Andreas Dombret: The role of national supervisors in European banking
supervision
Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at Chatham House, London, 30 January 2015.
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1. Introduction
Ladies and gentlemen
Thank you for this opportunity to speak at Chatham House today. It is an honour for me to
speak at such a distinguished institution and to share my thoughts with you. The topic of my
speech today is European banking supervision, but the underlying theme, of course, is
integration.
Since the Treaties of Rome were signed in 1957, the history of Europe has been
characterised by ever-deepening integration. Once it had been set in motion, European
integration proved to be a steady process marked by a number of leaps. One such leap was
taken in 1999. In that year, 11 European countries adopted the euro as their common
currency. Today, the euro is shared by 19 countries and more than 300 million people.
However, as you know, the sun does not always shine in the euro area. In the wake of the
global financial crisis of 2008, the euro area slid into a crisis of its own. In 2010, Greece
stumbled into a sovereign debt crisis. This led to a rapid loss of confidence in other countries
at the periphery of the euro area and eventually brought the euro area to the brink of
collapse. Extensive rescue packages provided by the member states of the euro area as well
as non-standard measures taken by the ECB helped to calm the markets and prevented the
crisis from escalating.
To some, the present situation might look familiar. Greece is again capturing the headlines,
since last week's elections put into power a party which is set to derail the train of reform.
And just three days before the Greek elections, the ECB again decided to take non-standard
measures in order to address the risks of too prolonged a period of low inflation - as you
know, the Bundesbank takes a rather critical view of these measures.
But even though some might be reminded of 2010, it is obvious that the situation has
improved over the past five years. And at some point, the focus should shift from managing
the current crisis to preventing future crises. With regard to the European banking sector, the
focus shifted in mid-2013 and, once again, the response was a leap in integration.
2. The idea behind European banking supervision
About a year later, on 4 November 2014, the first pillar of a European banking union was
erected. On that date, the ECB assumed responsibility for supervising the 120 largest banks
in the euro area - with the accession of Lithuania, the number of supervised banks has risen
to 123. These 123 banks account for more than 85% of the aggregate balance sheet of the
euro area's banking sector, making the ECB one of the biggest banking supervisors in the
world.
The idea of European banking supervision was undoubtedly born out of the crisis. The crisis
lent new urgency to something that had already been obvious before: in banking and finance,
national borders are far less relevant than in other areas of life.
Such an integrated financial system is certainly desirable for all the well-known reasons,
including efficiency gains and risk-sharing. However, that which distributes gains among all
of us in good times, forces us all to share the pain in bad times. In an integrated financial
system, problems in one country can quickly spread to others.
This is what happened during the recent crisis and it made us realise that banking
supervision had to adapt - with international banks that operate across borders, isolated
supervision was not so "splendid" after all. To quote the IMF, the European banking union is
the "logical conclusion of the idea that integrated banking systems require integrated
prudential oversight".
To be sure, there was a certain amount of cooperation in supervisory matters before the
crisis. There was an exchange between home and host supervisors of internationally active
banks. And there were supervisory colleges in which supervisors of global banks convened
and shared their insights. However, this was not enough. An integrated financial system
cannot be supervised through cooperation, it requires an integrated approach.
Taking banking supervision from the national level to the European level has three specific
benefits.
First, European banking supervision makes it possible for banks in the entire euro area to be
supervised to the same, high standards. These standards will emerge from sharing insights
and empirical findings internationally and taking the best from each national approach to
banking supervision. Germany, for instance, could benefit from a more quantitative-oriented
approach, which has already been adopted by other countries.
Second, European banking supervision makes it possible to effectively identify and manage
cross-border problems. This is essential, because, as I have mentioned, large banks are
usually active in more than one country. The failure of the Franco-Belgian bank Dexia in
2011 is a classic example of a case where banking supervision with a cross-border focus
could have improved crisis management. Another example is German Hypo Real Estate,
which failed in 2009.
Third, taking banking supervision from the national to the European level will add a layer of
separation between supervisors and the banks they supervise. This will prevent supervisors
from treating their banks with kid-gloves out of national interest.
You see that we have come to expect a lot from European banking supervision. But even
though I am extremely optimistic, we have to bear one thing in mind: European banking
supervision is an immensely complex operation that has been put together in a very short
space of time. We should not expect everything to run smoothly from day one. It will certainly
take some time before every detail is sorted out deep down in the engine room of actual
banking supervision.
