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“We need European solutions”

“We need European solutions” Interview published in the Handelsblatt

13.11.2018 | Joachim Wuermeling DE

Interview with Joachim Wuermeling conducted by Yasmin Osman, Andreas Kröner und Michael Maisch.
Translation: Deutsche Bundesbank

The results of this year’s European bank stress test have just been published. German institutions performed fairly poorly. How worried are you about this?

Not at all. In terms of the CET 1 capital ratios they were found to have in the wake of the simulated economic downturn, German banks were in the middle of the pack. But it’s not really possible to compare the results of individual countries. For instance, a more severe recession was simulated for Germany than for other countries.

NordLB and Deutsche Bank – to name just two German institutions – were among the ten weakest banks in Europe. That certainly cannot leave you, in your role as a supervisor, unmoved.

The crisis scenario and the stress test methodology were tough on the eight participating German banks, but these institutions were able to cope well in terms of their capital and risk situation. The fact is, because Germany is a strongly export-oriented country, our performance depends more heavily on the global economy. If it takes a turn for the worse, institutions that do business abroad will be hit harder than others. That’s exactly what the stress test shows. The performance of German banks was average among all the institutions tested, and was far better than in the stress test two years ago.

The results of the stress test influence the Supervisory Review and Evaluation Process (SREP), in which supervisors set capital requirements for individual banks. Are some institutions looking at increases here?

One of the purposes of the stress test is to identify vulnerabilities at individual banks – that is, to reveal risks based on specific economic scenarios. Supervisors take the results of the stress test into account when setting banks’ individual capital requirements.  So yes, there may be capital add-ons. But the stress test isn’t the only factor that determines this.

One of the reasons for German banks’ rather lacklustre performance in the stress test is that their profitability remains low. What would happen if the economy really were to take a distinct turn for the worse?

New regulation and stricter supervision have made the industry much more resilient. This means we can face any potential economic downturn more confidently. But that’s not to say that institutions can sit back and relax. What’s more, banks mustn’t take the currently favourable economic conditions as given; otherwise, there is a danger that a downturn might catch the economy off guard – in terms of credit risk, for instance.

But the competition in lending business in Germany is especially brutal. And that tempts banks to enter the market with aggressive rates, potentially adding tomorrow’s bad loans to their balance sheets.

The competition is certainly fierce, but I wouldn’t call it brutal. We keep a very close eye on developments in lending business and take corrective action if needed. At the moment, we can see that many banks are going to great lengths to improve their profitability – through cost-cutting measures, digitalisation and higher fees. If, on top of this, monetary policy were then to normalise, this could bring about a relatively rapid improvement in the earnings situation.

There has been a lot of talk about consolidation in Germany of late. Would the creation of a super Landesbank, which is under negotiation in the savings banks sector at the moment, make sense?

NordLB, which is currently looking for investors in its equity capital, is being closely monitored by the supervisory authorities throughout this process. The main aim here is to ensure that its capital is strengthened sustainably. If this means a debate about potential options as well as a major solution among the Landesbanken, then so much the better. From a banking supervisory perspective, it is always encouraging to see institutions looking into ways of increasing their resilience and becoming more profitable.

Does Germany also need a large merger when it comes to the retail banks?

As supervisors, we take a neutral stance towards issues like that. It is up to the owners of the institutions to decide whether they want to merge with others. But it goes without saying that markets don’t function in a vacuum. Regulatory frameworks and supervisory practices have a bearing on structural developments. It is therefore the task of supervisors and regulators to design the regulatory framework in such a way that sustainable, healthy structures can develop.

The rising costs of IT and regulation are a clear argument in favour of larger banks.

Size alone is no guarantee of resilience. Quite apart from that, I wouldn’t limit this to being a national debate. I would say we should focus not just on the structure of the banking market in Germany, but also in Europe. After Brexit, the European Union will lose its only global financial centre – London. Against this background, we should think less about the national and more about the global competitiveness of Europe’s financial hubs.

But your colleagues from Germany’s financial supervisor BaFin are a bit sceptical about cross-border bank mergers, since the synergies involved are, for the most part, modest.

Ultimately, market participants themselves must weigh up whether – and if so which – mergers make sense for them. As supervisors, at the end of the day, we are interested in seeing the emergence of robust and efficient institutions. That could mean purely German banks, or European institutions – we don’t have a preference. But pushing ahead with the European capital markets union or, better still, a financial market union, is equally important.


