«BLUEPRINT SERIES 25 EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHS Dirk Schoenmaker and Nicolas Véron, editors Thomas Gehrig, Marcello Messori, ...»
Subsidiaries of foreign banks have been fighting gold-plating and ring-fencing practices in Belgium71. By shifting power from national authorities to the ECB, the creation of the SSM is bound to enhance the centralisation of capital and liquidity within cross-border groups, thereby weakening gold-plating and ring-fencing possibilities in countries like Belgium. While this development is generally regarded as both inevitable and even potentially welfare-enhancing by Belgian authorities, there are also worries that it could generate some risks for Belgium given its persistent surplus savings. The risks concern mainly national taxpayers because of the incomplete nature of the banking union, and in particular the absence of a common deposit insurance scheme.
The expectation of the relevant stakeholders (bankers and public authorities) in Belgium is that the creation of a full banking union will take time and that, during the interim period, some gold-plating and ring-fencing will continue. The question then is what will be the strategy of foreign banks that operate in Belgium via subsidiaries.
70 Dexia is not included in this group since it has ceased operating activity. Belfius is the new name of what used to be the Belgian operations of the Dexia group, which were separated from the Dexia parent entity in 2011.
71 Of course, Belgium is far from the only euro-area country with such practices.
72 | BRUEGEL BLUEPRINT One option could be the transformation of (or more simply the shift of activity from) subsidiaries into (to) branches, which would also address the complaint of banks in Belgium that seem to be subject since the financial crisis to higher taxes than in other EU countries72.
From a Belgian perspective, this option would have the advantage of reducing the risks for the national deposit insurance scheme and therefore for domestic taxpayers, but it would also have two disadvantages. First, it would reduce the amount of taxes paid by banks to the Belgian government. Second, it would risk reducing strategic activities and knowledge centres in Belgium, which are important in the case of BNP Paribas and ING.
Before the creation of the SSM, the transformation of subsidiaries into branches for one of the big four would probably have been prevented by the NBB and the national political authorities. Today, it is less clear that they could interfere. An interesting parallel is with the situation in Finland, a country where the share of foreign banks is about the same as in Belgium, but is almost entirely accounted for by subsidiaries73. Nordea (headquartered in Sweden) and Danske Bank (headquartered in Denmark), the two groups whose Finnish subsidiaries are, respectively, the first and third-largest banks in the country, have long considered converting their Finnish subsidiaries into branches, raising some concern from the host-country authorities. In March 2016, Nordea’s Annual General Meeting voted to convert its subsidiary banks in Denmark, Finland and Norway to branches of the Swedish parent company, subject to approval by the relevant authorities.
The situation with respect to the possible transformation of their Belgian subsidiaries into branches would be different for BNP Paribas 72 HLEG (2016) reports that, although no information is available on the corporate taxes effectively paid by banks across countries, bank charges and levies seem to be somewhat higher in Belgium than in most other EU countries.
73 According to the ECB (2015a), foreign banks accounted for 67.2 percent of banking assets in Finland in 2014, with 61.5 percent held by subsidiaries and 5.7 percent by branches.
73 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHScompared to ING. The reason is that the Belgian state holds a participation of ten percent in the capital of BNP Paribas, the parent company of BNP Paribas Fortis, which it would likely try to use to discourage the transformation.
On the subject of state ownership, it should also be noted that the Belgian state fully owns Belfius, the country’s third-largest bank, which emerged in 2011 from the dismantling of the Dexia group. In this case, European banking supervision has created a change in paradigm by greatly reducing the possibility for the Belgian state to intervene in the supervisory oversight.
