If a bank is teetering on the edge of bankruptcy, decisive action is required. As the financial crisis unfolded in 2007-2008, officials often hammered out wide-ranging decisions over a single weekend – sometimes into the wee hours of Monday, before the world's stock markets began trading. The pressure to act can be immense when it's not just a single bank fighting for its survival, but the entire financial system.
Is the European Central Bank up to performing such a stressful task? The European Court of Auditors, a major EU institution based in Luxembourg, has its doubts. Since late 2014, the ECB has been in charge of overseeing the euro zone's biggest banks – and potentially the most systemically dangerous ones, based on size alone. The 100-plus financial institutions on its list include Germany's Deutsche Bank and Commerzbank.
Following its special review of the central bank's financial supervision, a team of the court's auditors issued a report saying the ECB's banking emergency procedures were "not mature." It said the central bank had no objective criteria for assessing whether a bank is in trouble, and no handbook for crisis management. Furthermore, and in an apparent replay of a previous visit from Luxembourg, the ECB refused to hand over some documents, meaning the examiners were unable to fully assess how the ECB would perform in a crunch situation.
For its part, the ECB claimed that it cooperated fully with the auditors, supplying all the necessary documents and explanations. The central bank said it accepted six of the eight recommendations, but rejected two, without specifying which ones. But it is fair to say that the Frankfurt-based ECB was not an enthusiastic partner to the audit. As the central bank sees it, Luxembourg is only entitled to judge how well the ECB's administration works, not whether the central bank is fulfilling its supervising tasks.
The dispute boils down to how much leeway banking supervisors should be given in deciding whether to categorize a bank as failing or likely to fail.
This is a long-running dispute. In some euro zone countries, like Germany and the Netherlands, national auditors had much greater scope to monitor banking regulators before the ECB took on its supervisory role. Auditing courts in five EU countries – Germany, Finland, the Netherlands, Austria and Cyprus – issued a joint report last month criticizing what they saw as a gap in the system. The ECB, however, saw this criticism as a threat to its independence.
Looking ahead, the examiners demanded that ECB officials focus more on "early intervention" to boost its crisis prevention, and to hone its procedures to better spot when a bank is at risk of failing. All in all, the team made eight recommendations including the setting up of special rules for financial conglomerates, such as banks that offer insurance products.
The auditors said the ECB should develop objective guidelines for deciding when a bank should be deemed “failing or likely to fail.” This is a delicate matter: Last year, four banks under the ECB's watchful eye, three Italian and one Spanish, were restructured or closed. Three of those institutions passed an ECB stress test back in 2014, when the central bank took over supervision, and one bank passed with conditions. The Luxembourg officials are also calling for the ECB to set benchmarks to show whether banks are meeting regulatory requirements. But again, the ECB says it is doing its job, maintaining that it was already following guidelines from the European Banking Authority.
The dispute boils down to how much leeway banking supervisors should be given in deciding whether to categorize a bank as failing or likely to fail. The ECB believes that supervisors need the leeway because in a crisis, it's impossible to predict what exactly is going to happen. For their part, the court auditors stop short of advocating a rigid, step-by-step system for crisis management, preferring a mix of objective criteria and flexibility to react to unforeseen situations. Whatever measures the ECB finally adopts, relations between Luxembourg and Frankfurt are likely to remain prickly.
Jan Mallien covers monetary policy for Handelsblatt from Frankfurt. Jeremy Gray adapted this article into English for Handelsblatt Global. To contact the author: [email protected]