LONDON — The EU’s banking regulators have come a long way since the financial crisis in cleaning up the sector’s colossal mess, but their job is hardly finished, according to European Banking Authority Chairman Andrea Enria.
A case in point: They don’t even have a precise definition of what constitutes “public interest” when winding down failing banks.
At the end of June, the European Central Bank declared that two small regional banks in Italy were “failing or likely to fail,” and they were subsequently liquidated under Italian law. But where the application of the post-crisis EU rules dealing with such situations proved problematic was in the interpretation of some significant details.
Brussels’ regulator-in-charge, the Single Resolution Board, said there was no “public interest” at stake for the EU as a whole to intervene in the case of Banca Popolare di Vicenza and Veneto Banca because these banks were too small. But then the European Commission’s competition arm allowed the Italian government to step in by using state aid to manage their collapse in a more orderly fashion, saying doing so was in the “common interest” of Italy’s Veneto region.
In an interview with POLITICO, Enria noted that this distinction between public interest and common interest — being applied “one at the EU level and another one by national authorities” — could undermine a consistent application of the new EU banking framework across the bloc.
“The Commission said rules have been strictly applied. And I am convinced this is the case, but some questions remain and might have to be looked at in more detail when the dust settles,” he said. “The decision that there was no EU public interest at stake in the crises of two ECB-supervised banks that were hoping to merge and operate in the same region with combined activities of around €60 billion sets the bar for resolution very high.”
Banking on progress
Sitting in his bright 46th-floor office overlooking Canary Wharf’s skyline and London City Airport’s runway, Enria is nevertheless adamant that the EU’s banking sector is heading toward an overall improvement. “First of all, we should say [these two] banks haven’t been rescued. They effectively defaulted and exited the market, and this is important and positive,” he said.
Although many onlookers said the Italian government’s involvement in the two Venetian banks’ case came at the price of undermining the EU’s banking union, that’s not the point, according to Enria.
“It’s important to understand that the [Bank Recovery and Resolution Directive] has a number of instruments to deal with ailing banks, and these instruments can be applied in ways that are tailor-made to the bank,” he explained, referring to an earlier case of Spain’s Banco Popular, which the SRB forced to merge with a bigger and stronger bank. “You can’t compare two different cases and immediately draw the conclusion that there are inconsistencies.”
Every situation is unique, and that’s why the rules envisage different options for different lenders, Enria argued. What’s important is that they are applied consistently. “We aren’t in a ‘pick and choose’ system,” he said. “Even if the rules’ application has to be tailored to the different banks’ situations, we are in an EU framework and we must have a system that is applied coherently and doesn’t reflect single countries’ preferences.”
On Wednesday, the EBA’s Italian head is scheduled to appear in the Italian Senate to discuss EU banking rules. A subject dear to his heart is the urgency of tackling the almost €1 trillion in nonperforming loans (NPLs) that sit on EU banks’ balance sheets — a third of them in Italy.
“NPLs are still a relevant problem in the EU,” he said, noting that “10 countries have NPL ratios above 10 percent … the [International Monetary Fund] says that if the ratio is above a 5 or 6 percent threshold, the system’s ability to lend is greatly diminished.”
Enria, however, is optimistic about NPLs, saying he’s satisfied with the faster pace at which troubled lenders have started to shed their bad loans. To further speed up the process, he advocates establishing an EU-wide asset management company to buy bad loans from banks at a deep discount, or at least “a blueprint” for such entities at the national level.
“We are still far from optimal,” Enria said. “But … everything is heading toward an overall improvement of stability, profitability and reliability of the EU banking system.”
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