«BLUEPRINT SERIES 25 EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS Dirk Schoenmaker and Nicolas Véron, editors Thomas Gehrig, Marcello Messori, ...»
39 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSFigure 7: Price-to-book ratio of the listed SIs (in %)
Source: Bruegel based on SNL Financial. Notes: P/B ratios are aggregated at the country level by computing an average of listed banks’ P/B ratios weighted by total assets of listed euro-area SIs included in the sample. Crédit Agricole SA was taken as a proxy for Crédit Agricole Groupe, as the latter is not listed. 2016 values correspond to 29 April
2016. Also see footnote 34.
European banking supervision has initiated a major effort to reduce the number of options and opportunities for national discretion in the various country banking regulations (ECB, 2016a and 2016f ). When completed, this project will make supervision easier and also contribute to the single market, but it stops well short of addressing all national idiosyncrasies.
There is no longer any liquidity supervision of branches within the banking union. Moreover, the liquidity coverage ratio (LCR) will be moved, as of October 2016, to 75 percent at subsidiary level if the parent bank’s ratio is 100 percent or more, which allows for some, but not unrestrained, circulation of liquidity among a group’s entities within the euro area (ECB, 2016f ). But there are no apparent plans to phase out such subsidiary-level LCR requirements entirely, nor are there any clear signs of phasing-out of extra capital requirements at the 40 | BRUEGEL BLUEPRINT subsidiary level, imposed both by European banking supervision and, in some cases at least, also by NCAs under a national-law mandate (such as deposit insurance or resolution authority). There is still ample evidence of such geographical ‘ring-fencing’ of capital in national subsidiaries46.
Several of this Blueprint’s country chapters also note some ambiguity about supervisors’ stances on mergers and acquisitions, especially those that take place cross-border. While the fact that the ECB is not expected to hamper cross-border M&A will foster better market integration, it is not clear whether all NCAs are prepared to let their ‘national champions’ go. The ECB has the final say on approving changes of control and acquisitions of/by all supervised banks (SIs and LSIs), but the NCAs receive the applications from banks and have a role in the preparation of decisions. Also, some aspects of the current supervisory approach could create unnecessary obstacles to the emergence of sustainable pan-European banking business models. For example, stress tests tend to favour scenarios of correlated downturns in all euro-area countries (and beyond), thus negating the stability benefits of geographical diversification even though these have been amply documented during the recent years of crisis (see in particular the chapter on Spain on this).
Many large cross-border banks complain about NCAs’ tendencies to keep introducing local requirements, limitations or distortions – at their national level, and also occasionally through their collective majority of the ECB’s Supervisory Board – thus preventing the vision of a single market from being realised. These local requirements apply only to cross-border subsidiaries, which are licensed by the host NCA and are thus subject to local rules. Cross-border branches fall legally under the parent company in the home country and are thus under the control of the home NCA. Banks might thus take action by converting subsidiaries into branches to bypass such local distortions, a 46 For an overview of geographical ring-fencing measures, see Beck et al (2015).
41 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSprocess that is likely to be much more feasible in the new context of European banking supervision. Recent examples of such conversions are the conversion of Deutsche Bank’s subsidiary in the Netherlands into a branch in February 2016 (Deutsche Bank, 2016), and the announcement by Sweden’s Nordea that it would turn its large Nordic subsidiaries into branches, including the one in Finland (thus in the banking union); this is still subject to regulatory approval47. Both the Finnish central bank and national banking supervisor have criticised the Nordea plan to convert its Finnish subsidiary into a branch, on the grounds that Nordea Bank Finland is systemically important in Finland with a market share of about 30 percent (Rosendahl, 2015)48. While national supervisors might thus want to block these conversions, the ECB might base its decision on the Second Banking Directive (89/646/ EEC), which allows freedom of cross-border establishment through a branch or subsidiary, and thus permit such conversions that foster the single market. At the time of writing (May 2016), the outcome is not clear, and might be an interesting indication of the future direction for European banking supervision in this respect.
Barriers to the completion of the single market, of course, are not only or even mainly down to supervision. Interestingly, the planned merger of Nordea’s Nordic subsidiaries into the Swedish parent as branches highlights the problems with national-based deposit insurance in an integrated market, as discussed in the country chapter on Belgium. While banks increasingly operate on a European level, only the locally incorporated banks, including subsidiaries of foreign groups, contribute to the local deposit insurance fund, with a fiscal backstop provided by the national government (Gros and 47 Nordea (2016), ‘Decisions by Nordea’s AGM 2016’ press release, 17 March, available at http://www.nordea.com/en/press-and-news/news-and-press-releases/ press-releases/2016/03-17-19h20-decisions-by-nordeas-agm-2016.html.
