ECB needs more "critical mindset" on banks, says Bundesbank deputy

Financial Times has published an article arguing that Claudia Buch is one of two candidates to replace Andrea Enria as the eurozone’s chief supervisor. Caliber.Az reprints this article.

One of the leading candidates to become the eurozone’s next chief banking supervisor has called for a more “critical mindset” in overseeing the sector and warned it still faces significant risks stemming from major macroeconomic upheaval.

Claudia Buch, deputy head of Germany’s central bank, told the Financial Times that “cultural change” in eurozone banking supervision was needed to bring in more people “who have a critical mindset and take the decisions to make sure supervisory action is taken”.

Buch is one of two candidates — along with the Bank of Spain deputy governor Margarita Delgado — on the shortlist to replace Andrea Enria as chair of the European Central Bank’s banking watchdog when he steps down at the start of next year.

The single supervisory mechanism was created in 2014 to harmonise supervision of banking across the currency bloc in response to the region’s sovereign debt crisis a decade ago. It oversees the bloc’s 110 biggest and most systemically important banks.

Earlier this year, the EU’s external auditor criticised the ECB for being too lax in supervising banks and insufficiently aggressive in pushing to reduce stockpiles of bad loans.

Eurozone lenders were, however, relatively untroubled by turmoil in the sector earlier this year, when several US lenders collapsed including Silicon Valley Bank and a liquidity crisis at Credit Suisse that forced it into the arms of its rival UBS.

The EU’s top regulator said on July 28 only three of Europe’s 70 biggest banks would be forced to raise capital in a doomsday scenario, praising the “robust” nature of the bloc’s banking sector.

Buch said the resilience of the region’s lenders, despite the recent shocks of the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine, reflected the sector’s own efforts to boost capital and liquidity as well as “the success of supervision”.

Yet the Bundesbank vice-president listed several challenges confronting banks. The biggest stemmed from how the macro environment was changing. In particular, a sharp rise in interest rates to tackle soaring inflation has increased the risk that a lender’s deposits could evaporate quickly as happened during the recent turmoil among US lenders.

Buch said: “The problem in Germany is that banks are under pressure to increase their deposit rates and they can’t pass this on to their loan customers because loan demand is relatively weak.”

The Bundesbank has imposed extra capital requirements on two-thirds of German banks to cover the impact of rising borrowing costs. These increased minimum capital levels by 0.89 percentage points of risk-weighted assets. This pushed up minimum capital levels by about €12bn for the country’s 22 biggest banks supervised by the ECB.

Many German banks have locked in low rates for long periods in their large mortgage portfolios and these are worth less after the ECB raised rates by 4 percentage points in the past year.

Eurozone banks have increased their average rate on deposits with a maturity of up to one year to 2.5 per cent, which compares with only 0.21 per cent on overnight, instant-access deposits. In response, deposits with a maturity of up to two years have almost doubled to €1.8tn in the past year, while overnight deposits have fallen nearly 10 per cent to €9.1tn.

“You can do some simple simulations on what would happen if a significant share of depositors switches to higher interest-paying deposits, and then you see that the net interest margins are shrinking,” she said. “So we’re telling the banks: where we think that interest rate risk is quite significant, we are imposing higher capital charges.”

Buch warned the decline of energy-intensive industries in Europe, where output has fallen sharply after the recent natural gas crisis caused by Russia’s war in Ukraine, could lead to an increase in bad loans among banks exposed to these sectors.

“We could have a bigger need for structural change with resources moving out of the very energy intensive sectors . . . or with entire business models in the corporate sector that don’t work anymore,” she said.

Business insolvencies in Europe have been rising(opens a new window) in recent months but remain below pre-pandemic levels in many countries such as Germany. “So far everything looks good. But that, of course, doesn’t mean that it will stay this way,” she said, adding that record low eurozone unemployment was “certainly a big stabilising factor all over Europe” for credit quality.

Last week Germany’s biggest lender Deutsche Bank said it had raised its loan loss provisions to €401mn in the second quarter, a 72 per cent increase from a year ago, because of “the uncertain macroeconomic backdrop and lower loan balances”.

The ECB is due to propose Enria’s successor in September, who will then require approval by the European parliament and EU leaders. The candidates appeared at a closed-door hearing in parliament this month, when MEPs were more impressed by Delgado’s grasp of banking supervision details than Buch’s, according to a person familiar with the meeting.

In comments reflecting Germany’s traditional scepticism about creating a common deposit insurance scheme to replace the patchwork of different national arrangements across the eurozone, Buch played down its importance, even though this had long been a priority for the ECB. “I wouldn’t say that the system is not working because we have missing parts in the banking union,” she said.

While acknowledging that a single deposit insurance scheme would be better “in an ideal world”, she said “in the real world, we have very different institutional regimes across countries and so we can’t just with one snap of the fingers jump to a new system”.