«BLUEPRINT SERIES 25 EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS Dirk Schoenmaker and Nicolas Véron, editors Thomas Gehrig, Marcello Messori, ...»
Data requests are aligned with standards, which the EBA began to define well before the start of European supervision. The main standards for harmonised reporting by banks are COREP (common reporting for regulatory metrics, such as Pillar-1 capital14) and FINREP (financial reporting data, such as annual financial statements). While the NCAs are first in line for the collection of supervisory data and quality control, the ECB has established further quality controls to ensure consistent data quality standards across all supervised banks, and is gradually building up integrated information systems. The supervisory banking data system (SUBA in ECB lingo) allows for communication and data-sharing between the ECB and NCAs (ECB, 2016a, section 1.6).
The euro-area banking system As of early 2016, the ECB directly supervises 129 SIs, listed and summarily described in Table 6 at the end of this chapter. Of these, 96 are designated as significant because they have more than €30 billion in assets; the other 33 are designated under other criteria set by the SSM Regulation (among the largest three banks in a country; assets above 20 percent of a country’s GDP; significant cross-border operations;
or banks with assets over €30 billion in the previous three years). The 14 The Basel capital accord (currently Basel III) defines Pillar-1 capital requirements as a minimum ratio of regulatory capital (eg common equity Tier1 or CET1 capital) over risk-weighted assets. Pillar-2 is based on supervisory review involving a greater degree of supervisory judgment, and may entail additional capital requirements (‘Pillar-2 add-ons’). Pillar-3 is a framework for mandatory disclosure of regulatory information and risks, currently undergoing review by the Basel Committee because it has generally disappointed in the past.
12 | BRUEGEL BLUEPRINT breakdown of these banks and the 3,167 LSIs is shown in Table 1.
Source: Bruegel based on SNL data and ECB (2016a). Notes: The CET1 ratio and leverage ratio are calculated as an average weighted by total assets. The leverage ratio is defined as the ratio of Tier 1 Capital and total leverage exposure.
Source: Bruegel based on SNL data and China Banking Regulatory Commission (CBRC) for China, ECB (2016a) for the euro area, and Federal Reserve for the United States. Notes: The total assets comprise consolidated assets of domestic banking groups and domestic assets of subsidiaries and branches of foreign banks. To calculate the size of the respective banking systems (labelled as domestic assets), the foreign assets of the domestic banks are deducted. The concentration ratio of the largest five banks (CR-5) is based on their domestic assets as a percentage of total domestic assets.
13 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSThe SIs dominate the landscape, with 83 percent of the system’s total assets; LSIs are more important in some member states (especially Austria, Germany and Italy), but unfortunately the ECB does not (yet) provide a split of LSI assets by country. The eight largest SIs are designated by the Financial Stability Board (FSB) as ‘global systemically important banks’ (G-SIBs)15. We use the label ‘European systemically important banks’ (E-SIBs) for the next 22 SIs with more than €150 billion in assets16. Together, the euro area’s G-SIBs and E-SIBs represent almost two-thirds of the area’s total assets.
Table 2 compares the euro area with the banking systems of China and the United States. Following rapid recent growth, China has become the world’s largest banking system with €28.2 trillion in total assets at end-2015. The European banking union follows closely with €27.7 trillion, and the United States is about half that size with €14.3 trillion. Table 2 also shows that euro-area banks are much more internationally active (outside the euro area) than their US or Chinese counterparts (see Table 3 for more detail). It further indicates that the concentration ratio for the largest five banks (CR-5 ratio) is only 24.6 percent in the euro area, while for both the Chinese and US banking market it is 40.4 percent. Europe’s banking union thus starts significantly less concentrated than its international counterparts, even though its banks have a heavier weight than those in the US when measured against euro-area GDP17. A crucial question is whether the euro area will witness the same merger-and-acquisition dynamics as 15 By decreasing order of total assets (Table 6): BNP Paribas, Crédit Agricole, Deutsche Bank, Santander, Société Générale, BPCE, UniCredit and ING.
16 The ECB does not explicitly disclose the split of SIs by supervision between DGMS I and DGMS II, but we presume that the 30 banks supervised by DGMS I are the eight G-SIBs and 22 E-SIBs. The E-SIB labelling is our judgment and does not appear in ECB communication.
17 The gap between Europe and the US is partly, but far from entirely, related to differences in accounting standards, which make the US banks appear comparatively smaller when measured by total assets. Accounting differences presumably have less of an impact between Europe and China.
