and a trilogue process, finally enacted on 15 October 2013. ECB banking supervision started shortly afterwards, with intense recruitment activity throughout 2014 and simultaneous work on the comprehensive assessment of 130 euro-area based banking groups, involving an asset quality review (AQR) and a stress test. The results of this 7 Academics and policymakers have long argued that the increasing intensity of cross-border banking would require a form of European banking supervision and/or resolution. See, for example, Folkerts-Landau and Garber (1992), Schoenmaker (1997), Padoa-Schioppa (1999), Vives (2001), Decressin et al (2007), Véron (2007) and Goodhart and Schoenmaker (2009).
8 | BRUEGEL BLUEPRINT assessment were published on 26 October 2014 (ECB, 2014a), days before the ECB assumed its supervisory authority on 4 November.
The 2014 comprehensive assessment resulted in downward adjustments of the reviewed banks’ assets of €48 billion, or 2.2 percent of their assets at the time. The stock of their non-performing exposures (NPE) was increased by €136 billion, as NPE definitions were harmonised. The assessment identified capital shortfalls for 25 banks as of its cut-off date of end-2013, totalling €25 billion8. In absolute terms, Italy with €9.7 billion and Greece with €8.7 billion had the greatest capital shortfalls. As a percentage of risk-weighted assets, the countries with the greatest capital shortages were Cyprus (6 percent), Greece (4 percent) and Portugal and Italy (1 percent each).
Under the SSM Regulation, the ECB is the single licensing authority for all banks in the euro area; it also has sole authority to approve changes of ownership and new management9. The ECB enforces supervisory laws and regulations that are substantially harmonised at the EU level, and known as such as the ‘single rulebook’ The.
single rulebook, among other things, lays down capital and liquidity requirements for banks. Relevant EU legislation includes the Capital Requirements Regulation (CRR, (EU) No 575/2013) and four successive Capital Requirements Directives (CRD), the last enacted in 2013 (2013/36/EU). The European Banking Authority (EBA), created in early 2011 with its seat in London, prepares many of the lower-level delegated and implementing acts (broadly equivalent to what are called regulations in the United States), which require the European Commission’s eventual approval. The EBA also maintains a single supervisory handbook to ensure consistency across the EU.
8 Twelve of these 25 banks had addressed the shortfall during the first nine months of 2014. The other 13 were asked to rapidly present recapitalisation plans for the shortfall to be addressed in the course of 2015.
9 On this, the euro-area framework is more centralised than in the United States, where many banks and credit unions are licensed by state authorities even though they are supervised by federal agencies.
9 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSThe ECB directly supervises 129 banking groups, broadly speaking the largest in the euro area. They are labelled significant institutions (SIs)10. The euro area’s more than 3,000 other banks (or less significant institutions, LSIs) are supervised by national competent authorities (NCAs), which are the national supervisors in the respective countries11. The ECB does not conduct parallel supervision of the LSIs, but exercises oversight of the NCAs to ensure supervisory consistency, and gives them supervisory support. Figure 1 illustrates the framework.
Figure 1: European banking supervision
Source: Bruegel based on ECB (2016a).
10 Under the SSM Regulation, all banks with consolidated assets over €30 billion are automatically designated as SIs, and other banks may also be designated if they meet other criteria. The list of supervised institutions, including designation of all SIs and LSIs, is regularly updated by ECB banking supervision and published on its website. Unless otherwise indicated, all numbers in this Blueprint are based on the list as of 1 January 2016.
11 As of April 2016, for 12 of the 19 euro-area countries (Belgium, Cyprus, France, Greece, Ireland, Italy, Lithuania, the Netherlands, Portugal, Slovakia, Slovenia and Spain), the NCA is the national central bank (NCB). For the other seven (Austria, Estonia, Finland, Germany, Latvia, Luxembourg and Malta), the NCA is an independent supervisory authority, such as BaFin in Germany, but the NCB also participates in the relevant JSTs. In the latter cases, the exact division of labour between the NCA and NCB varies for different countries.
10 | BRUEGEL BLUEPRINT Operationally, the key unit for European banking supervision is the Joint Supervisory Team (JST), one for each of the 129 SIs. JSTs combine ECB banking supervisory staff with staff from the NCAs. Each JST is led by a coordinator from the ECB12, always a national from outside the supervised bank’s home country, in line with standing practice of surveillance by international organisations like the International Monetary Fund (IMF). Each JST also includes a sub-coordinator from the NCA of the bank’s home country, and if the bank has major operations in other euro-area countries, additional sub-coordinators from the relevant NCAs. JSTs of the largest banks can have as many as 70 to 80 members, of which up to a dozen are ECB banking supervisory staff and the rest are from the participating NCAs.
The key decision-making body is the ECB’s Supervisory Board, which includes a chair (currently Danièle Nouy), a vice-chair who is also a member of the ECB’s executive board (currently Sabine Lautenschläger), four ECB representatives (currently Ignazio Angeloni, Luc Coene, Julie Dickson and Sirkka Hämäläinen), and representatives from all participating member states13. Apart from the Supervisory Board’s secretariat, ECB banking supervisory staff work in four directorates-general for micro supervision (DGMS). DGMS I supervises the system’s largest banking groups, currently numbering 30. DGMS II supervises all other SIs. DGMS III, the smallest of the four directorate-general in terms of headcount, oversees the supervision of LSIs by the NCAs. DGMS IV is in charge of horizontal functions, such as policy and common methodologies (eg for the SREP process), inspections and thematic reviews, for example on risk governance, horizontal analysis of internal models and IT and cybersecurity risks. There were 250 inspections in 2015 (of which 12 By contrast with, for example, the Federal Reserve system, in which each bank’s supervisory team is led by one of the 12 regional Federal Reserve Banks, all JST coordinators are located at the ECB in Frankfurt.
13 For those member states where the NCA is separate from the NCB, there are two representatives (from the NCA and NCB respectively), but they collectively have only one vote.