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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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This overview does not include supervisory decisions on LSIs, which are still made by NCAs under ECB oversight. The vast majority of the euro-area LSIs are in only three countries: Austria, Germany and Italy. In Austria and Germany, they are typically covered by institutional protection schemes (IPS), which are arrangements under which small banks may provide each other with financial assistance within a network (eg the German or Austrian savings banks, or Sparkassen)36.

From the relevant country chapters of this Blueprint, the perception 36 Lautenschlaeger (2016) calculates that half of all banks in the euro area (SIs and LSIs), and four-fifths of those in Germany, are IPS members.

30 | BRUEGEL BLUEPRINT that emerges is that LSI supervision by NCAs is typically laxer than the supervision of SIs by the ECB. This discrepancy could be a source of future supervisory failures, as illustrated by the chapters on Greece (the case of Attica Bank) and Italy. In early 2016, the ECB conducted a consultation on IPS that might be followed by new supervisory initiatives in this area, an issue which is developed at more length in the chapters on Austria and Germany.

Overall, there is no doubt that European banking supervision is generally tougher than the national supervisory regimes it has replaced in all countries reviewed in this Blueprint. Whether that makes it tough enough is of course a different question. At this point we are inclined to think that it does, but a better-informed assessment will be provided by the observation of future developments in the euro-area banking system.

Fairness and consistency We have not found evidence of a country- or institution-specific pattern in the SREP process that would suggest favouritism, discrimination or other forms of undue distortion. In fact, the question might aptly be raised whether there is sufficient dispersion in the SREP requirements shown in Figure 4, given the differences in the quality of the banks in general and the problems at some banks in particular. Our impression is that European banking supervision has initially erred on the side of not enough differentiation, precisely to avoid being accused of displaying an inherent bias.

One additional layer of complexity for European banking supervision is that NCAs retain a separate competence on the application of macro-prudential buffers, comprising systemic and countercyclical buffers. The systemic risk buffer is an additional capital charge for systemically important banks to address the ‘too-big-to-fail’ issue. The Financial Stability Board has started this process with the suggestion of additional loss-absorbing requirements for G-SIBs. In addition, the

31 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS

CRD IV (Article 131) empowers NCAs to designate other systemically important institutions (or O-SIIs, also known in Basel parlance as domestic systemically important banks) and apply to them a capital surcharge of up to 2 percent. Finally, the CRD IV (Article 133) also allows NCAs to set systemic risk buffers of at least 1 percent. The last column of Table 5 calculates the domestic systemic buffer as the higher of the latter two buffer requirements, which are set by the NCAs. Figure 6 shows the same numbers as a map, illustrating the differences in toughness among NCAs.

Most northern member states generally apply higher systemic buffers of up to 2 or 3 percent, while southern member states (except Cyprus and Malta) apply low systemic buffers of up to 1 percent.

Remarkable cases are Italy and Latvia, which have set the systemic buffer for other systemically important institutions at 0 percent, with only a G-SIB surcharge of 1 percent for UniCredit following the Financial Stability Board’s guidance.

While national authorities have the primary responsibility for such macro-prudential requirements (Article 5.1 of the SSM Regulation), the ECB has the ability to set more stringent requirements (Article 5.2).

So far, it appears that the ECB has chosen to not use this option, perhaps to avoid opening a new front in its already complex relationship with national central banks and other NCAs. Nevertheless, it appears desirable that systemic buffer requirements should be harmonised across the banking union area at some stage. Meanwhile, the variation of macro-prudential stances in different countries is bound to generate perceptions of unjustified differential treatment.

32 | BRUEGEL BLUEPRINT

–  –  –

Source: Bruegel based on ECB (2016c), ESRB (2016) and ESRB National Policy database. Notes: G-SIB buffer is the global systemically important bank buffer set by the FSB and the Basel Committee on Banking Supervision; the O-SII buffer is the other systemically important institution buffer set by the NCA based on the CRD IV; the systemic risk buffer is set by the NCA based on the CRD IV. The domestic systemic buffer is the higher of the latter two buffer requirements, except for Slovakia that sums its O-SII and systemic risk buffers. The maximum of the domestic systemic buffer is shown in the last column.

33 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS

Figure 6: Domestic systemic buffer requirements across the banking union (fully loaded) 0 -1 % 1 -2 % 2 -3 % Source: Bruegel based on ECB (2016c), ESRB (2016) and ESRB National Policy database; see Table 5.