48 As Table 6 shows, Nordea Finland, with €302 billion in assets, is by far the largest national entity of any non-euro-area banking group in the banking union area, followed by HSBC France (€168 billion) and Abanca (€47 billion) in Spain.
42 | BRUEGEL BLUEPRINT Schoenmaker, 2015). Local deposit insurance funds might run into problems, as recently witnessed in Iceland and in the 1930s in the United States, when many of the state-level deposit guarantee schemes went bankrupt because of a lack of geographic diversification and size (Golembe, 1960). This is one of many ways through which the bank-sovereign nexus still exists, along with domestic home bias in banks’ sovereign-bond portfolios, government-owned banks, bank and corporate insolvency law, taxation, housing finance, pension frameworks, lender-of-last-resort operations and more. The European Commission’s European Deposit Insurance Scheme (EDIS) proposal of November 201549 has triggered a debate on some (but not all) of these obstacles, and it is to be expected that this debate will remain active for many years.
Even with such obstacles firmly embedded in national legislation and politics, there is some evidence of a reversal since mid-2012 of bank market fragmentation in the euro area. The dispersion in the cost of borrowing from banks for non-financial corporations and households across the euro area, which increased substantially in 2011-12, had shrunk markedly by 2015 and early 2016 (ECB, 2016b).
Nevertheless, cross-border credit provided by local affiliates of foreign banks stagnated in 2015. The share of total assets and total loans of non-domestic affiliates remained at low levels of around 14 percent (ECB, 2016b).
Our overall assessment is that banking union is only half-finished as an overarching policy framework (Posen and Véron, 2014).
European banking supervision is by far its most integrated component, the SRM being significantly less centralised. The continued absence of EDIS and of a common backstop for the Single Resolution Fund (SRF), which was decided on in principle by the European Council in late 2013 but not implemented, are key aspects of this incompleteness, 49 The EDIS proposal is available at http://ec.europa.eu/finance/general-policy/ banking-union/european-deposit-insurance-scheme/index_en.htm.
43 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSas is the lack of harmonisation of national bank insolvency regimes, which implies that the Single Resolution Mechanism is ‘single’ in name only.
Future outlook European banking supervision, with its start in 2014, was the first step towards the banking union. The SRM started in January 2016, and it is still too soon to convincingly assess its effectiveness as long as there is no actual case of resolution. The European Commission’s proposal for EDIS was published in November 2015, but its adoption is far from certain, as with other necessary and still missing components of a complete banking union, as we have discussed.
The banking union needs to be completed to ensure the strength and stability of the euro-area banking system (see for example Hellwig, 2014). A swift handling of the banking fragility that Italy is experiencing at the time of writing is a prerequisite (Véron, 2016). At the European level and in the short term, we support a balanced policy package including EDIS, effective limits on banks’ exposures to each sovereign including their home country, bank insolvency law harmonisation and reform of the Capital Requirements Regulation (eg prohibition of deferred tax credits as capital, and fuller compliance with Basel III)50. Collectively, euro-area banks will benefit from more demanding supervisory standards, and might thus in future reverse their recent relative decline compared to their more stringently supervised US rivals on the European and international market for investment banking services (Goodhart and Schoenmaker, 2016). Simultaneously, risk sharing through adequate European arrangements is needed to eliminate economically damaging geographical ring-fencing and make the euro area resilient to future shocks.
50 See, for example, ECB (2016b).
44 | BRUEGEL BLUEPRINT Table 6: List of significant institutions (1 January 2016)
Source: Bruegel based on ECB List of Supervised Entities as of 1 January 2016; online sources and company reports (headquarters, governance, ownership); SNL Financial (assets, CET1 and leverage ratios).
Notes: bank names are based on the banks’ own branding and common usage, and may differ from the names of parent legal entities as listed by the ECB (eg L-Bank refers to Landeskreditbank Baden-Württenberg-Förderbank). Country codes are based on the ECB list; for branches and subsidiaries, the home country of the parent bank is indicated in parentheses (we use standard two-letter ISO codes, eg CH for Switzerland 52 | BRUEGEL BLUEPRINT and IE for Ireland). Headquarters refers to the operational head office; where relevant, the separate place of incorporation is indicated (eg Bilbao for BBVA).
‘Governance’ includes three categories: (1) ‘Government’ governance applies to all banks owned or controlled by government at the national or local level, and also to those jointly controlled by a group of such banks (such as DekaBank in Germany). (2) ‘Cooperative’ governance applies to a range of non-commercial models, which are not government-controlled. These include cooperative banks in a narrow sense and their central/national bodies (eg Crédit Agricole, Crédit Mutuel, DZ Bank, Rabobank), banks controlled by non-profit foundations (eg successors of Spain’s savings banks), a joint venture majority-owned by cooperative banks (France’s CRH), and Italy’s ‘popular banks’ (see below). (3) ‘Commercial’ governance applies to all other banks, which are organised on a joint-stock basis. Euro-area branches or subsidiaries of other banking groups are classified according to the governance of their parent group.
