«BLUEPRINT SERIES 25 EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS Dirk Schoenmaker and Nicolas Véron, editors Thomas Gehrig, Marcello Messori, ...»
The report, commissioned in May 2014 and delivered in December 2014, deeply dented the reputation of the Austrian supervisors. The impact of this report is seen by some industry observers as one of the reasons for the eagerness of the FMA and OeNB to cooperate with the ECB in SSM matters, as an attempt to restore their public reputations.
Less dramatic was the exit of ÖVAG, which, as mentioned, failed the 2014 stress test. Its banking licence was relinquished in July 2015.
ÖVAG had got into trouble with bad investments in derivatives and stocks, prior to and during the subprime crisis. In this case too, it appears that Austrian supervisors were slow to close the failed bank, adding to the costs ultimately borne by the taxpayer.
One important result of the restructuring of HAA and ÖVAG has
63 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSbeen an increasing willingness to use bail-in instruments. Austrian policymakers are increasingly prepared to implement forms of burden-sharing that include bail-in instruments, even at the cost of legal risk62.
Overall assessment and prospects The introduction of the SSM has clearly changed the supervisory culture in Austria. It is too early for a definitive assessment, however. The publication of the Griss report on Hypo Alpe Adria, which uncovered massive supervisory failures by both the OeNB and FMA, dominated
2015. After the denting of their reputations, both supervisors have tried to restore their good names and public confidence by cooperating closely with the ECB and by avoiding any public conflict with it.
Given Austrian banks’ substantial CEE exposures and relatively low capital levels, Austrian supervisors are not likely to support local interests to the extent expected by domestic banks. The signs are that there will be massive sector concentration, and reduced horizontal or geographical diversity in the Austrian banking industry. Banks appear to be gradually continuing to reduce their role as major financiers of smaller and medium sized, and especially, of innovative and risky companies. A widely discussed report on SMEs by the Ministry of Science, Research and Economics, showed that the value of newly granted loans per SME applicant dropped by about 20 percent from €7,120 in 2009 to €5,930 in 2014 (BMWFW, 2015, Fig. 59), despite significantly enhanced public support in line with to the European Small Business Act of 2008. Moreover, while funding conditions have improved in the euro area since 2011, the spread between lending rates for small business and the ECB rate (or 6-month Euribor) has widened from less than 150 to more than 200 basis points (BMWFW, 2015, Fig. 54)63.
62 In May 2016, after several failed attempts, the Austrian Federal Finance Ministry reached a settlement with HETA creditors in order to avoid lengthy and costly legal proceedings.
63 This increase in spreads for SMEs cannot be explained by refinancing costs.
64 | BRUEGEL BLUEPRINT Many Austrian observers see the real test of SSM’s success as its ability to attract the under-banked non-euro CEE countries to opt into banking union through the close cooperation procedure and, thus, to maintain if not increase the competitiveness of euro-area based banks in eastern Europe64. Currently there is no sign of this, causing concern among Austrian banks and economic players that they will lose competitiveness in eastern Europe and neighbouring countries because of the SSM.
Overall, it seems that banking union has already contributed positively to speed up the resolution of failed banks in Austria. In this regard, the SRM in particular will help to restructure European banking markets and to enable market forces to determine the viability of banking business models. While concerns about the (increasingly) intrusive character of the SSM might admittedly reflect self-serving interests of the banking industry, it remains debatable how conservative and standardised European banking supervision ultimately should be. If supervision is too tight, it might be successful in almost eradicating the problem of failing banks, but it might also impede the ability of the banking system to fund (small) risky and innovative ventures.
Recent evidence from the United States (Götz et al, 2016) suggests that geographical diversification can be an important substitute for (excessively active) supervision. In Europe, significant diversification benefits could, for example, be gained by hedging risks between overbanked core countries and underbanked CEE countries. In this sense it would seem appropriate that future SSM policies should be put in place with a view to future growth and development, and not only Increasing risk premia are also an unlikely explanation, given improved government guarantees as a consequence of the implementation of the European Small Business Act. Given the high intensity of competition throughout this period, the apparent explanations for the spread increase are heightened regulatory costs and reduced competitiveness.
64 See the panel contribution of Erste CEO A. Treichl at the 42nd Economics Conference of the OeNB in 2014 (Oesterreichische Nationalbank, 2014).