As emphasised in the previous subsection, a potentially more serious asymmetry is the lingering one between LSIs and SIs, whereby LSIs are subject to a national supervisory stance even though the ECB’s oversight (and specifically its DGMS III) could bring a degree of convergence over the medium term. In particular, national networks of local banks bound together in an IPS, such as the German or 34 | BRUEGEL BLUEPRINT Austrian Sparkassen, are not fundamentally different from groups of mutuals that co-own a consolidating central entity (such as the large French cooperative groups, the Netherlands’ Rabobank or Finland’s OP group), and in principle should compete on equal terms including in terms of the supervisory regime. This will certainly remain a widely debated issue over the next few years. More generally, a consistent SREP methodology for LSIs across euro-area member states remains a somewhat distant objective. The ECB acknowledges that risk assessment systems that underpin SREP scoring, in particular, are far from harmonised (ECB, 2016a, section 2.4.5). There is still work to be done within European banking supervision to ensure consistency, even for significant institutions.

Overall, we find no evidence of blatant unfairness in the current European banking supervisory regime for significant institutions, but more observation will be needed to conclude that it is genuinely fair.

Areas for improvement European banking supervision has experienced many teething problems, and there remains much scope for improvement. Examples of problems are overlapping and redundant data requests, which have generated considerable frustration among supervised banks, as illustrated by many of this Blueprint’s country chapters. Further coordination is needed with the gradual implementation of the ECB’s AnaCredit project, a detailed euro-area-wide bank loan dataset which predates banking union but has become even more important in the context of European banking supervision. Another, perhaps more serious, unfortunate episode was the sequence of communication about what has come to be known in European banking jargon as maximum distributable amounts (MDA), also discussed in the chapter about France. In summary, ECB banking supervision took a long time to reach the conclusion that MDAs would be based on Pillar-2 capital requirements, and that these requirements should therefore be disclosed publicly by the supervised banks (in contrast to most prior

35 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS

and international practice). The combination of this decision with high Pillar-2 capital add-ons (see above) is likely to have contributed to European bank stock market volatility at the beginning of 2016.

The later revision of the stance (with the introduction of a distinction between Pillar-2 requirements and additional Pillar-2 ‘guidance’ which, hints at a possible softer future approach) gave an impression of insufficient preparedness, even though we have no objection against the new stance on substance37.

There appears to be scope for streamlining the internal decision-making procedures, data requests and related reporting formats. Decision-making processes in the Supervisory Board appear overly burdensome. There were no fewer than 38 Supervisory Board meetings in 2015, of which 22 were in Frankfurt and 16 by videoconference (ECB, 2016a), many of which lasted more than one full day.

In addition, many authorisation procedures (on which 921 decisions covering more than 2,000 individual procedures were taken in 2015) need approval by the ECB’s Governing Council, adding further delays.

The existence of a long backlog of fit-and-proper authorisations is acknowledged by the ECB (ECB, 2016a, section 3.1.2) and, there appears to have been significant adverse operational consequences in some banks. While some of this burden is inherent in the governance framework set by the SSM Regulation38, our assessment is that the operation of the Supervisory Board should be revised, and more decisions delegated from the Supervisory Board to ECB banking supervision staff. This in turn requires constructive engagement from at least a critical number of the NCAs.

Transparency, or the lack thereof, is another area that calls for significant improvement in the near future. To its credit, the ECB 37 See Boris Groendahl and Jeanna Smialek, ‘ECB’s Nouy Says Legal Change Is Needed to Provide CoCo Clarity’ Bloomberg, 24 March 2016.

, 38 Unless there are changes to the European treaties, there is no way to avoid the constraint that many of the Supervisory Board’s decisions only take effect after formal approval by the Governing Council.

36 | BRUEGEL BLUEPRINT has provided a lot of public information on the implementation of European banking supervision since late 2013, with regular and detailed reports on the build-up of its own banking supervisory capacity, the execution of the 2014 and 2015 comprehensive assessments and initial rounds of SREP decisions, and related issues of governance and operations. NCAs also generally produce increasingly detailed activity reports. Where European banking supervision falls short, however, is on transparency about the banks themselves. As we have observed, only a minority of SIs, let alone LSIs, are publicly listed and thus subject to the corresponding demanding disclosure obligations under EU legislation39. In principle, banks also need to make disclosures under the so-called Pillar 3 of the Basel framework, as transposed into EU and national legislation by the successive Capital Requirements Directives and the CRR, but the quality and comparability of such Pillar-3 disclosures leave considerable scope for improvement40. In practice, therefore, supervisors have an irreplaceable role in collecting, aggregating and disseminating quantitative and qualitative data about banks. In the United States, very rich data on all federally supervised banks is publicly available through the Federal Financial Institutions Examination Council (FFIEC), an umbrella organisation of all federal supervisory agencies41. By contrast, in the euro area, banklevel information is generally not disclosed by national supervisors.

