Luxembourgh Times

Europe’s top bankers are pressing regulator to back off

Senior executives exasperated with long list of requests by European Central Bank’s oversight arm

The headquarters of the European Central Bank in Frankfurt

The headquarters of the European Central Bank in Frankfurt © Photo credit: Shutterstock

Source: Bloomberg

European bank executives are expressing increasing frustration with what they see as excessive interference and unreasonable demands from the region’s top financial regulator.

Bankers are now becoming more vociferous about a raft of long-held irritations with the European Central Bank’s oversight arm, led by Andrea Enria.

These include more day-to-day gripes, such as burdensome data demands, but also more significant debates over lenders’ freedom to pay out dividends and bonuses as well as the level of intrusion that supervision warrants, according to executives familiar with the matter.

With dissatisfaction rising, Lorenzo Bini Smaghi, chairman of France’s Société Générale SA and a former ECB executive board member, wrote to the central bank in October to protest against officials’ requests to be present in bank board meetings, according to a document seen by Bloomberg. He argued that the practice damages the effectiveness of the management discussions.

“To my knowledge, no other authority in the major advanced economies attends board meetings and committees in its supervisory activity,” he wrote. “Not the Federal Reserve, nor the Bank of England, the Swiss national bank nor Finma. Some European supervisors have adopted such practice in the past, with apparently very little benefit and serious concerns raised by the supervised entities.”

After almost a decade of oversight from the ECB, which set up the Single Supervisory Mechanism as part of the region’s response to the sovereign debt crisis, banks weathered the pandemic era largely unscathed thanks to better capitalisation and significant government backstops. And while the industry also ultimately benefited from years of ECB pressure to reduce bad loans and improve risk management, bankers argue that it is now going too far.

While banks and their supervisors often have frictions, the latest come amid ECB calls to prepare for the high level of oncoming risk in the economy. In September, the European Systemic Risk Board issued an official warning on vulnerabilities in the financial system amid spiking energy prices and surging inflation.

Officials have also been proved prescient in their warnings in recent years about the risks mounting in the business of leveraged lending, as global banks have racked up billions of dollars in mark-to-market losses from that area over the past six months.

Risk warning

On Friday, Enria warned in a presentation that while lenders balance sheets are generally sound, risks are building in a number of areas including the residential real-estate market amid rising interest rates.

The SSM “was created to foster the safety and soundness of the banking sector, and we are committed to fulfilling this mandate and assessing the banks against very high standards,” an ECB spokesman said in a statement. “We have always been and remain open to dialogue about the efficiency and effectiveness of our supervisory processes.”

The chairman of France’s Société Générale wrote to the ECB last month to complain about officials’ requests to be present in bank board meetings

The chairman of France’s Société Générale wrote to the ECB last month to complain about officials’ requests to be present in bank board meetings © Photo credit: Shutterstock

In the letter, addressed to Ramon Quintana, a director general at the ECB, Bini Smaghi said he had called for a meeting with Enria and the chairs of other major European lenders “to exchange views on how to ensure a proper assessment of banks’ governance.”

The ECB has previously said that occasional attendance by its staff as observers at board meetings is one of the tools it uses to assess banks’ governance frameworks. Société Générale declined to comment on the letter.

Bankers interviewed by Bloomberg argue that the ECB’s de facto ban on payouts at the height of the pandemic damaged them in the eyes of investors, and that moderation now isn’t justified given their bumper earnings.

Firms from Deutsche Bank AG to Banco Santander SA reported double-digit gains in lending income in the third quarter, helping bolster earnings even as central banks’ rapid increases in interest rates squeeze companies and consumers with higher borrowing costs.

Amid that tension, how the watchdog carries out oversight on a day-to-day level is grating more than usual. One executive compared the watchdog to the Federal Bureau of Investigation, claiming that supervisors ask the same question a number of times to separate bank staff, in order to compare answers.

Some requests are seen as probing deep into the business decisions of private companies, for example into specific drivers of profitability, says one of the people familiar with these interactions. Conversely, some bankers also allege that the teams assigned to them by the ECB and national regulators are often inexperienced or ask for reports that are highly granular and end up not being read.

Focus on minor issues

Agendas for board meetings at banks are seen as overly focusing on comparatively minor issues at subsidiaries raised by the regulator, one executive said. Meanwhile, committees below board level are being obliged to provide the watchdog with transcripts of meetings, according to another, giving a sense of unnecessary intrusion. Compliance teams complain of trouble retaining staff burnt out by the growing demands.

Still, the issue of dividends shows the ECB and bank are still able to work together. ING Groep NV, a Dutch lender that has one of the highest capital levels among European banks, said on Thursday that it would buy back as much as €1.5 billion of stock after getting approval from the watchdog. Chief Executive Officer Steven van Rijswijk said conversations the bank has had with regulators have been “constructive.”

And Intesa Sanpaolo SpA CEO Carlo Messina said that while supervisors do pressure banks, he doesn’t see a need to change how things operate.

“Our relations with the ECB are good,” Messina said on an earnings conference call Friday. “To date it’s still an acceptable relation, but undoubtedly, the supervision shouldn’t go beyond the way in which we operate at the moment. So I do not agree with the need for a strong clarification with the supervisor.”

© Photo credit: Shutterstock

Set up in 2014, the ECB’s banking supervision arm is unlike any other regulator, in that it coordinates financial oversight across the euro area’s 19 countries.

The watchdog has previously faced accusations of overstepping its mandate, notably for how Enria’s predecessor pushed banks to shrink their mountain of bad loans.

Today, bankers - and even some regulatory officials - grumble that the ECB’s plans to police climate risks go too far or that authorities are taking a heavy-handed approach to the lucrative business of leveraged finance.

While much of the frustration among bankers is over interaction with the ECB on a working level, big ticket projects like this year’s climate change stress test are also a sore point.

Supervisory review

The labour-intensive exam was billed as a “learning exercise” for regulators and lenders alike, yet several banks Bloomberg spoke to said they were disappointed that the initial criticism wasn’t more constructive given the effort they put in.

Enria, 61, has long been at the core of the effort to improve the financial health of Europe’s banks. Before taking over as Chair of the ECB’s Supervisory Board at the start of 2019, he led the European Banking Authority, which helps implement regulation and holds stress tests for lenders in the region.

The Italian national has made the ECB’s supervisory activities more transparent, for example spelling out how it treats bank mergers, and has sought to remove hurdles that banks face in moving liquidity across borders, albeit with mixed results.

In September, the ECB started a review of annual supervisory process, which is known as SREP. The European Banking Federation, a lobby group, said via a spokeswoman that there is “room for improvement” in SREP despite being an “achievement” and it would use the review to engage with the ECB over it.

Enria himself has recently hinted at the tension in the relationship with banks, but has doubled down on warnings that individual institutions need to focus on future risks rather than shower investors with cash.

In a speech last month, he said that optimism at banks over bumper earnings this year have generated “a certain reluctance on the side of banks to seriously engage in supervisory discussions” about economic risks.

Even so, Enria has acknowledged that the ECB and other authorities were overly pessimistic in their warnings earlier in the pandemic.

“We might be suffering the same fate as the boy who cried wolf in Aesop’s Fables, and a tendency might be spreading among banks to dismiss their supervisors’ calls for prudence as unjustified conservatism,” he said.

©2022 Bloomberg L.P.