14 | BRUEGEL BLUEPRINT the US experienced after the lifting of restrictions on interstate banking by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Stiroh and Strahan, 2003; Schoenmaker, 2015b).
Zooming in on the G-SIBs and E-SIBs, Table 3 shows their banking union market shares and cross-border footprints. The banking union market share is defined as a banking group’s assets in the euro area divided by total domestic assets in the banking euro area (as shown in Table 2). While the euro area has very large banks with up to almost €2 trillion in assets, their banking union market share does not exceed 7 percent (Crédit Agricole). By contrast, large US banks, such as JP Morgan Chase and Bank of America, have 13 percent and 11 percent respectively of the US banking market18. This highlights the comparative fragmentation of the euro-area market when seen from a European perspective19.
Table 3 also provides the geographical segmentation of bank assets by home country, other euro-area countries, non-euro EU countries and non-EU countries. On (weighted) average, G-SIBs and E-SIBs conduct 58 percent of their business in their home countries, and 16 percent in other banking union countries. As a consequence, the euro area, which may be viewed as their new ‘home’ base, represents 74 percent of their total assets. The SSM is thus significantly better able to conduct supervision of these large banks at a consolidated level than individual country authorities were in the pre-banking union era.
Table 3 shows some major differences in the banks’ internationalisation patterns. Three of them have a global reach with around 30 percent or more of their assets outside the EU: Deutsche Bank, Santander 18 US federal law prevents any bank from gaining more than 10 percent of national deposits in the United States through acquisition. So, JP Morgan Chase and Bank of America can only organically grow in the US. Lucas (2014) ranks the top five US banks by assets.
19 Compared to asset numbers, market shares are less affected by differences in accounting standards. Of course, the market landscape is very different when considered from a national perspective inside the euro area, as illustrated in several of this Blueprint’s country chapters.
15 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSand BBVA. Next, several banks can be considered pan-European, with more than 30 percent of their assets in other European countries: BNP Paribas, UniCredit, ING, Commerzbank, KBC, Banco Sabadell and Erste. The remaining banks retain a strong domestic focus, with over 70 percent of their assets in their respective home countries20.
Turning to the overall group of SIs, there is an important distinction between 100 banking groups headquartered in the euro area, or euro-area banking groups, and 29 subsidiaries and branches of other groups21. Figure 2 shows the distribution of the 100 euro-area banking groups by home country. France is a clear first in this ranking, with an aggregate €7.4 trillion in assets, followed by Germany (€4.4 trillion), Spain (€3.4 trillion), Italy (€2.4 trillion) and the Netherlands (€2.2 trillion). The other countries are all well under €1.0 trillion. While the German and French banking systems are more or less equal in size (around €8 trillion)22, this chart illustrates a major difference between the two largest banking union countries: France has a centralised banking system with a few relatively large banks, some with substantial international assets. By contrast, German banks are typically small and local (and thus categorised as LSIs), and even the larger German banks, with the exceptions of Deutsche and Commerzbank, tend to have a domestic focus. A similar contrast underlies the respective positions of Spain versus Italy, or the Netherlands versus Belgium.
If we look at cities instead of countries, Paris is by far the biggest banking centre with 11 of the 100 euro-area banking groups representing €7.4 trillion in assets, followed by Frankfurt (six groups, €2.9 trillion), Madrid (eight groups, €2.6 trillion), the Dutch Randstad (six groups, €2.2 trillion) and Milan (five groups, €1.8 trillion). Table 6 provides the details.
20 Dexia is left aside in this enumeration, because it is in a process of unwinding.
21 As Table 1 shows, the vast majority of SI assets belong to the 100 euro-area banking groups.
22 Source: Aggregate MFI balance sheets at the ECB Statistical Data Warehouse.
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Source: Bruegel based on SNL Financial, annual reports and ECB SDW. Notes: The market share in the banking union is defined as the share of total assets in the banking union of the respective banking group over total banking assets in the banking union.
The geographical breakdown refers to the share of assets in the home market, the banking union, the rest of Europe and the rest of the world over the total assets of the respective banking group. The home and banking union shares add up to the total banking union share. The bottom line is calculated as average weighted by assets. The data is for end 2015, except for Crédit Mutuel, which is end 2014.