65 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHScalibrated on what was the most serious crisis in decades. After all, the raison d’être of banks as delegated monitors of risk requires them to acquire social information, especially about risky entrepreneurial ventures.
4 Belgium André Sapir The Belgian banking landscape Belgium is special among the nine countries described in this Blueprint. It is the only one for which the importance of foreign banks, via branches or subsidiaries, was greater (in terms of assets) than that of domestic credit institutions at the start of European banking supervision65. According to the ECB (2015a), banking groups headquartered outside Belgium accounted for 65.6 percent of banking assets in Belgium in 2014. This is far more than in the other eight countries, where the share of foreign banks averaged only 12 percent in 2014 and ranged between 2.5 percent (Greece) and 24.7 percent (Austria).
Belgium is also the country with the greatest share of bank assets held by subsidiaries (43.1 percent of total) and by branches (22.5 percent) of foreign banks.
The reasons for the large share of foreign banks in Belgium include the financial crisis of 2007-08, which resulted in the demise of Fortis (the largest bank in Belgium) and its acquisition by BNP Paribas.
Another important reason is the large pool of surplus savings in Belgium. According to the High Level Expert Group on the Future of the Belgian Financial Sector (HLEG, 2016), the net financing of the resident banking sector by Belgian households (ie surplus savings) 65 This feature, however, is shared by several other SSM countries which are not included in the project, such as the Baltic countries, Finland and Luxembourg.
Portugal is also likely to join the group shortly.
67 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSamounted to 46 percent of GDP, roughly €180 billion, in 2015. A significant part of these surplus savings is channelled abroad by foreign banking groups, mostly in the context of intra-group operations. The total of net intra-group interbank claims of resident banks in 2015 was estimated at about €90 billion, a large part of which was channelled by branches or subsidiaries of foreign banks.
Immediately before the creation of the SSM, the National Bank of Belgium (NBB) was the supervisory authority for all Belgium-based banks, ie all domestic credit institutions and subsidiaries of foreign credit institutions. Belgian branches of foreign credit institutions were supervised only by their home supervisory authorities. With the creation of the SSM, the NBB retains supervisory responsibility for the less significant institutions (LSIs).
Table 7 at the end of this chapter shows the top 20 Belgium-based banking groups, which account for 99 percent of all banks (excluding foreign branches) in terms of assets, and the situation in terms of
supervision following this shift66. Seven different cases can be distinguished, four for significant and three for less significant institutions:
• Significant institutions:
1. Domestic credit institutions: KBC, Dexia, Belfius, Argenta, Degroof Petercam;
2. Subsidiaries of foreign credit institutions from non-SSM countries: Bank of New York Mellon;
3. Subsidiaries of foreign non-credit institutions: AXA Bank (subsidiary of French insurer AXA);
4. Subsidiaries of foreign significant institutions from SSM countries: BNP Paribas Fortis, ING Belgium, bpost bank (another subsidiary of BNP Paribas), Santander, BKCP and Beobank (both fully-owned by Crédit Mutuel Nord Europe, itself a memData reported in Table 7 is consolidated, and might include therefore non-banking (mainly insurance) activities, and non-euro-area banking activities that fall outside SSM responsibility.
68 | BRUEGEL BLUEPRINT ber of France’s Crédit Mutuel cooperative group);
• Less significant institutions:
5. Domestic credit institutions: Crelan, Finaxis, VDK, CPH;
6. Subsidiaries of foreign institutions from non-SSM countries:
Euroclear (owned by Euroclear UK);
7. Subsidiaries of foreign non-credit institutions: Nagelmakers (owned by Chinese insurer Anbang).
Among the top 20 Belgium-based banks, there are therefore: 13 that are, or belong to, significant institutions, seven considered as Belgian (cases 1-3) and six from another SSM country (case 4)67; six less significant institutions, all considered Belgian (cases 5-7); and BHF Kleinwort Benson, which currently has no SSM-supervised banking activity in Belgium68.
Assessing the working of the SSM from a Belgian perspective All SIs operating in Belgium are directly supervised by the ECB, with participation of the NBB in their Joint Supervisory Teams (JST). All Belgian LSIs remain directly supervised by the NBB, as before the creation of the SSM. Branches of SSM-headquartered foreign banks are now supervised by the ECB if the parent group is a SI, or remain supervised by the relevant national supervisor if the parent group is a LSI.