Let us take a tour down into that engine room and see how European banking supervision is
organised and what that entails for the national supervisors.
3. The role of national supervisors
A question I often heard during the run-up to European banking supervision was: "Aren't
national supervisors digging their own grave? Now that supervision has been transferred to
the European level, where will that leave you as national supervisors?"
First of all, we should certainly not succumb to the illusion that European-level supervision is
going to spell the end of national supervision. In the entire euro area there are about 3,400
banks, of which only 123 are directly supervised by the ECB - the rest remain the
responsibility of national supervisors. In Germany, for instance, about 1,800 credit institutions
are still being supervised by the Bundesbank and BaFin.
Nevertheless, the ECB will certainly play a part in harmonising the supervisory approaches to
all banks in the euro area. Consequently, national supervisors will have to take a more
European perspective in supervising those banks which remain within their direct sphere of
responsibility.
But what about those banks which are directly supervised by the ECB? Are national
supervisors being pushed to the sidelines in these cases? Well, let us consider the facts. The
ECB has to supervise 123, mostly very large and complex banking groups, which are located
in 19 different countries. To do so, the ECB has a staff of 1,000, most of whom are located in
Frankfurt. There is no other option for European banking supervision than to rely on national
supervisors.
The role of national supervisors builds on their expertise and experience, as well as their
resources and their presence on the ground. The Bundesbank, for instance, has decades of
experience in banking supervision, has nine regional offices and about 1,300 supervisors.
Consequently, the ongoing banking supervision lies with "joint supervisory teams". These
teams are headed by ECB staff, but are comprised mainly of national supervisors. The
Bundesbank is represented in all the joint supervisory teams for German banks and also in
some teams for foreign banks. Altogether, about 300 supervisors from the Bundesbank work
in the context of European banking supervision.
And here, I am just talking about ongoing supervision. In addition to that, all the national
supervisory authorities are represented on the Supervisory Board, the decision-making body
of European banking supervision. For the Bundesbank that means we are ceding, in whole
or in part, responsibility for supervising 21 German institutions, but becoming involved in the
supervision of 102 foreign institutions.
You can imagine that all this requires national supervisors to adjust - not only from an
organisational point of view but also from a personal standpoint. Supervisors who, for years,
were responsible for national banks are suddenly being pushed into an international working
environment. This is exciting and challenging at the same time, and it will be some time
before everyone has adjusted to the new circumstances. Experience of the first few weeks is
rather encouraging, though.
From an organisational perspective, the Bundesbank has already adapted. We have
changed our structure to allow us to play an efficient and effective role in European banking
supervision: we have set up a new Secretariat to prepare the meetings of the Supervisory
Board, we have set up a new department to analyse the foreign banks which fall under
European banking supervision, and we have set up a staff unit to coordinate those
colleagues from the Bundesbank who work in the joint supervisory teams.
All this requires great effort and represents a formidable challenge. However, the real
challenge does not lie in organising day-today supervision in the new system. In my view, the
real challenge lies in the decision-making processes.
Since the ECB is responsible for European banking supervision, the Governing Council is the
highest decision-making body not only for monetary policy issues but also for matters of
banking supervision. These two responsibilities converge on the banks. Banks are a crucial
element in the transmission process of monetary policy, while, at the same time, being the
object of banking supervision. This, of course, gives rise to conflicts of interest, as it creates
a banking supervisor with access to central bank liquidity.
To minimise such conflicts of interest, a governance structure has been created that limits
the Governing Council's involvement in supervisory decisions. Time will tell whether this
structure truly helps to avoid conflicts of interest between monetary policy and banking
supervision or whether it might have been better to create an independent banking
supervisor.
4. Conclusion
Ladies and gentlemen
European banking supervision certainly represents the biggest step towards financial
integration in Europe since the launch of the euro. And, to me, it is the most logical step to
take. Single monetary policy requires integrated financial markets - which includes, without
doubt, European-level banking supervision.
And for anyone who has gained the impression that we have transferred responsibility for
banking supervision to an institution with no previous experience of supervising banks, rest
assured: that is not the case. National supervisors will continue to play an important role in
supervision within the new system.
For us, as national supervisors, this is an extremely exciting challenge. Since colleagues
from the Bundesbank began taking part in the joint supervisory teams, our tasks and
perspectives have been broadened substantially. I am sure that our national supervision will
also benefit from the experience we gain by working in the joint European teams. And I firmly
believe that European banking supervision will benefit from the involvement of national
supervisors.
Thank you.