Given today’s global instabilities, we must make sure that Europe’s financial markets can fund Europe’s economy independently. When it comes to funding our economy, our prosperity and our progress, we must not rely primarily on sources outside of our own continent. Especially in the financial sector, we need European solutions if we want to keep up with competitors in Asia and the Americas.

How realistic is it to push ahead with European solutions when individual countries such as Italy are not playing by the common rules?

It does not make sense to use problematic developments in some member states as an excuse to roll back the European project. If every European country retreats into its national shell, we all lose out. We have to find solutions with those countries which are calling into question individual European rules. We have always managed this up until now and should succeed under the current circumstances, too. A further opening-up of the internal market in financial services is the only way to make the European economy less dependent on financial hubs outside the euro area in the long term.

Do you think we also need a European deposit insurance scheme to achieve this?

Germany understandably has reservations about this at the current time. And it is clear that developments like those seen in Italy do not provide extra motivation to push ahead with this project in the near future.

Controversy about the Italian government’s borrowing plans is also putting massive pressure on the banks. Is there a risk of a new banking crisis there with possible spillover effects?

There is no question that a downgrade of the country rating and higher risk premia for Italian government bonds are not exactly beneficial for the recovery of the Italian banking sector. In a pinch, however, market pressure will discourage the responsible players from testing the robustness of the system to the limits.

Apart from all the problems we face at the current time, what are the greatest challenges for banking supervision in the coming years?

Ten years on from the Lehman Brothers collapse, we have implemented the large regulatory programme and significantly improved the resilience of banks. In this sense, the Lehman anniversary marks a turning point from a supervisory viewpoint. Now we have the possibility and the obligation to turn our attention more to forward-looking topics in supervision and regulation again. For me, this mainly means giving banks guidance as they transition into a digital world.

Experience from other industries shows that digitalisation will transform the financial sector. Do you think this will offer more opportunities than risks?

In economic terms, digitalisation is a new stage of innovation that is beneficial for growth. It improves market efficiency, brings together more supply with more demand and facilitates risk transfer. Digitalisation can thus help make the financial system more resilient. However, this desired effect will only come about if the financial sector succeeds in keeping the associated risks in check.

You said that ten years after Lehman the global regulatory agenda has been largely implemented. US President Trump is turning back the clock, though. Is there a danger of a regulatory race to the bottom?

There are no indications of this so far. In all international committees, our US colleagues assure us that they intend to continue to play by the international rulebook. We have taken a very close look at the planned amendments in the United States and established that they are still in line with the global standards agreed upon by the member countries of the Basel Committee. The United States has initially far exceeded the minimum standards in some cases. It is now reducing “gold plating” again to the minimum standard. In this way, the United States is making greater use than before of the option to only apply international minimum standards to globally important banks. By contrast, in the EU all banks are subject to the rules for competitive equality reasons.

Was that a good idea on the part of the EU?

It does have its merits because we have a European single market in which there is fierce competition between large, medium-sized and small banks. In order to create the same competitive conditions for all competitors, it makes sense that all have to comply with the same standards.

But why is competitive equity between large and small banks more important in the EU than in the USA?

Our banking system is more disaggregated, particularly here in Germany, with a large number of savings banks, cooperative banks and smaller private banks. The markets are more segmented in the USA. Here in Germany, there is a higher degree of competition between large and small institutions than on the other side of the Atlantic. If, for example, here in Frankfurt, the Commerzbank and the Frankfurter Volksbank are competing for the same customers, then it would be unfair for the Commerzbank if it were the only one for whom the stricter rules were applicable.

Some German banks are casting envious glances in the direction of the United States and would also like to review whether some of the new rules might not be superfluous. What do you make of this debate?

We are having this debate here, too. The Bundesbank is involved in a thorough examination of the rules at the national, European and international levels. After the financial crisis, we tightened regulation for the larger international institutions. In this actually quite sensible framework, it is conceivable that relief could be granted to small and medium-sized banks where certain risks do not even exist. Our intention is to reduce the administrative burden for small institutions, for example with reporting requirements. In the context of the ongoing European legislative procedure, we have already taken one major step forward. However, there is still scope for further relief which in no way would compromise the stability of the financial system. The capital and liquidity requirements must of course still apply to all institutions.

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