The Chair of the Single Supervisory Mechanism (SSM), Andrea Enria, and the President of the European Banking Authority (EBA), José Manuel Campa, stressed, on Tuesday 21 March at a hearing in the European Parliament, the solidity of the European banking system in the wake of the recent bank failures in the United States and in Switzerland. They called for a faithful application of the Basel Committee’s banking prudential standards, including those for crypto-asset exposure, as well as the completion of the euro area Banking Union.
“Are we reliving the events of 2008? I don’t think that’s the case”, said Mr Campa. He spoke of the results of a decade of legislative work that has substantially strengthened European banks and developed a common set of rules that increase the resilience of the industry.
According to Mr Enria, the aggregated Common Equity Tier 1 (CET 1) ratio of the European banking sector is 15.3% and the liquidity coverage ratio stands at 161%. The average non-performing loan (NPL) ratio was reduced to 1.8%, while the return on equity, at 7.7%, had reached “its highest level since the implementation of the Banking Union”.
According to the Chair of the SSM Council, “there is no direct read-across of the US events to euro area significant banks”. In particular, the business models of European banks are much more diversified than that of the Silicon Valley Bank, whose deposits came mainly from customers in the new technology sector and 80% of which were unsecured.
Mr Enria also pointed out that all European banks are subject to Basel standards, including liquidity ratios, whereas the US imposes these standards on only 30 or so large systemic banks.
AT1. Ernest Urtasun (Greens/EFA, Spanish), Dorien Rookmaker (ECR, Dutch) and René Repasi (S&D, German) questioned Mr Enria on the use by the Swiss authorities of clauses in the forced marriage between UBS and Credit Suisse that allowed the holders of additional capital (‘AT1 instruments’) to be fully involved before all Credit Suisse shareholders were affected by the bankruptcy of the latter.
This had created “an inversion of the hierarchy because equity holders still received some positive value for their investments when AT1 investors did not” and this led to “some turmoil in the market for AT1 instruments and contaminated other asset classes”, noted Mr Enria.
On Monday, European regulators stressed that such a reversal was not possible in the EU (see EUROPE 13145/19).
With the BRRD, “we have a clear hierarchy of claims in resolution” and “a clear policy” in the case of restructuring orchestrated solely by the private sector, Mr Enria pointed out. He added: “The AT1 instruments we have either entail conversion into equity (which would make a holder pari passu with equity holders) or a temporary write down clause which would enable AT1 holders to recover value”, when there is the upside after any type of solution.
Basel III. Asked about the finalisation of the introduction in the EU of the ‘Basel III’ agreement on banking prudential standards, Mr Enria and Mr Campa reiterated the importance for the EU to comply as much as possible with international standards in order not to provoke similar reactions in other jurisdictions, a situation which would weaken the whole scheme.
Mr Enria also encouraged the European legislator to allow supervisors to carry out ‘fit-and-proper’ assessments of a bank managers before they take up their position. Such a provision is supported by the European Parliament (see EUROPE 13106/19), but rejected by the EU Council.
Mr Enria and Mr Campa also called for the Basel Committee “robust” standards on banks’ exposure to crypto-assets to be incorporated into EU law, perhaps through the inter-institutional negotiations on the ‘Basel III’ package. (Original version in French by Mathieu Bion)