10 December 2018

Financial Times: As European banks regulator retires, challenges remain

When European policymakers gathered last week in Frankfurt to mark the retirement of the eurozone’s chief banking regulator, there was an odd mix of emotions.

Ms Nouy is rightly credited with having established the SSM, notwithstanding the gloomy predictions of many critics, as a credible regulator that has helped the European banking system to get on top of some of its most urgent challenges.

Ms Nouy has also, as she herself said last week, established the SSM as a “tough but fair” regulator.

But even she admits the sector looks far from healthy. Here are six of the biggest problems that Andrea Enria, who succeeds her next month, will have to contend with:

• The average European bank generated a return on equity of less than 6 per cent last year, barely half the typical cost of capital and far short of the near-10 per cent tally racked up by US banks. Greece, Portugal and Cyprus remained lossmaking. That is unsustainable — and worrying since it crimps banks’ ability to raise fresh capital when needed.
• European banks, now dwarfed by US rivals, seem unable to compete effectively on the global stage. This is a vicious circle that is not only bad for the banks themselves but for the economies they serve.
• For all the advances in European regulation, including the creation of the SSM as a single supervisor, the broader promise of a pan-eurozone Banking Union remains a dream. Germany in particular is uncomfortable with pooling banking system risks across the region and has helped thwart the creation of a eurozone deposit guarantee mechanism. Without such a guarantee, national authorities will not reverse their post-crisis policies of ringfencing capital and liquidity — policies that make a nonsense of the idea that the eurozone is a borderless single market.
• Germany’s intransigence is ironic since its banks are among the weakest in the eurozone. Deutsche Bank in particular is a significant cause for concern, with revenues shrinking faster than costs and the share price nudging record lows.
• The other big regional worry is Italy, where the combination of a populist Eurosceptic government and a still weak banking system has revived the “doom loop” from 2012, with banks again increasing their sovereign debt exposure, whether under pressure from the government or tempted by the yield. Italian 10-year debt has been yielding more than 3 per cent for the past couple of months. Banks themselves are finding it tough to raise funds. UniCredit recently had to stump up nearly 8 per cent for a five-year issue.
• Given the weaknesses — and growing nervousness about the economic and market outlook — it is unfortunate that another element of post-crisis European reforms, namely the bolstering of balance sheets with so-called MREL debt, has been laggardly. The “minimum requirement for own funds and eligible liabilities” will require banks to issue bonds that can be “bailed in” in the event of trouble. But the process has barely begun and the eurozone’s Single Resolution Board, which is policing it, said last month that some banks would be given up to four years to complete issuance.

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