03 May 2012

Klaus C Engelen: Germans vent fury over 'arbitrary' EU supervisor

The drive for a common rulebook is provoking a backlash in Europe's biggest economy, writes Engelen for Global Risk Regulator. German bankers are angry. And the focus of this wrath is the European Banking Authority (EBA).

The London-based EBA is accused of exceeding its legal authority, of bungling the recent stress testing of European banks, and exacerbating the eurozone sovereign debt crisis. Also slammed for undermining Germany’s unique and diverse three-pillar banking system, the EBA is facing a growing backlash among Berlin politicians, as well as the bankers and their regulators. Heinrich Haasis, outgoing president of the Association of German Savings Banks (DSGV), charges the supervisory watchdog with “arbitrary rule-making” and destructive regulation designed to speed up the formation “of a banking system according to Anglo-Saxon design”. And Jochen Sanio, until recently the head of Germany's Federal Financial Supervisory Authority (BaFin), claims the EBA is acting “without proper legitimacy in setting controversial rules that define bank capital".

Among its key tasks is crafting binding technical standards for the banking sector across the bloc’s 27 member countries, as well as promoting supervisory convergence and advising the European Commission. On some counts, the EBA will have to design between 150 and 170 new binding standards as Europe adopts its own version of the Basel III capital and liquidity reforms for its banks (known as the Capital Requirements Directive). And that is what worries many in Germany. The imposition of these standards – the socalled “common rulebook” – will make no allowance for the specificities and diverse character of its banking system.

Diversity in the German banking industry, comprising many small and medium-size savings and cooperative institutions, as well as large banks such as Deutsche Bank or Commerzbank (the sector’s three pillars), has been one of the key factors mitigating systemic risk during the recent financial crisis. But today much of this industry feels betrayed by Berlin's conservative-liberal coalition government. Bankers fear that, under the pressures of rescuing some large banks and tackling the euro sovereign debt crisis, Chancellor Angela Merkel, and her forceful finance minister Wolfgang Schäuble, are selling out the industry’s vital interests to EU bureaucrats in Brussels, and a new power elite of European supervisors bent on pursuing the single rule book. Critics see, too, the spectre of a powerless national regulator being out-manoeuvred on a dramatically changed European stage – in sharp contrast to the extraordinary strength of the German industrial sector – and bearing little relation to the country’s role in the European Union.

Another disturbing factor for many involved in Germany’s financial services is how under-represented the country is among the senior staff of ESAs, relative to its economic weight. When the three Authorities were being created, spokesmen for the financial industry called on the Berlin government to make sure that Germany was adequately represented. It didn’t happen.

In theory, the staff of ESAs should promote the best interests of the EU as a whole, not the interests of their home countries. But most governments still feel it is helpful to have their own nationals in key staff positions. Like all other countries in the EU, Germany’s national supervisory agency, BaFin, is represented on EBA’s supervisory board, the main decision-making body. It also has a seat on the management board. Nonetheless, it is claimed by German bankers that many member countries that do not have large, systemically important banks – and, thus little understanding of the issues involved – can often swing the result of major votes. Now, it is said, the country’s political establishment as well as the financial community is realising how much supervisors and regulators from other countries are calling the shots at the ESAs.

[Jochen] Sanio, who steered BaFin through years of financial turbulence... is far from alone when warning that the bungled EBA stress test “leaves fears for the future”. As Matthew Elderfield, the EBA's alternate chairman and deputy governor of the Central Bank of Ireland, conceded at the CDU/CSU March Congress in the Reichstag: “Once the banks complete the process of meeting EBA’s aggregate €115 billion capital requirement, perhaps the safest course of action will be for a breathing space in terms of further initiatives on the capital front”. The European Banking Authority’s decision to “postpone its next stress test exercise into 2013 is therefore a sensible development”.

So the next stress test conducted by EBA in 2013, and the quality of the binding technical standards to be crafted over the next few months, are now seen by some as a test of the supervisory body itself. And Germany, at least, will be watching closely.

© Global Risk Regulator