Andreas Dombret: German banks can still do more to cut costs
Interview published in "Handelsblatt", title: "Things are still too bureaucratic"
Interview with Andreas Dombret conducted by Kröner and Daniel Schäfer.
Mr Dombret, you were a member of the Bundesbank’s Executive Board for eight years. What would you say were your greatest successes?
I would say that setting up the Single Supervisory Mechanism (SSM) and introducing global capital rules – that is to say, Basel III – were important milestones. Together with BaFin, we thoroughly analysed the topic of Brexit, too. In addition, I pushed hard for proportionality in banking regulation and supervision, for instance, as well as encouraging climate risk to be taken into account in banks’ balance sheets.
And what were your greatest disappointments and defeats?
Probably the watering down of the euro area rules and the blurring of the boundaries between monetary and fiscal policy in the wake of the crisis. I joined the Executive Board on Monday 3 May 2010. The very next weekend, the first rescue package had to be agreed, and on 10 May, the Governing Council of the ECB announced a government bond purchase programme which to this day I consider questionable. A large number of compromises were made in Europe – although they stabilised the situation in the short term, they created new problems for the euro area in the medium to long term.
And aside from monetary policy?
In the area of banking supervision, I set out to achieve three things that remain unresolved. First, I wanted to contribute to the harmonisation of accounting standards. Sadly, the International Financial Reporting Standards (IFRS) and the US GAAP rules are further apart today than they were eight years ago. Second, within Germany and with the help of a few institutions, I wanted to simulate the effects of a cyber attack, but that is not part of the Bundesbank’s mandate. And third, banks are still not required to hold any capital against the government bonds they buy. Although this issue is still the subject of international debate, it is far from being resolved in what I would consider a satisfactory manner from Germany’s perspective.
Is that also true for the Single Supervisory Mechanism?
Although the SSM was established at very short notice, it was nonetheless a boon for banking supervisors in Europe from day one. All things considered, cooperation between the authorities involved is good. Given the rapid pace of developments, we took a diplomatic and flexible approach to problems in the first two years. Nowadays, we discuss any issues openly and constructively.
What bothers you the most?
Things are still too bureaucratic because most decisions involve 19 countries at once, and sometimes two supervisory authorities. Certain routine decisions, such as suitability checks for bank board members, should not still have to go through the Supervisory Board and the Governing Council of the ECB. That’s why the ECB should, wherever legally possible, delegate far more decisions to the national supervisory authorities, thus becoming more effective.
Where do you still see problems in day-to-day supervisory tasks?
We need to keep improving on-site inspections at banks. We actually wanted to take a much more international approach to our prudential inspections. For instance, examiners from the Bundesbank were supposed to inspect institutions in Spain, which are subject to Spanish law, the French supervisory authorities were supposed to inspect German banks according to German law, and so on. Apart from that, we had intended to mix the teams up much more. A large number of country-specific rules still need to be harmonised if this is to be possible on a larger scale.
Criticism has recently been voiced over the winding-up of the Latvian bank ABLV. Although it was supervised by the European authorities, crucial indications of suspected money laundering came from the US authorities.
This example brought it home to all of us that, up to now, European banking supervisors have not had any authority in the area of anti-money laundering. I believe that legislators should step in here and grant the SSM additional powers. Unfortunately, at the moment, we are all too often lagging behind on issues such as this. I find it alarming that the US authorities are ahead of us because we simply do not have the necessary information. We don’t really have a clue whether or not banks are sticking to the rules with regard to anti-money laundering provisions.
Should we fundamentally question the European supervisory system and separate monetary policy from banking supervision?
Absolutely! It would be much better in the medium term if banking supervision and monetary policy were separated, thus avoiding potential conflicts of interest. Although things might be slightly less efficient, both institutions would be far more independent.
So should the ECB’s banking supervision be moved to the European Banking Authority (EBA)?
I think that having both authorities under one roof – separate from the ECB – would be a very sensible arrangement. There’s no urgent need to address this topic directly, but we must not forget the idea altogether.