‘Public listing (ownership)’ indicates whether the bank is listed or not at parent-entity level, and gives an indication of ownership structure. ‘Dispersed’ ownership, in this context, only means that no shareholder holds an absolute majority, but it should be kept in mind that this category covers a wide variety of situations, which may in some cases involve de-facto control by minority shareholders, acting on their own or as part of shareholders’ agreements. Among the banks under government control, we distinguish between ‘nationalised’ banks (which were in the private sector before the start of the crisis in 2007), ‘policy banks’ (which have a specific public-interest mission, such as financing local government in the case of the Netherland’s BNG Bank, Finland’s Kuntarhoitus or France’s SFIL), and other (such as Germany’s Landesbanken).
‘Popolare’ refers to the specific case of Italian popular banks, which currently follow a one-person-one-vote principle (as opposed to one-share-one-vote) even when publicly listed. This information is updated as of May 2016.
All financial metrics are as of end-2015, except Crédit Mutuel, HSH Nordbank, Erwerbsgesellschaft der S-Finanzgruppe, Iccrea Holding, HASPA, AXA Bank, Precision Capital, Banque Degroof, Sberbank Europe, VTB Austria, Bank of New York Mellon, RCB Bank (VTB), UBS Luxembourg, JP Morgan Luxembourg, all of which are as of end-2014, and State Street Luxembourg, as of end-2013. In addition, the leverage ratio is as of end-2014 for Dexia, NRW.BANK, WGZ Bank. We made estimates for Barclays’ branches in Italy and France, based on the Barclays plc annual report, since these branches are not specifically included in the SNL database.
3 Austria Thomas Gehrig Austrian banking groups are characterised by different degrees of complexity in their organisational structure. ‘One-tiered’ banks are standalone joint-stock banks, such as Bank Austria (controlled by UniCredit since 2005)51, savings and loan institutions, local mortage banks (Hypo Landesbanken) and special-purpose banks. There are two ‘two-tiered’ groups, the savings banks (Erste Group Bank, Zweite Sparkasse and 46 other Sparkassen) and cooperative banks (41 Volksbanken and Apothekerbank Sparda Banken), within which individual entities are financially linked through central coordinating banks on a second tier (respectively Erste Bank der Österreichischen Sparkassen AG, and Volksbank Wien). The Raiffeisen group is ‘three-tiered’ with 473 independent local Raiffeisen (cooperative) banks, eight regional Raiffeisen Landesbanken, and a central entity, Raiffeisen Zentralbank (RZB).
The group ownership structures of the Erste and Raiffeisen groups are Austrian particularities deserving further comment. Erste Bank AG is the group central entity and manages the foreign subsidiaries and capital market activities. It evolved as a subsidiary of the Sparkassenverband (Savings Banks Association), which remains the main shareholder via the Erste Foundation, jointly owned by the ‘tier-1’ Sparkassen. Similarly, Raiffeisen Zentralbank AG (RZB) is the ‘tier-3’ centre of the Raiffeisen group, conducting international 51 Bank Austria used to be part of the national savings banks system (Sparkassenverband), but left it in 2004.
54 | BRUEGEL BLUEPRINT business (through its listed subsidiary Raiffeisen Bank International) and most of the group’s capital market activities. About 88 percent of its share capital is owned by a joint entity of the eight ‘tier-2’ Raiffeisen Landesbanken, the rest being held by a handful of external shareholders.
The two- and three-tiered groups are structured as institutional protection schemes (IPS), which imply mutual risk sharing, though without mutual or centralised control. In addition to the mandatory deposit insurance system administered by the Österreichische Raiffeisen-Einlagensicherung eGen (ÖRE), the Raiffeisen group has a longstanding mutual insurance scheme, the Solidaritätsgemeinschaft der Raiffeisen Bankengruppe, and also, since 2000, an institutional protection scheme (Raiffeisen Kundengarantiegemeinschaft Österreich) which has been joined so far by about 85 percent of Raiffeisen banks. Similarly, the Volksbanken are members of an IPS named Österreichische Genossenschaftsverband (Schultze Delitzsch). The IPS that covers the Sparkassen and Erste Bank is the Haftungsverbund der Sparkassen.
The Austrian national supervisory authority is the FMA (Finanzmarktaufsicht), an independent federal agency. The national central bank (OeNB, for Österreischiche Nationalbank) provides consulting and information services to the FMA but does not control it, in a relationship similar to that between Bundesbank and BaFin in Germany.