Conflicts of interest Central banker Dombret urges EU bank supervisors to merge

Andreas Dombret, a Bundesbank policymaker, says Europe’s bank oversight needs a fundamental reform. The ECB, invested with major watchdog powers since 2013, is unlikely to welcome his advice.
Quelle: Bloomberg
Parting shots for Mario Draghi's crew at the ECB.

Europe’s system of banking supervision needs to be revamped — again — because it’s still too bureaucratic and lacks the clout that US regulators have in tackling money laundering, said a leading German central banker.

Andreas Dombret, 58, a member of the board of the Bundesbank, Germany’s central bank, told Handelsblatt that banking supervision should be separated from monetary policy in the euro zone, in effect calling for the European Central Bank to be stripped of the bank watchdog function it was given in 2013.

“In the medium term, it would be much better if banking supervision and monetary policy were separated. That would pre-empt possible conflicts of interest," he said in an interview. "There may be a small loss of efficiency, but both institutions would be markedly more independent.”

Mr. Dombret said it would make sense to merge the ECB’s bank watchdog duties with the European Banking Authority, the EU agency that conducts so-called "stress tests" of banks to check their resilience to crises. “There’s no urgency to address this issue imminently, but this idea definitely shouldn’t be forgotten,” he said.

It would be much better if banking supervision and monetary policy were separated. That would pre-empt possible conflicts of interest. Andreas Dombret, Bundesbank board member for banking supervision

Mr. Dombret, who is in charge of banking supervision at the Bundesbank, is due to step down in late April after eight years on the job. His remarks are in line with previous German criticism of the Single Supervisory Mechanism, one of the pillars of the EU’s banking union plan. Launched in 2012, the SSM was designed to reduce financial risks after the euro-debt crisis and the 2008 global financial meltdown.

He said that from day one, the common monitoring of Europe’s biggest lenders had benefited banking supervision. But he added: “Things remain too bureaucratic because 19 countries are involved in most decisions, partly with two supervisory authorities each.” The ECB should devolve more decisions to national authorities, as it made no sense that the ECB’s governing council should be involved in routine matters like the vetting of a bank's executive board members.

He said the failure of Latvian bank ABLV highlighted that Europe’s supervisory system needed more powers. The ECB decided at the end of February that ABLV was "failing or likely to fail" after suffering a run after the US Treasury claimed the bank was involved in money laundering. "I find it alarming that the American authorities are ahead of us because we simply don’t have the necessary information," he said. "We have no sense whatsoever of whether banks are sticking to the rules on money laundering or not.”

Quelle: Bloomberg
Latvian washing machine, as viewed from the US.

He praised Germany’s banks for doubling their average equity capital ratio to over 16 percent over the last decade but noted that their earnings trailed far behind their international rivals. This isn’t just a German problem, he added. Many European lenders have fallen behind their US counterparts. With Europe’s economic outlook brightening and the ECB’s ultra-easy monetary policy likely to end soon, earnings should improve, he said.

Mr. Dombret disagreed with the ECB’s call for international bank mergers in Europe, pointing out that national mergers made more sense. “Experience shows that as a rule, they offer scope for significantly more job cuts than cross-border mergers,” he said. The former investment banker said that in the meantime, many banks will probably scale back their trading activities. “There is surplus capacity in this area. The stricter financial rules mean that some deals are simply no longer viable anymore.”

Germany’s biggest lender, Deutsche Bank, appears to agree. After three straight years of losses, it named retail banking expert Christian Sewing as its new boss on Sunday, suggesting the lender will move its focus away from investment banking.

Andreas Kröner, a financial correspondent, and Daniel Schäfer, head of Handelsblatt’s finance section, reported this story from Frankfurt. David Crossland adapted it into English for Handelsblatt Global. To contact the authors: kroener@handelsblatt.com and schaefer@handelsblatt.com

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