Germany’s large banks are falling further and further behind, internationally speaking. Most US banks outstrip their German competitors in terms of profit and market capitalisation. As a supervisor, does this make you worried?
Germany’s banking industry is not made up exclusively of big banks; it contains a large number of institutions, many of which have very different business models. This diversity clearly contributes to the strength of the German banking system. And by international standards, German banks do not score badly in terms of soundness. Over the last ten years, they have actually doubled their capital ratios to over 16% on average.
But looking at the profit figures, large German banks are lagging far behind their competitors.
When it comes to earnings, there is definitely room for improvement in many cases. The fact that banks in Germany are persistently earning so little – especially in periods in which there is hardly any need for write-downs – should also be cause for concern to supervisors in the medium term. After all, this is limiting institutions’ ability to accumulate capital internally and attract it externally. With regard to the large banks, however, we should bear in mind that not only German institutions, but also many European banks, have fallen behind their US competitors.
How can we reduce the gap?
We are already catching up. Europe’s economies are performing much better, and the forecasts for the next two to three years are also positive. This will provide European banks with a tailwind – even in countries in which there were still strong headwinds until recently. That’s why I would warn against drawing too bleak a picture of the situation today without taking account of the outlook for tomorrow.
What can German banks do by themselves to become more profitable?
Banks and savings banks can still do more to cut costs, especially through digitalisation. Although they are still having to invest in this area at the moment, it will save them a large amount of money in the future. Second, banks can lower their costs through mergers. There is certainly a willingness to do this. Our last low-interest-rate survey revealed that one in two German institutions could envisage a merger in the next five years. And third, the future normalisation of monetary policy will offer German banks and savings banks the chance to improve their figures further.
Could a merger also be the solution to the problems of Germany’s big banks?
That’s a private sector decision for the institutions in question to make. Supervisors only become involved once proposals for a merger are on the table. We then have to take a critical look at whether the merged institution is more stable and whether it has the right corporate governance.
The ECB is more forthcoming on the matter and is openly calling for cross-border mergers, too.
As I see it, supervisors should take a completely neutral stance. Although international mergers are logical in a common currency area, national mergers generally make more sense from a business perspective. Experience has shown that, as a rule, they can create significantly larger cost savings than cross-border mergers.
You worked as an investment banker for many years. What future do you see for trading, an area in which many European banks are now failing to make adequate returns?
There are definitely overcapacities in this area. Stricter financial rules mean that some transactions are simply no longer worthwhile these days. And a very low level of volatility doesn’t exactly mean that banks can go on generating high returns through trading. So some banks will probably continue to scale back their trading activities.
Does Germany still need a big bank that offers large-scale, global investment banking?
That’s for the market itself to decide. But it is striking how often Germany’s business community stresses that, from its point of view, a large, globally active bank based in Germany is necessary. Of course, an economy that is as strongly export-driven as Germany’s will benefit if bank decisions can be made locally and with good customer knowledge.
Are you worried that, ten years on from the financial crisis, the regulatory pendulum is swinging back in the other direction?
If it did swing back, that would be a serious problem. Regulation has made the banking system much safer and has restored confidence. But I do think that taking a short break from regulation would make sense so that we can see where it is having unintended effects or where it has been taken too far. Not every rule has actually proved to be useful.
These discussions are among the last negotiations you will take part in during your term of office. How long do you intend to take a break for afterwards – a year?
A cooling-off period is indeed required, and I think that’s as it should be. But it’s still too early to say exactly what my time schedule will look like. Many banks have trusted me with their business secrets, which are absolutely safe with me. Not only because of the legal obligations, but also on moral grounds. Whatever I do in future, I will do my very best to avoid conflicts of interest.
Are you at all interested in returning to the financial industry?
I don't know yet. But I won't retire – I will use the mandatory cooling-off period to think things over carefully.
Will you stay in Germany?
I haven’t decided that yet either. I am keeping my options open for the time being. In any case, I have decided not to commit myself to anything in the first six months.
Mr Dombret, thank you very much for talking to us.
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