THE ECB AS SUPERVISOR. Karel Lannoo CEO, CEPS

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1 THE ECB AS SUPERVISOR Karel Lannoo CEO, CEPS

2 2 Overview Why? Ireland vs Nevada Spain vs Florida What and how? Tasks Structure When and who? Outstanding and non-harmonised? Member states vs SSM What remains local competence?

3 MFI total assets/gdp Source: AMECO (2013), ECB (2013) 450% 400% 350% 300% 250% EURO Non EURO EU27

4 Low equity ratio Source: CEPS Banking Database (2013) 7.5% 5.0% 2.5% 0.0% EURO EURO - High EURO - Medium EURO - Low Non EURO EU27 * Equity ratio = Total Equity / Total Assets

5 5 Why? Banking union (BU) plus OMT should reduce barriers to N-S capital flows and eliminate convertibility risk (and thus capital flight). Does not solve underlying imbalances, but should lead to more normal financing conditions during transition to new real equilibrium.

6 6 Shock absorbing benefits of Banking Union US States enjoy one huge advantage over Eurozone MS: A well-functioning Banking Union Freddie Mac, Fannie Mae and the Federal Deposit Insurance Corporation (FDIC) spread state risks and losses (GSEs through securitization). Bank failures during crisis prime example: Nevada versus Ireland Spain versus Florida

7 7 Ireland vs Nevada Key statistics: 2011 Ireland Nevada Population (in million, 2011) Nominal GDP (in billion, 2011) Change in nominal GDP ( ) -17.6% -3.6% Average net migration rate since bust (2008) as percent of total population 0.32% 0.09% Unemployment rate (2011) 13.5% 14.4% Change in unemployment rate ( ) 9.8pp 8.8pp 7

8 8 Nevada vs Ireland (II) : FDIC closed 11 banks headquartered in NV Assets of over $40 billion =30% NV GSP Losses incurred by FDIC of roughly $4 billion Federal loss sharing through Fannie Mae & Freddie Mac of $8 billion since 2008 (losses concentrated in Nevada, borne by federal government) Total direct loss absorption : about 12 bn., 10 % of GSP Not counted: High market share of out-of-state banks in NEV, also, partially in Ireland (HSBC, etc.) = Market banking union Total loss protection much higher: 20 % of GSP?

9 9 Spain vs Florida Key statistics: Spain Florida Population (in million, 2011) Nominal GDP (in billion, 2011) Change in nominal GDP ( ) 1.0% -0.9% Unemployment rate (2011) 21.7% 10.5% Change in unemployment rate ( ) 13.4pp 6.5pp 9

10 10 Florida: US banking union in action : FDIC closed 65 banks headquartered in FL Losses incurred by FDIC of roughly $14 bn Federal loss sharing through Fannie Mae & Freddie Mac of $19 billion since 2008 (losses concentrated in Florida, borne by federal government) Total direct loss absorption : about 33 billion, 6 % of GSP Not counted: Large banks operating nationwide have 50% market share. Private sector losses on average twice sum of FDIC and GSEs. Loss absorption by foreign banks probably another 6 % of GDP => Total loss absorption (ex post) much higher!

11 11 What and how? What: ECB to have prudential supervisory powers over all banks in participating Member States i.e. euro-zone plus those adopting close cooperation Direct ECB prudential supervision will be limited to significant banks; national supervisors will remain responsible for supervision of less significant banks Branches of banks from non-participating Member States are subject to normal host state supervision. The ECB will be host authority for its specific tasks only Tasks approve authorisations, acquisitions and disposals (prepared by national supervisors); ensure compliance with capital, liquidity, leverage and governance requirements; conduct firm-specific reviews and stress tests and apply resulting capital requirements; set additional macro-prudential capital buffers (in consultation with national authorities); approve recovery plans including any necessary structural changes; and intervene early in recovery phase, coordinating with national resolution authorities

12 12 Who and when? 124 banks Separate executive board and supervisory board 1 person / 1 vote Reporting to the Governing Council Indepedent but accountable to EP and national Parliaments Regulation applicable from 3 November 2013 Supervision in place by 3 November 2014

13 13 Outstanding not harmonised Reach 25 members (not UK, Czech Rep. and Sweden)? Interaction betw supervision (SSM) and regulation (States)? Member states to set macro-prudential buffers (Art. 443 CRR) Member states to set capital buffers (Art CRD) EBA to set single rulebook Financial stability remains member state competence and with it ELA (with some ECB guidelines) Consumer/investor protection Legal distinction branch/subsidiary Diversity in organisation of banks Tax (VAT, corporate) Shareholder rights

14 14 Still to do Separate supervisory manual (Art. 132 TFEU, Art 34 ECB Statute) Resolution and recovery directive (RRD) Living wills, separable banks Structured Early Intervention and Resolution (SIER) Bail-inable items Single Resolution Mechanism (SRM) Liquidation authority: single entity, interaction with m-states Deposit Guarantee Schemes (DGS) Some further harmonisation of national schemes

15 15 Conclusion SSM (BU) is move to twin peaks model the EU way Systemic matters centralised, conduct of business local EBA to become standard setter EU unity has been maintained, no divergence between euro and non-eurozone (but what with EU vs MS?) Further reforms needed to give ECB powers in insurance and securities markets supervision? ECB/ESRB role in ESMA/EIOPA limited Cooperation EU Comm and ECB in secondary regulation? New wave of cross-border mergers? International implications

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