Finally, two comments on branches. First, in case BNP Paribas and/or ING decided to transform their Belgian subsidiaries into branches, it is clear that the NBB would remain involved in their JSTs since the new cross-border branches would be significant. Second, in most current cases, cross-border branches operating in Belgium are not significant, and therefore the NBB is not directly involved in their supervision, despite the creation of the SSM. This does not mean, however, that the SSM has not changed anything in this respect. The NBB, like its counterparts in other SSM countries, can now take to the ECB any problem it might have with the behaviour of a bank operating as a branch within Belgium’s borders or offering cross-border services there, even if that bank is classified as less significant and therefore not directly supervised by the ECB. For instance, there are rumours that, in 2015, the NBB raised with the ECB the issue of Nemea, a Maltese online bank that was offering unusually high interest on bank deposits and advertised in Belgium74. According to the Belgian press, where the issue was much discussed in 2015, Nemea is jointly owned by two Finnish bankers who were involved in Kaupthing, an Icelandic bank that went bankrupt in 2008. It is unclear, however, whether the alleged intervention by the NBB was successful in changing the behaviour of 74 Being a purely online bank, Nemea does not have a physical presence in Belgium and does not therefore operate in the country via what would be considered stricto sensu as a branch.
74 | BRUEGEL BLUEPRINT Nemea, which still offered in April 2016 interest of 3.5 percent on fiveyear deposit accounts, by far the highest rate advertised in Belgium at that point.
Conclusion The first year of operation of the SSM has been rather uneventful as far as the Belgian banking sector is concerned. However the sector has two features that will probably raise interesting issues for European banking supervision in the future. One is the high share of foreign banks operating in Belgium through subsidiaries and branches. The other is the full or partial ownership by the Belgian state of two of the big four banks.
75 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSTable 7: Top 20 Belgium-based banking groups (latest date available)
Source: columns 2-4: SNL database.
Note: *Belgian state ownership of the parent group, BNP Paribas.
5 France Philippe Tibi The French banking landscape For historical reasons (Jacobinism, nationalisation waves in 1946 and 1981), the French banking system is highly concentrated. Seven parent banks own the near-totality of retail banking networks: Banque Postale (state-owned), BNP Paribas, BPCE (formed in 2009 through the merger of the Banques Populaires and Caisses d’Epargne cooperative groups), Crédit Agricole, Crédit Mutuel, HSBC France, and Société Générale.
Apart from Banque Postale, which specialises in retail services, they are all universal banks with significant operations in retail, commercial and investment banking, and life insurance and asset management75.
HSBC is the only foreign bank in this group, following its 1999 takeover of Crédit Commercial de France. The presence of other foreign banks is almost negligible. The largest of them, the French branch of Barclays, has less than €50 billion in assets according to the ECB’s list of supervised institutions, in in the context of €8.5 trillion, or about four times French GDP, for all French banks76.
BNP Paribas and Société Générale developed an acquisitive strategy outside France, with the ambition to build leadership positions in selected countries, primarily but not only within the euro area. The 75 Caisse des Dépôts et Consignations, a large state-controlled financial institution, is not a bank.
77 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHSsame is true to a lesser extent of Crédit Agricole and Crédit Mutuel.
France is the home country of half of the top ten significant institutions (SIs) in the euro area. Among the six euro-area banking groups with assets in excess of €1 trillion, four are French (the others being Deutsche Bank and Santander). A related feature is that LSIs collectively make up a smaller share of the French banking system than in other large euro-area countries, especially Germany and Italy. In another contrast to other large countries, all French SIs are headquartered in a single metropolitan area, namely Paris.
The French national supervisory authority is the Autorité de Contrôle Prudentiel et de Résolution (ACPR), a semi-autonomous institution within the central bank (Banque de France). ACPR results from the 2010 assumption by the banking supervisor (formerly known as Commission Bancaire) of further prudential authority over insurers, nonbank credit institutions and investment firms, to which resolution authority was added in 2013.
Overall assessment The implementation of the SSM has been positive for the French banking system. It has clarified its relationship with its various regulators and opened a welcome path towards a single European banking market and cross-border consolidation. It has also brought a more international perspective to supervision, and has been instrumental in recent governance transformations of France’s mutual banks.
Looking back at the rationale for European supervision, however, it is very problematic that the SSM so far has not changed the market assessment and rating of the European (including French) banks, as measured for example by price-to-book-value ratio. The sector remains fragile, almost ten years after the beginning of the subprime crisis. Reasons for this may include stringent capital rules inconsistent with banks earning their cost of capital; unpredictable rules, or rules in the making, which justify a very large risk premium; a lack of credibility of stress tests and/or of the quality of banks’ balance sheets; banks 78 | BRUEGEL BLUEPRINT paying only lip service to the new regulatory requirements; anaemic growth in the euro area; and the risk of another situation like Greece, including in a larger country. All of these factors, with the exception of economic growth, are at least partly within the remit of European banking supervision. More work has to be done to persuade market participants and the public about the quality of the reforms and the endgame of banking union, both in terms of market outcomes and of the architecture of the various agencies.
