Today the EBA made an announcement that requires banks to hold nominal amounts of capital over amounts previously set out in a recommendation set out a year ago. When banks’ capital levels fall below the nominal floor, they will have to present credible plans for restoration.
This looks like a novelty, as banks are used to maintain ratio’s of capital, not values. Apparently, EBA saw the ratio’s as problematic, as lowly capitalized banks chose an easy but painful way out. They shrank the denominator, in a process called deleveraging. In business speak this is downsizing. Downsizing for banks means less mortgages and loans for their customers – with nasty effects on the economy.
Another apparent novelty is that the credible plans will have to be submitted to EBA.
Holy cow!
“The capital plans and templates will be shared with the EBA. The national authorities, in close cooperation with other relevant competent authorities within colleges of supervisors as appropriate and with the EBA, should assess credit institutions’ capital plans for transition to the CRD/CRR full implementation.”
But then comes the confusing part. The capital plans shall be discussed. Expect lots of discussions as well as the usual second guessing and horse trading between the EBA Member States:
When reviewing capital plans, national authorities should discuss and challenge banks’ assumptions and consider the impact of stress events on the viability of the plans. As the result, measures to maintain capital, such as restrictions on dividends and other variable payments, and any other measures considered to be necessary and appropriate by the competent authorities in consultation with the EBA for addressing any deficiencies in the plans should be applied.
This discussion based system is very philosophical. It shows the poor governance of EU bank supervision. It forces supervisors in a nasty split. On the one hand they have to agree with decisions made at the EBA level, decisions that keep the majority of Members States happy. On the other hand these EBA level decisions may frustrate policies made at home.
The result is in many cases a two-faced national regulator, who consequently lacks authority: a representative of one country that just signed of on an excessive bonus payment by one of its national champion banks will not likely vote against another country’s representative who just signed off on a buy-back or dividend payment.
To mitigate the uncertainty of outcomes of this process banks will vigorously lobby their supervisor.