The ECB will indeed supervise only those banks deemed as significant credit institutions based on the total value of their assets, on their importance for the economy of the country in which they are located or the EU as a whole. They will also examine the scale of cross-border activities and on whether banks have requested or received public financial assistance from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF).
In Spain, following the banking bail-out in 2012, the ECB will supervise 95% of the banking industry, covering 15 entities. Meanwhile, in Germany, due to the exceptional nature of its banking system, the 24 banks supervised by the ECB will cover only 65% of the banking business in the country. In fact, Germany has 1,697 out of the 3,532 small banks considered by the ECB as “less significant entities”, and therefore, will continue to be supervised by the relevant national authority.
These figures are derived from the German banking sector, where the savings banks (Sparkassen), together with the cooperative banks (e.g. VR Banken), are the backbone in the refinancing of local, regional, small and medium sized firms in the country.
“Without their profit driven motivation, especially for those households in the German society who earn less than €2,500 a month, they provide a wide range of financial products and solutions, and very often they are the lender of last resort in crediting small local firms (like local crafts) or in providing affordable payment and credit solutions for large sections of the society,” explains Dr. Bernd Nolte, Prof. in the Steinbeis University in Berlin and CEO of 4P Consulting Group.
During the debate of the Single Supervisory Mechanism Regulation, German policy makers were clearly against ECB supervision of the small and less significant banks.
“The Bafin’s (the federal financial supervisory authority) existence would have been at stake if supervision of Sparkassen and that of the mutual banks (Genossenschaftsbanken) had been handed over to the ECB. “The German Government did not want that,” says Prof. Dr. Dorothea Schäfer, research director of Financial Markets department in the German Institute of Economic Research (DIW).
Thus, these banks will continue to be supervised by the federal financial supervisory authority in Germany and indirectly by the ECB. However, the ECB can decide at any time to exercise direct supervision in order to ensure consistent application of high supervisory standards.
“The supervision of less significant institutions should follow the same basic principles across all countries,” says Jörg Rocholl, professor of Finance and president of the European School of Management and Technology in Berlin. “And it is up to the ECB to ensure that a single rule book applies for the implementation of these principles. While it does not need to be located at the ECB, there should be a close and frequent exchange between national supervisors and the ECB. The preference of the German government is in line with this general consideration.”
In its forecast simulation of 300 German regional banks over the next five years, 4P Consulting Group predicts that if the European regulatory pressure and the associated cost increases continue, it is likely that the economic sustainability of these specialized banks in a low interest rate economic landscape will continue to deteriorate dramatically.
“We estimate that most of these regional-growth-relevant banks will then drift into the problem area with cost and revenue problems. That will cause corresponding negative credit, income and employment spillover effects on the respective regional society and economy,” warns Bernd Nolte, 4P CEO.
Nevertheless, Prof. Dr. Schäfer from Berlin-based DIW is clear:
“Big banks are the big risk, small banks can be easily resolved and have no systemic importance”.
For the future, however, Jörg Rocholl- who once said that Sparkassen are better positioned politically than any other group of banks- warns that it is very important that German savings banks and cooperative banks become as transparent as possible about the interconnectedness in their groups.
“It is important to rule out the potential concern that seemingly less significant institutions become in fact systemically important given their strong interconnectedness, in particular in downturns,” concludes Prof. Rocholl, also member of an advisory council for the Finance Ministry.