Questions for Eurofi Newsletter
Danièle Nouy, Chair of the Supervisory Board of the ECB,
26 April 2018
Question 1: How do you explain the low levels of cross-border consolidation and integration in the banking union?
Many causes are at play here, but three stand out. First, banks’ risk appetite has diminished since the financial crisis. That, in turn, limits the banks’ interest in engaging in cross-border consolidation. Second, the crisis also triggered ring-fencing at the national level. And third, regulation in Europe is less harmonised than it should be and this, too, acts as a brake on cross-border consolidation.
Take, for instance, the issue of cross-border exposures between entities of the same banking group. In my view, regulatory requirements for such exposures should be waived within the euro area – as long as some prudential safeguards are in place, of course. There should be a waiver on large exposure limits. And that is indeed our policy, as communicated in our Regulation on the exercise of national options and discretions, ONDs for short. However, it is up to the Member States to actually apply this waiver – and not all of them do. Several countries have used the option – available to them until 2028! – to apply their own national policy on this waiver. This overrides our policy and makes the playing field for euro area banks less level.
In turn, this affects the usability of waivers on liquidity requirements. Large exposure limits constrain the movement of funds, putting a limit on the amount of liquidity that cross-border banking groups can move around freely. Banks therefore have less reason to apply for liquidity waivers in the first place. In a broader context, this also reduces the incentive to engage in cross-border mergers. What’s the point in being a cross-border banking group if you cannot reap all the benefits that brings?
And finally, there should be cross-border waivers on capital. Introducing such waivers would be another important step towards a truly European banking market and a true banking union.
Question 2: How should we encourage more integration? Could the regulatory framework for banking groups be reviewed with this in mind?
Well yes, we obviously need to further harmonise regulation. A first step would be to have more EU regulations and fewer directives. As regulations are directly applicable in all Member States, they ensure a high level of harmonisation, in particular within the banking union, which ensures their consistent implementation. Directives, on the other hand, need to be transposed into national law and the outcome in most cases differs widely across countries.
Another step would be to tackle ONDs. European banking regulation contains quite a number of these ONDs, which give authorities some leeway in applying the rules. Supervisors have agreed to exercise a number of ONDs in a harmonised manner across the euro area. But the remaining ONDs are in the hands of national legislators, including the one on large exposure limits that I just mentioned. Such ONDs need to be harmonised too, for example by transferring responsibility for exercising them from the national legislators to the national competent authorities, and hence the Single Supervisory Mechanism for the euro area.
Fit and proper rules also offer plenty of scope for further harmonisation. People who manage banks must be fully qualified to do so. Their suitability affects banks’ governance – an area where major weaknesses have emerged in the recent past. In Europe, it is up to supervisors to check whether bank managers are indeed “fit and proper”. But the approach to checking fitness and propriety differs considerably across the euro area. We need far more harmonisation here.
There is much debate on how to proceed with the banking union. In my view, completing the banking union is not just about risk reduction. It is also, very importantly, about creating a union! Risk reduction is music to the ears of supervisors; but if it is the sole focus and if the banking union is built on the current fragmented legal foundation, we run the risk of missing out on some of the expected benefits of the banking union. Personally, I don’t think this would be the right way to proceed. The banking union needs to have an even foundation, bringing us once again to the conclusion that we need more regulatory harmonisation. Without harmonisation, integration will always be constrained.
Question 3: What conditions are required for the euro area to be recognised as a single jurisdiction in international banking regulation?
I would say that we should first consider ourselves as a single jurisdiction. This means that we should put an end to the post-crisis national ring-fencing, and begin moving towards truly harmonised regulation. Practically, this means, for instance, accepting the possibility of cross-border waivers for liquidity, solvency and large exposures under fully harmonised prudential safeguards, at least within the euro area. In international regulation, this plays a role with regard to capital surcharges for global systemically important banks (G-SIBs), for instance. Cross-border exposures are a factor in calculating the capital surcharges for G-SIBs. But this is not even the most important point: Does it make sense to think of cross-border exposures within a banking union? I believe that it is now time to recognise the progress already made in developing a truly European supervision and to address the remaining legal fragmentation I just discussed.
Together with the completion of the banking union, this would significantly strengthen our case for a single jurisdiction. The important thing is that Member States see themselves as part of a union, a single jurisdiction, and act accordingly. They should do away with the post-crisis ring-fencing mindset and embrace harmonisation. The important part of banking union is union; it is about being stronger together.