Europe’s top banking supervisor says fragmenting market raises risks

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The increasing fragmentation of Europe’s banking system is a “faultline” that heightens financial vulnerability and saddles everyone with higher costs, the European Central Bank’s outgoing head of supervision Andrea Enria has warned.

Enria, who is stepping down at the end of this year after five years as the ECB’s chair of supervision, told the Financial Times his biggest “personal regret” was how the banking market of the 20-country eurozone was becoming “more and more segmented along national lines”.

“We still maintain this sort of [national] faultline in our institutional arrangements, in terms of integration and in terms of the safety net,” he said. “That’s the main issue that we should fix.”

Enria added that the faultline created an “element of risk”.

“If you have a shock hitting a part of the banking union, the banking sector doesn’t work as it could as a shock absorber by absorbing losses in one country through profits in another country,” he said.

Banks across Europe have been criticised for not passing on the sharp rise in interest rates to depositors as fast as they have increased the cost of loans. The gap between loan and savings rates has boosted lenders’ profits and prompted some countries, such as Spain and Italy, to introduce windfall taxes on the sector.

Enria said this was in part down to the lack of cross-border competition across the single currency bloc. “If you have more competition, if you have a more integrated market, that will be much more beneficial for customers of banks, both depositors and borrowers,” he said.

The 62-year-old Italian has been a driving force in the integration of Europe’s financial market. He was the first head of the European Banking Authority for eight years before joining the ECB. EU leaders recently approved the appointment of Claudia Buch, vice-president of Germany’s central bank, to succeed him at the end of December.

The single supervisory mechanism was created in 2014 to harmonise oversight of banking across the currency bloc in response to the region’s sovereign debt crisis a decade ago. It monitors the bloc’s 110 biggest and most systemically important banks.

Eurozone lenders were relatively untroubled by turmoil in the sector in March, when several US lenders collapsed including Silicon Valley Bank and a liquidity crisis at Credit Suisse forced it into the arms of its rival UBS.

However, Enria said the upheaval in the sector “really scared me” because of how “investors go to the next weak link” in a crisis by betting against a bank’s share price or by buying insurance against a debt default. This had “an immediate negative impact on the behaviour of institutional and corporate treasurers” who pull deposits from banks seen as vulnerable.

He said supervisors “need to put a lot of attention on these type of dynamics” in particular by scrutinising “the funding and liquidity risk of banks much more than we have done in the past”. Watchdogs should also tighten up oversight of governance and business models, which “are the drivers that attract the attacks from investors”.

For much of the past decade there have been failed attempts to complete the eurozone’s banking union by agreeing a common deposit guarantee scheme for the bloc. Enria said this was “totally mired in a cobweb of red lines by member states”. But even without it, he said EU lawmakers could do more to encourage banks to expand across national borders.

There was “an element of myopia” both by national regulators, who under appreciated the benefits of integration, and by banks, who are not doing enough to make banking union “work at its best”, he said, appealing for “more courage” on both sides.

Bank executives say they cannot create truly pan-eurozone businesses because, while the ECB handles the prudential regulation across the bloc, they must deal with a patchwork of national authorities’ different rules on conduct.

Enria hinted more conduct oversight could be brought under the ECB’s remit, adding this could boost the EU’s capital markets union project, the bloc’s long-running drive to fully integrate its financial system. “If you want a capital markets union, you need to make bolder steps also in the direction of integration of supervision on the conduct side,” he said.

Global regulators are seeking to clamp down on risks outside the banking sector among hedge funds, private equity and crypto exchanges. Enria said the initial approach had been to control risks by heaping additional requirements on the banks who finance the “shadow banking” ecosystem.

Watchdogs are discussing whether the “regulatory perimeter” should be expanded to include more direct supervision of other entities including those offering a panoply of bank-like services that are in effect acting as “virtual banks”. Enria stressed he was not arguing to expand the ECB’s powers.

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