This assessment of the working of the SSM can therefore focus primarily on the SIs operating in Belgium, for which the creation of the SSM has shifted supervisory responsibility to the ECB. This means focusing on the 13 banks listed above as being, or belonging to, significant institutions.
The seven Belgian-headquartered SIs (cases 1-3 above) were all subjected to SSM comprehensive assessments in 2014 (Argenta, AXA, 67 Outside the top 20, there are seven subsidiaries of foreign significant institutions.
68 Outside the top 20, there are dozens of less significant institutions, mainly Belgian domestic credit institutions but also some subsidiaries of foreign credit institutions.
69 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSBelfius, BNY Mellon, Dexia and KBC) or 2015 (Degroof, in anticipation of its merger with Petercam) to help ensure that they were adequately capitalised and could withstand possible financial shocks. The result of the 2014 comprehensive assessment indicated a capital shortfall for two of the Belgian banks: AXA Bank (€200 million shortfall) and Dexia (€339 million shortfall). AXA Bank has since been fully recapitalised by its parent group. Regarding Dexia, the Belgian authorities had argued that it should be excluded from the comprehensive assessment altogether, since it has been in orderly resolution since December 201269.
The ECB Supervisory Board rejected this on the grounds that Dexia is a significant institution with full access to ECB liquidity. Nonetheless, the ECB stated after the comprehensive assessment that, in view of the orderly resolution plan for Dexia, which benefits from a Belgian federal state guarantee, there was no need to proceed with capital raising.
As far as significant non-Belgian institutions with important activities in Belgium (ie those listed under case 4 above) are concerned, none of the parent groups was identified by the SSM as having a capital shortfall. The sole significant foreign institution operating in Belgium found to have a capital shortfall was Monte dei Paschi di Siena, the Belgian subsidiary of which is rather small with €1.2 billion in assets at the end of 2014.
How have relevant Belgian stakeholders, in particular bankers and supervisors, reacted to the creation of the SSM? All of them seem to strongly support the creation of the banking union and of European banking supervision as a matter of principle. This is because they regard the banking union as an important step forward in reinforcing the economic governance and financial stability of the euro area, but also because the Belgian banking sector is so interconnected with the rest of the euro area. Given the cross-border dimension of the Belgian banking industry, extending bank supervision beyond domestic 69 Since December 2012, Dexia has been majority-owned by the Belgian state (50.02 percent), with the balance held by the French state (44.40 percent) and other shareholders (5.58 percent). Source: Dexia website.
70 | BRUEGEL BLUEPRINT borders is generally viewed as crucial to align responsibilities and ensure coherent and harmonised implementation of supervisory and regulatory practices (HLEG, 2016).
This does not mean, however, that Belgian stakeholders directly involved in supervision (bankers or supervisors) have no criticisms of the actual working of European banking supervision during its first year of operation. A comment often heard among Belgian stakeholders is that JSTs are very centralised, with little room for manoeuvre left for the NBB’s sub-coordinators. In other words, responsibility for the supervision of significant institutions seems to have really shifted, as intended, from the NBB to the ECB. Belgian bankers seem to miss the cosy relationship they enjoyed with their Belgian supervisor. There is a strong feeling that informality has been replaced by anonymity and that this carries a cost: less dialogue leading to less nuanced, more bureaucratic and more ‘one-size-fits-all’ supervisory decisions.
There is also a feeling among some Belgian bankers that the small size of Belgium translates into less influence over decisions taken in Frankfurt, compared to banks from larger countries. Here the situation obviously differs according to whether or not the Belgian bank is a subsidiary of a foreign bank headquartered in a large country (as is the case for the six banks in case 4). For subsidiaries of foreign banks from large countries, European banking supervision might actually give a stronger voice to the concerns of Belgian bankers via their parent companies.
What is less clear at this stage is how what is described by some as the ECB’s more bureaucratic and less subtle approach, compared to the pre-SSM regime and the allegedly more strategic NBB approach, translates into actual supervisory decisions. The only example so far seems to concern the ‘fit and proper’ requirement for new bank administrators and board members, which requires approval by the ECB for both SIs and LSIs. However the complaint here seems to be more in terms of the length of the process than its results.
Another issue, which is likely to have far more systemic