Europe’s top bankers are pressuring their regulator to back down

(Bloomberg) – European bank executives are expressing growing frustration over what they see as excessive interference and unreasonable demands from the region’s top financial regulator.

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Bankers are now increasingly vocal about a series of longstanding irritations with the European Central Bank’s watchdog arm, headed by Andrea Enria. These include more day-to-day complaints, such as heavy data requests, but also larger debates about the freedom of lenders to pay dividends and bonuses as well as the level of intrusion that supervision justifies, according to leaders familiar with the subject.

With discontent growing, Lorenzo Bini Smaghi, chairman of Societe Generale SA in France and a former member of the ECB’s executive board, wrote to the central bank in October protesting officials’ demands to be present at board meetings. administration of the bank, according to a document seen by Bloomberg. . He argued that the practice undermines the effectiveness of management discussions.

“To my knowledge, no other authority in major advanced economies attends board and committee meetings as part of their oversight activity,” he wrote. “Not the Federal Reserve, nor the Bank of England, nor the Swiss National Bank, nor Finma. Some European supervisors have adopted such a practice in the past, with apparently very little benefit and serious concerns raised by the entities. monitored.

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

Risk Warning

While banks and their supervisors often have friction, the latest comes amid calls from the ECB to prepare for the high level of impending risk in the economy. In September, the European Systemic Risk Board issued an official warning about vulnerabilities in the financial system amid soaring energy prices and soaring inflation.

Officials have also been prescient in their warnings in recent years of growing risks in the leveraged lending industry, as global banks have racked up billions of dollars in mark-to-market losses in this area over the past few years. last six months.

On Friday, Enria warned in a presentation that while lenders’ balance sheets are generally healthy, risks are mounting 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 evaluating banks against very high standards,” an ECB spokesperson said in a statement. communicated. “We have always been and remain open to dialogue about the efficiency and effectiveness of our oversight processes.”

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

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

Bankers polled by Bloomberg say the ECB’s de facto ban on payments at the height of the pandemic hurt them in the eyes of investors, and moderation is no longer warranted given their windfall earnings. Businesses from Deutsche Bank AG to Banco Santander SA recorded double-digit gains in loan income in the third quarter, helping to bolster profits even as rapid increases in central bank interest rates squeeze businesses and consumers with higher borrowing costs.

Amid this tension, the watchdog’s day-to-day surveillance is grittier than usual. One executive likened the watchdog to the Federal Bureau of Investigation, saying supervisors ask different bank employees the same question multiple times in order to compare answers.

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

Bank board meeting agendas are seen as focusing too much on relatively minor issues at subsidiaries raised by the regulator, one executive said. Meanwhile, committees below the board are forced to provide the watchdog with transcripts of meetings, another says, giving a sense of unnecessary intrusion. Compliance teams complain of difficulty in retaining staff exhausted by growing demands.

Yet the issue of dividends shows that the ECB and the bank are still able to work together. ING Groep NV, a Dutch lender that has one of the highest levels of capital among European banks, said on Thursday it would buy up to 1.5 billion euros ($1.5 billion) from actions after getting approval from the watchdog. Chief executive Steven van Rijswijk said the conversations the bank had had with regulators had been “constructive”.

Created in 2014, the banking supervision arm of the ECB is unlike any other regulator, in that it coordinates financial supervision in the 19 countries of the euro zone. The watchdog has previously been accused of overstepping its mandate, including for the way Enria’s predecessor pushed banks to reduce their mountain of bad debts. Now bankers – and even some regulators – are complaining that ECB plans to control climate risks are going too far or that authorities are taking a heavy-handed approach to the lucrative effect finance business. of leverage.

While much of the bankers’ frustration is about interacting with the ECB at an operational level, big projects like this year’s climate change stress test are also a sore spot.

The labor-intensive review was touted as a “learning exercise” for regulators and lenders, but several banks Bloomberg spoke to said they were disappointed the criticism initial was not more constructive given the efforts they have made.

Enria, 61, has long been at the heart of efforts to improve the financial health of European banks. Before taking over as chairman of the ECB’s supervisory board in early 2019, he headed the European Banking Authority, which helps enforce regulations and organizes stress tests for lenders in the region. The Italian national made the ECB’s oversight activities more transparent, for example outlining how it deals with bank mergers, and sought to remove obstacles banks face in moving cash across borders, though with mixed results.

Supervisory review

In September, the ECB launched a review of the annual surveillance process, known as SREP. The European Banking Federation, a lobby group, said through a spokeswoman there was ‘room for improvement’ in SREP although it was an ‘achievement’ and that it would use the review to engage with the ECB on this.

Enria itself recently hinted at the strained relationship with banks, but doubled down on warnings that individual institutions need to focus on future risks rather than flooding investors with cash.

In a speech last month, he said banks’ optimism about windfall earnings this year had generated “some reluctance on the part of banks to seriously engage in prudential discussions” about economic risks.

Even so, Enria acknowledged that the ECB and other authorities were too pessimistic in their warnings at the start of the pandemic.

“We could suffer the same fate as the boy who cried wolf in Aesop’s Fables, and a tendency could spread among banks to dismiss their supervisors’ pleas for caution as unwarranted conservatism,” he said. he declares.

–With the help of Alexandre Rajbhandari.

(Add Enria’s comments to eighth paragraph)

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