How Sabine and Danièle coordinate

This post may be purely speculative. However, I noticed two important figureheads of EU bank supervision (Sabine Lautenschläger and Danièle Nouy) went public on two, apparently separate, issues. However, combined, they may show how EU bank supervision may develop.

In the FT of February 24, Nouy showed a dramatic, but surely sensible, U-turn on the very complex prudential bank rules that she helped create. When she worked for the French prudential authority, she defended important exemptions from Basel III solvency rules for the French banks. The most significant ones were the exemptions from rules that require banks to deduct holdings in other banks and insurance companies. These rules would hurt French bank-assurance companies – if left untouched. So France doctored important relief here, see, for example Article 49.1 of the CRR. This of course to the dismay of the Basel Committee, which complained about material European exemptions in its 2012 Basel III regulatory consistency assessment report.

Now at the ECB, Nouy voices her concerns about the myriad of exemptions “It’s not so much about how much [capital] it’s about the definition of capital. There are too many, in my view, national options in the definition of capital in Europe and we have to address that. [ . . .] We may have to go to the legislature, to the European Parliament, to ask for more harmonisation in regulation.”

By all means, this is an impressive and laudable change of position.

First target may be the deferred tax assets (DTAs), about which I wrote earlier, albeit that there is probably not a lot the ECB can do about them. As with anything tax-related in Europe, DTA’s are regulated at the country level, not by European rules. So, please forget EU tax harmonisation.

The DTAs are probably a red herring, meant to distract from the really important exemption: the holdings of banks in other banks and insurance companies. To not embarrass anyone in particular, this exemption will probably be not mentioned for some time.

Instead, the ECB chose a different route, as explained by Sabine Lautenschläger in an odd, dry, and technical speech with a title that does not match its contents: “How can prudential regulation foster growth?” The speech is not at all about regulation and growth! It is about a way of dealing with these nasty exemptions, without embarrassing France.

Lautenschläger: “I would like to draw your attention to two important issues with implications for growth which both also reflect the unique features of the SSM.”

First is the Supervisory Review and Evaluation Process (SREP), “which gives us the instrument to tailor supervisory requirements beyond the minimum capital requirements set by the Basel Accord. …”

Second is “the harmonisation of supervisory practices to the highest standards, through the consistent and rigorous exercise of options and discretions formally left to national supervisors.”

So here you have it: to harmonise supervisory practices across Europe, the ECB can require banks to hold more capital if deemed necessary.

Forget your national exemptions.

And if you misheard Sabine Lautenschläger at the dinner: she makes perfectly clear what she expects: “harmonisation cannot be a goal in its own right. Exactly the same is true for national specificities: if national specificities contribute to a more stable banking system, the SSM will be eager to preserve or even promote them. But if national characteristics are only the reflection of unquestioned traditions and regulatory capture, they should be eradicated.”

Bon appétit!