Next, Table 4 ranks the banking groups according to their governance. We distinguish three main categories: commercial banks, cooperative-governed banks, and government-owned banks (see the notes to Table 6 for definitions). Remarkably, and in sharp contrast to both the United States and the United Kingdom, commercial banking groups with dispersed ownership are barely more than half of total assets (€11.9 trillion, or 54 percent of the total), making up only 30 out of 100 banking groups. Cooperative groups are almost as numerous (27 out of 100) and total €6.3 trillion in assets, or 28 percent of the total. There are no fewer than 32 government-controlled banking groups, including some owned by local governments, banks nationalised during the crisis, and policy banks; they represent €3.6 trillion in assets, or 16 percent of the total. The remaining banks (2 percent of the total) are privately-controlled commercial banks.
18 | BRUEGEL BLUEPRINT Figure 2: Significant euro-area banking groups, total assets by country (€ bn) 8,000 6,000 4,000 2,000
Source: Bruegel based on SNL Financial for the 100 euro-area-headquartered SIs. Note that all SIs in Estonia, Lithuania and Slovakia are branches or subsidiaries of groups headquartered elsewhere (see Table 6).
Source: Bruegel based on SNL data and ECB (2016a). Notes: The CET1 ratio and leverage ratio are calculated as an average weighted by total assets.
19 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSWhile the government-controlled banks appear to be better capitalised with an average CET1 ratio of 18 percent compared to around 13 percent for commercial and cooperative banks, the average leverage ratio hovers around 5 percent for all three categories. This illustrates the zero/low risk-weights for sovereign and semi-sovereign exposures as input to the risk-weighted CET1 ratio calculations, combined with the fact that government-owned banks often hold a lot of sovereign and semi-sovereign assets. The unweighted leverage ratio corrects for these low risk weights.
Only 41 of the 100 euro-area banking groups are publicly listed at the parent-entity level, representing €15 trillion, or 68 percent of total assets of these 100 groups. This has implications in terms of transparency, since disclosure requirements are more stringent and better enforced for listed groups than for unlisted ones. The branches and subsidiaries of non-euro area banks are comparatively more ‘commercial’ with 22 out of 29 banks, representing €798 billion out of €940, billion in assets (85 percent), being part of commercial banking groups with dispersed ownership.
Finally, 18 of these 29 branches and subsidiaries (representing €744 billion in assets, or 77 percent of total assets of the 29 branches and subsidiaries) are held by EU-based groups, including by far the two largest, Nordea Finland and HSBC France. The largest euro-area bank with a non-EU parent is Abanca (formerly Novacaixagalicia, sold by the Spanish Fund for Orderly Bank Restructuring to Venezuela’s Banesco), which comes a distant third with €47 billion in assets. In other terms, non-EU foreign penetration in the euro-area banking system is very low. One reason for this is that large American and other non-EU banks tend to concentrate their EU operations in London and use their EU internal market ‘passport’ from there (Goodhart and Schoenmaker, 2016). There is essentially no US presence in European retail banking, in marked contrast to US retail banking where several euro-area groups (in particular BBVA, BNP Paribas and Santander) have significant regional positions.
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Source: Bruegel based on IMF Financial Soundness Indicators database. Note: ‘Core’ refers to a simple average of Austria, Belgium, France and the Netherlands (Germany is omitted for lack of data availability).
The euro-area banking system is not only heterogeneous in terms of bank size, governance, and ownership; it is also characterised by significant variations in bank strength. The strength of the banking sectors in different countries also varies notably. Figure 3 illustrates this heterogeneity by comparing non-performing loan (NPL) rates in several member states. This picture has to be taken with a grain of caution, because it is based on national NPL definitions that are not necessarily harmonised, and an increase in reported NPLs is itself an ambiguous signal: it might signify a deterioration in the quality of loans, but might also result from better measurement and curbs on practices variously referred to as loan forbearance, ‘evergreening’ or ‘extend-and-pretend’ (Advisory Scientific Committee, 2012). Nevertheless, Figure 3 provides support for the view that Greece, Italy and Portugal, in particular, are still far from having brought their banking systems back to soundness, while Ireland and Spain are, after major restructuring and
21 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSrecapitalisation of their banking systems, more advanced on the path towards recovery23.
Assessing European banking supervision Our assessment is based on three criteria. The first is effectiveness: is European banking supervision able to fulfil its mandate? The second is toughness: is the supervision rigorous enough to ensure the stability of the banking system? The third is fairness: is it consistent across supervised banks and countries? Where relevant, we use quantitative indicators to underpin the assessment. Our aim is to assess the performance of the overall system of European banking supervision, including the ECB and all NCAs24. At times, it is nevertheless helpful to differentiate between the performance of the ECB, which is ultimately in charge, and those of the NCAs. This split is unsurprisingly even more apparent in the subsequent country-specific chapters of this Blueprint.