The ECB’s regularly updated list of supervised entities only gives highly imprecise indications of consolidated balance sheet size, and only for SIs. The EBA’s regular transparency exercises provide much richer 39 Even though the enforcement of these obligations by securities market regulatory authorities is of variable effectiveness across member states.

40 The Basel Committee’s Pillar-3 framework is currently undergoing revision, and significant new proposals were published for consultation by the Basel Committee in March 2016.

41 These include the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Consumer Financial Protection Bureau.

37 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS

information, but are insufficiently institutionalised and don’t even cover all SIs. Overall, the euro area’s level of supervisory transparency is pitifully low42.

As for institutional transparency and accountability, an interinstitutional arrangement between the European Parliament and the ECB specifies the modalities of democratic accountability and oversight of the ECB’s supervisory tasks, covering elements such as submitting reports, attending hearings, responding to parliamentary questions and providing access to confidential information43. One area for improvement is the European Court of Auditors’ mandate for the audit of the operational efficiency of the ECB’s management. This does not seem to encompass policies and decisions related to its supervisory tasks (Contact Committee, 2015). Public auditing of supervisory effectiveness is an accepted practice in countries such as the United States, Canada, Australia, Denmark, Sweden, France and Germany (Contact Committee, 2015).

The fact that European banking supervision remains a work in progress is starkly illustrated by the mixed market judgment on (listed) euro-area banks. Figure 7 shows wide fluctuations in price-to-book (P/B) ratios in selected countries covered in this Blueprint (grouped in two charts for better readability). While all suggest lacklustre valuations, with P/B ratios generally less than 100 percent, some countries (Austria, Belgium, the Netherlands and Spain) are better regarded by the markets than France, Italy and Portugal, let alone Germany and Greece44. In general, the banks’ P/B ratio in the United States is 1.4 42 See Gandrud and Hallerberg (2014) and Gandrud, Hallerberg and Véron (2016) for a more in-depth analysis of supervisory transparency in the European Union.

43 The ECB’s written responses to questions from MEPs are published on its website and occasionally provide useful information about European banking supervision.

44 The low average P/B ratio observed for German listed banks cannot be solely attributed to market concerns about Deutsche Bank (which has a high weight in the calculation because of its large size). The German ratio without Deutsche Bank is equally low. Most German banks, however, are unlisted and thus not included in this calculation.

38 | BRUEGEL BLUEPRINT times higher than in the EU (IMF, 2016). This market indicator suggests deeper problems. The euro area remains significantly ‘overbanked’, with an insufficiently efficient banking sector and insufficiently developed capital markets (Véron and Wolff, 2015; Langfield and Pagano, 2016)45. European banking supervision still has to deal with significant excess capacity in European banking, and must encourage further consolidation, restructuring and renewal of the European banking sector over the coming years.

Finally, the country chapters (eg on France, Germany and Spain) highlight concerns about the multiplicity of EU-level agencies, including ECB banking supervision, the EBA, the European Commission (not least in its state aid control capacity) and the Single Resolution Board (SRB) that started work in 2015 and acquired its full resolution authority on 1 January 2016. While some mechanisms exist in the EU legal framework to avoid overlapping information requests and diverging policy stances, the coordination between these agencies is inherently difficult, and appears to be less than optimal in at least some cases. It is likely that this challenge will not be solved any time soon, but proactive efforts should be made to minimise the resulting frictions and dysfunction.

A single banking market?

The aim of Europe’s banking union was to break the bank-sovereign vicious circle, by decoupling banks from their respective home countries. This decoupling should in principle lead to a seamlessly integrated single market for banking services in the entire banking union area. Evidently, this remains a distant vision, as mirrored in several of our country chapters (see for example the chapter on France).

45 See also Advisory Scientific Committee (2014) and more recently the IMF (2016).



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