Furthermore, it is vital to demonstrate that European banking supervision will not be unduly influenced by political factors. But it
is also increasingly difficult to understand the ECB’s dual strategy:
encourage banks to take risks in order to finance the economy, while simultaneously adding new layers of capital to mitigate risks. It is very
difficult for the ECB to please three constituencies at the same time:
the economy, public opinion and the shareholders and bondholders who finance banks. European banking supervision’s future success will partly depend on its ability to steer the right macro-prudential policy course, a concept that has very limited substance and effectiveness at the moment.
Another trade-off must be managed. The post-crisis European paradigm is that markets should increase their share of the financing of the economy, at the expense of more constrained banks (capital markets union). This can only be true if markets are liquid. The under-recognised reality is however that bond markets are very illiquid at the moment, even for government bonds, because banks have massively reduced the capital they allocate to market-making activities (AMAFI,
2015) in order to improve their CET1 ratios. Banking regulations also affect market structures.
Many French stakeholders are concerned that the SSM and ECB may be losing sight of their fundamental mission: ensuring a productive financing set-up in the euro area, with the most efficient and secure supervisory arrangements. This is seen in France as entailing quality of judgement and strategic handling of trade-offs, and also
79 | EUROPEAN BANKING SUPERVISION: THE FIRST EIGHTEEN MONTHShaving a clear view of the endgame, formulated and managed by a strong leadership. French institutions worry that existing trends might not play in this direction. In addition, they worry that the original quid pro quo – loss of sovereignty against a level playing field – might be lost on the way.
France and the SSM concept Banking union is the child of the euro-area sovereign debt crisis and the idea that more federalism was necessary to restore the healthy functioning of the European financing system, beyond the objective of breaking the bank-sovereign vicious circle. The concept has been
strongly supported in France, for three main reasons:
• First, it required strong political traction, which only Germany and France were able to exert. Banking union was seen as an opportunity to leverage French ideas at the European level.
• Second, French banks are among the largest and the most internationalised in Europe. As a consequence, they supported plans to level the playing field and establish a unified banking system in Europe. They would be significant beneficiaries of a radical simplification of the competitive and regulatory landscapes.
• Third, European banks were penalised by low valuations, as illustrated by price-to-book ratios. Proper supervision was seen as an efficient tool to reduce uncertainty and risk premiums, and to enhance balance sheet credibility, in particular in a market environment influenced by scepticism on the part of American investors.
European banking supervision is the first pillar of the banking union, complemented by the more recent SRM and the still-to-come European deposit insurance scheme (EDIS). It has a clear mission to ensure the safety and soundness of banks, and to contribute to the 80 | BRUEGEL BLUEPRINT financial integration of the euro area. As such, it is unanimously welcome by those in the French financial community, be they regulators or banks.
It is agreed in France that these objectives make sharing a significant amount of financial sovereignty worthwhile. This ‘sacrifice’ is viewed as material. Unlike several other euro-area countries, almost all French banks are SIs and thus directly supervised by the ECB. Unlike in some other countries, the transfer of sovereignty is not seen as justified by past supervisory failures: French banks fared comparatively well during the crisis, and the reputation of French banking supervision emerged almost unscathed from this sequence. (In France, the case of Dexia is not generally seen as a failure of French supervision).
In short, the French financial elites are now pro-Europe and pro-European supervision.
The positives of European banking supervision The dominant view in France is that the recapitalisation of Greek banks by private investors in late 2015 was successful, and was an important test for the credibility of European banking supervision. Tougher capital and liquidity requirements are also seen as a positive in principle, because they help to restore trust in the sector. This statement however has to be nuanced in practice, given French banks’ frequent criticism of overshooting in the form of excessive capital thresholds.