Buch says No to Deregulation

Claudia Buch rejects any trade-off between regulatory standards and growth

Draghi goes for growth

Mario Draghi - again - dominated EU policy discussions last week. On 9 September the former ECB President and Italian Prime Minister released his report on the future of European competitiveness. The 300 plus-page report offers a competitiveness strategy for the EU, and calls for Europe to 'radically change' its approach and take ambitious steps to invest in new infrastructure, integrate European markets, and promote innovation and growth. Draghi's recommendations are expected to be central to the new European Commission's policy agenda, and were welcomed by re-elected EC President Ursula von der Leyen.

Most of the media attention has so far focused on Draghi's call for up to €800 billion of additional investment in sustainable energy systems, digital technology and European defence. In particular, his endorsement of joint European borrowing has touched off a heated debate about how that investment should be financed.

Less prominently discussed, however, are Draghi's proposals for the European banking sector. Draghi noted that EU banks are consistently less profitable than their US counterparts. As profitability correlates with financing capacity, this limits European banks' ability to finance major investments. Lower profitability is in part due to smaller scale (a product of Europe's fragmented financial market) and in part the product of higher regulatory compliance costs. To increase the financing capacity of the banking sector, Draghi therefore recommended that the EU “assess whether the current prudential regulation ... is adequate to have a strong and international [sic] competitive banking system in the EU.”

Buch says no lighter touch

Draghi's recommendation has certainly been noticed at the ECB. On 12 September Claudia Buch used a speech in Budapest to reject any softening of bank regulation or supervision (though without mentioning Draghi by name). A stable banking system, the ECB Supervisory Board Chair argued, is a prerequisite for growth. In contrast with Draghi, Buch emphasised capital over profits: better capitalised banks, she said, are more resilient and so more able to take risks and lend to the real economy.

As for the comparison with the US, Buch cited ECB research showing that current European capital standards are not higher than those in the US. Indeed the largest European banks (the G-SIBs) would face higher capital requirements if they were located in the US - though for medium and smaller banks, US capital requirements would be lower. (And Buch would no doubt have reminded anyone arguing in favour of US standards for banks in this category that 18 months ago a group of mid-sized US banks spectacularly collapsed.)

To hammer home her point, Buch also pointed to impact assessments by the Basel Committee, the Financial Stability Board and the European Banking Authority as well as ECB research on the economic consequences of tougher regulation and supervision. These, she said show little evidence that higher capital and other standards harm lending and growth. Deregulation and lighter-touch supervision therefore risk undermining financial stability without any significant economic benefit.

Nobody's perfect

As ECB President Mario Draghi supposedly nicknamed Bundesbank head Jens Weidmann "Nein-zu-allem" - "no to everything" - for his relentless opposition to unconventional policy measures in response to the Eurozone crisis. Buch, who served as Weidmann's deputy for several years, avoided striking a purely negative tone. In her Budapest speech, she acknowledged that the ECB can always improve its supervision. She therefore mentioned the reforms to the Supervisory Review and Evaluation Process (SREP) that she announced in May. These changes, Buch said, would make ECB supervision less complex, more effective, more efficient - and more intrusive. A lighter touch is not part of the ECB's blueprint.

Scanning the broader horizon, Buch argued that to promote European competitiveness and growth policymakers should focus on tackling the root causes of low productivity. This should be done through policies to promote innovation and to deepen the EU Single Market - including by making progress toward a more integrated European banking and capital market. ECB Banking Supervision, meanwhile, was already making its contribution by ensuring the stability of the banking system. This should not be endangered or undermined: for Buch there can be no compromise on resilience.