Banks: EU banking supervisor wants to simplify bank stress tests

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The EU banking authority EBA wants to simplify its regular fitness checks for financial institutions. "We want to make the stress tests cheaper and easier to handle for all sides," said EBA boss José Manuel Campa in the Handelsblatt interview. Also with the data inquiries it should give relief. "We are currently conducting a feasibility study for an integrated reporting scheme," Campa said. "The goal is that banks do not have to report the same or very similar data to different authorities on several occasions."

The EBA runs a stress test every two years. She examines how large European banks develop in certain scenarios. Most recently, the EBA made headlines as General Director Adam Farkas joined the European financial lobby association Afme. Campa said the EBA had followed all the rules when changing from Farkas. These could only be changed by the European legislator.

"There is room for improvement," Campa admitted. However, the term of office at the EBA head is limited to a maximum of ten years. Then you can not prohibit anyone to earn a living. "If you introduce a cooling-down phase for former EBA executives, you have to pay them a basic salary," Campa demanded. "That could be a solution, but currently we have no budget for it."

Read the entire interview here

Mr. Campa, Federal Finance Minister Olaf Scholz has made a proposal for a European deposit insurance. What do you make of it?
That's a very positive announcement. A European Deposit Guarantee Scheme is an important component of the Banking Union. But I agree with him that other components, such as harmonized bankruptcy laws, proper resolution of banks or the elimination of excessively high concentrations of government bonds are also very important.

Scholz also demands that government bonds should no longer be treated as a risk-free investment. Is this realistic?
In general, the risks of all assets should be appropriately valued. However, we see worldwide that banks are allowed to treat their domestic government bonds as risk-free. It would therefore be difficult to deviate from it.

Vita by José Manuel Campa

EU rules are less stringent than in other countries.
I would say that Scholz focuses on the concentration risks and the excessive exposure of some banks to government bonds in their home country. This is the right way. Banks should be encouraged to diversify their portfolio and invest in the sovereign bonds of different EU countries. There should also be an upper limit to how much banks may invest in government bonds of a single country.

Regarding regulation, different rules apply within each EU country. This inhibits cross-border mergers, complain banks. Rightly?
It is obvious that this fragmentation exists. This applies not only to bankruptcy or tax law, but also to restrictions on banks in terms of the transfer of liquidity and capital within the banking union. In my view, however, the business models and the attractiveness of the business case play a greater role. This is missing in many cases.

The rules on money laundering are seen as a weak point in the EU. The Eba has received more competences in the field. Is that enough?
Above all, we can coordinate. The lack of coordination was one of the main problems. We can build a database to share information. We can help to share best practices and bring the national money laundering authorities together in a new committee. In that sense, the new skills help.

Is that enough to end the fragmentation of money laundering rules?
No. For a money laundering regulation would be necessary, which is legally binding under national law. The current rules are based on guidelines with fairly general principles. That leaves room for national deviations. In particular, the money laundering directive is very principle-based and leaves a lot of leeway.

Would you prefer a regulation?
More regulation would be helpful. But we should not forget that money laundering is based on a crime that needs to be prosecuted by the police and the judiciary. This criminal aspect is and remains very, very local. National intelligence agencies are equally active in this field and by definition do not want to share all their information. It is therefore unrealistic to call for the creation of a large European money laundering authority with similar powers to the ECB in banking supervision.

Next year stress tests will again take place, which some criticize as unhelpful. How do you want to improve the stress tests?
First of all, we should not forget that these stress tests were incredibly helpful in creating more transparency for the markets. But it is true that banks and supervisors are not completely satisfied. One problem is that we use a very similar methodology that is not very flexible. Therefore, it does not take into account specific features of a bank. Therefore, we are thinking about easing this part a bit and giving banks the opportunity to point out specifics. At the same time, this must be made transparent to investors.

The banks also complain about the cost of the stress test.
The stress test is very costly because it binds many resources to banks and oversight. Not only does it cost money, it also strains the bank's relationship with its overseer, as this process can quickly become confrontational. A system in which banks can explain their specificities could be relieved. We want to make the stress tests cheaper and easier to handle for all sides.

Is the mass of data a problem?
The regulatory burdens have grown since the financial crisis. Banks must follow the rules. But we have to make it easier for them to report that they meet the requirements. We are currently conducting a feasibility study for an integrated reporting scheme. The aim is that banks do not have to report the same or very similar data several times to different authorities. We talk to national supervisors, the ECB and other central banks that need information from banks. We hope that we can optimize the number of data queries. Another option is that banks give us access to their systems. This concept is being tested by German financial supervisor Bafin.

Recently, the Eba Executive Director Adam Farkas moved directly to the Lobby Association Afme. Does Eba need stricter governance rules?
We have not made the rules for Eba management and can not change them – that's the responsibility of the European legislator. The only thing we can do is to be transparent and show what rules we apply. Adam is not allowed to contact Eba staff for two years, and he is not allowed to participate in Afme discussions for the next 18 months on topics he has worked on in recent years.

You can hardly verify that.
My ability to enforce these rules is indeed low.

Are there sanctions if Adam Farkas does not comply?
The rules for EU employees allow disciplinary action against former employees: If he does not behave according to the rules, one could cut his pension.

Does not it need stricter rules, such as a cooling phase?
There is room for improvement. But one should not forget that the tenure of the Eba tip is limited to a maximum of ten years. Afterwards one can forbid nobody to earn a living. According to the current rules, you can only restrict the field of activity for a while. If you introduce a cooling-off phase for former Eba executives, you have to pay them a basic salary. That could be a solution, but currently we have no budget for it.

How do you rate your own conflict of interest? They came from Santander to the Eba.
It is a similar situation. But the conflicts of interest are named, and it's public how they deal with them. I had to sell all the financial holdings to Santander. And I can not take part in any decision, such as sanctions, when it comes to Santander. In general, I believe that the exchange between the financial sector and the public sector is good. I am against silo structures.

Mr. Campa, thank you for the interview.

More: Banking regulation in Europe threatens the economy, believe the Handelsblatt guest authors Laurent Mignon and Hans-Walter Peters.

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