Europe’s top banking regulator has repeatedly drawn criticism for what the industry views as blunt and intrusive scrutiny. With four months left in his tenure, Andrea Enria is sharpening the European Central Bank’s approach in the biggest overhaul since it started overseeing lenders almost a decade ago.
(Bloomberg) — Europe’s top banking regulator has repeatedly drawn criticism for what the industry views as blunt and intrusive scrutiny. With four months left in his tenure, Andrea Enria is sharpening the European Central Bank’s approach in the biggest overhaul since it started overseeing lenders almost a decade ago.
In a wide-ranging interview in Frankfurt, Enria outlined plans to ease the burden of banks’ annual risk reviews and move away from higher capital requirements as the default tool for pushing lenders to fix problems. Instead, he wants supplement them with more “enforceable qualitative actions” such as sanctions or penalty payments that would allow the ECB to better tailor its oversight.
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The measures won’t necessarily be any “less demanding or less challenging for the banks,” Enria said in the hour-long interview, in which he also defended his tenure against criticism from bank executives.
The comments mark the first time that the head of the ECB’s Supervisory Board has spelled out in detail how the watchdog plans to adapt, after a report that it had commissioned faulted its oversight as inefficient and “too capital-centric.” Enria, whose successor has yet to be named, took the initial steps for the overhaul last year when bankers’ frustration with the ECB was about to burst into the open, pledging to lighten their burden with a more targeted approach.
At the core of his efforts is the cumbersome annual examination of the risks that individual banks face, known as SREP. Enria wants to make it more efficient by differentiating between risk factors and processes that the ECB is quizzing banks on every year. Going forward, he said, some of those checks can be conducted over the course of several years.
“We throw too many measures at the banks and it is difficult for them to tick all the boxes within a very compressed time frame,” said Enria, who is 62.
At the same time, he wants to tailor the ECB’s enforcement response better to the specific risks. Enria cited the ECB’s recommendations for managing climate risks where “we have this never-ending debate with the industry on whether we are about to brandish the capital stick for banks which are not in line.”
Instead, non-compliant banks could face “periodic penalty payments.” Other tools could include sanctions or so-called fit-and-proper reviews for a bank’s leaders in cases of serious management or governance shortcomings. The ECB also needs to look at how authorities in other jurisdictions operate, Enria said, pointing to cease-and-desist orders that can constrain the ability of US banks to make acquisitions if they are found to have insufficient controls.
“We need to be better at telling the banks, ‘These are the areas which are really serious, I want you to remediate these shortcomings within a certain time frame. If you don’t do that, you know that there will be a hammer brought down on you’,” he said.
Some of the changes and recommendations made in the report that the ECB commissioned will be addressed this year. Others will likely be discussed when the Supervisory Board reviews the watchdog’s processes next year under a new chair. Bank of Spain Deputy Governor Margarita Delgado and Bundesbank official Claudia Buch are the only candidates to succeed Enria, who is from Italy. The term runs for five years and is not renewable.
“We try to be open” and “maybe also less heavy-handed in terms of processes than it has been in the past,” he said. “I think these are all positive achievements that I leave to my successor.”
Still, European banks shouldn’t hold out any “unwarranted hopes” that the ECB becoming less capital-centric will mean lower requirements, said Enria. So-called capital add-ons will continue to be the best tool in some cases, for instance when it comes to addressing risks from leveraged finance, he added.
Enria defended the most controversial decision of his tenure, the temporary restrictions on dividends and buybacks at the height of the pandemic. While he acknowledged that some of the issues he has warned banks about, such as hits to their loan books during the pandemic, didn’t end up being as severe as expected, he still thinks that put them on a better footing.
The ECB is now challenging firms with “excessively rosy” projections for how their revenue will benefit from higher interest rates. The watchdog has also increased scrutiny of bank liquidity, a risk that came to the fore this year with the collapse of several US firms and the unraveling of Credit Suisse.
Enria said he’s disappointed not to have seen more integration of the euro area’s banking sector under his watch. While the ECB notched a win by convincing international regulators that the bloc should be treated as one jurisdiction, progress on related measures was slow at best. There haven’t been a meaningful number of cross-border mergers and acquisitions, which would be evidence that banks view the the wider region as a single domestic market.
The criticism notwithstanding, Enria said he’s proud of his time at the ECB as he prepares to step down at the end of the year.
“We showed a probably unexpected positive agility in reacting to an unprecedented series of external shocks: a pandemic, war in Ukraine, an unprecedented shift in interest rate environments with crisis in regional banks in the US and in Switzerland,” he said. “I think that’s shown a level of maturity in this supervisor that is a major achievement.”
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