Defensive celebration

Away from political dramas, ECB leaders warn against complacency on the SSM's 10th anniversary

The news this week has of course been dominated by the US elections. The implications for Europe of Donald Trump's victory will be enormous. How a new Trump Administration's policies impact Europe - and how Europe responds - will surely be one of the most closely-followed stories of the years to come.

Meanwhile Europe's reaction to Trump's return to the White House may in turn be shaped by this week's biggest European political drama: the collapse of the German ‘traffic light coalition’ coalition of Chancellor Olaf Scholz. In virtually all areas of policy we look set for a period of great uncertainty and fluidity.

Congratulations...

Amid all this political drama, it was perhaps easy to overlook another story of the week: the 10th anniversary of the start of European banking supervision. On 4th November 2014, the European Central Bank took over direct supervision of the 100-odd largest European banks (designated ‘significant institutions’) under the EU Single Supervisory Mechanism (SSM). The anniversary was marked with a flurry of speeches from ECB leaders, including at a special conference in Frankfurt on 6 November.

In two keynote speeches, Claudia Buch and Frank Elderson both struck a tone of defensive celebration. They first hailed the achievements of the SSM in its first decade. The SSM has established itself as a credible and respected supervisor, drawing in expertise from across Europe. It has successfully harmonised - and toughened - supervision of the most important European banks. Thanks to this (as well as better risk management by firms and support from fiscal and monetary policy), European banks have become much stronger. Since 2014, capital and liquidity ratios have risen and non-performing loans have been reduced. This resilience allowed banks to come through an unprecedented series of crises over recent years: the Covid-19 pandemic, the Russian invasion of Ukraine and the worst energy shock in 50 years.

...but don't relax

This record, they argued, should be a source of pride - but not complacency. While banks are strong, they face an external environment that is complex and volatile, marked by several new and emerging risks. Geopolitical conflicts threaten global trade and economic integration. Cyber attacks grow in number and sophistication. And climate change poses both increasingly severe risks to banks' current businesses and the challenge of adapting to the zero-carbon transition. Banks, they warned, must ensure they remain resilient in this uncertain and dangerous world.

Buch and Elderson also had a warning for policymakers. As memories of the great financial crisis fade, the temptation might grow to relax bank regulation and supervision in the hope of promoting economic growth and competitiveness. They named no names, but as I wrote before, this seemed a clear reference to Mario Draghi's recommendation that the EU reassess its prudential standards to ensure European banks are sufficiently able to finance future investment. Once again, Buch and Elderson flatly rejected this suggestion as wrong and dangerous: financial stability is a prerequisite for growth, they intoned, and it is well-capitalised banks that are best able to lend to the real economy. Loosening regulatory standards would not help the economy but imperil it.

On message

It's hardly surprising to hear supervisors making the case for maintaining tough regulation. (A message Buch repeated again this week in a written statement to the Eurogroup for good measure.) Nonetheless the message discipline at the top of ECB banking supervision is striking. The argument against deregulation in Buch's and Elderson's remarks were virtually identical in both logic and language: and entirely aligned with Buch's Budapest speech in September, when she first responded to the Draghi report. (Buch's line was also dutifully echoed by Elizabeth McCaul in October.) Similarly consistent was their list of external risks facing banks - with geopolitical risk heading the list. As I wrote previously, the importance of managing geopolitical risk has been a personal priority of Buch's since her nomination as SSM Chair. Earlier this autumn she gave a major speech on the importance of geopolitical risk - a point that was duly repeated by both Elderson and McCaul in the following weeks.

Buch has thus been strikingly successful in getting the SSM leadership to adopt her policy priorities. This was not a given when she took office: after a bruising confirmation process in which her limited experience in supervision was highlighted, there were those (including within the ECB) who questioned whether Buch would be able to command the respect of the organisation she was now to lead. But it now seems that, at least at the executive level, she has effectively imposed her agenda. The next question is how far that translates into change at the level of day-to-day supervision: for example, how far the SREP reforms Buch announced in May (and that she, Elderson and other Board members have repeatedly highlighted since then) will change how Joint Supervisory Teams (JSTs) operate in practice.

Integration and Mergers

Another implication of Buch's ability to set the agenda is that confirms a shift in emphasis from ECB banking supervision on the issue of European financial integration. At the end of his tenure as Chair, Buch’s predecessor Andrea Enria lamented the non-emergence of pan-European cross-border banks as a “missed achievement” of European financial integration. Enria sought ways to overcome barriers to cross-border consolidation and urged banks to make use of their ability to establish branches throughout the Euro area. Buch by contrast has been much more cautious, emphasising the potential downsides of cross-border mergers.

Right now, of course, the topic is highly sensitive given the potential UniCredit takeover of Commerzbank. Pressed in an interview this week on whether the ECB supported a merger, Buch was studiously neutral. She emphasised the ECB's mandate to consider any takeover from a purely prudential perspective, and for good measure noted that not all mergers deliver the promised synergy benefits and that bigger banks are not necessarily stronger or safer. So at the SSM anniversary event it was left to ECB President Christine Lagarde (who does not take part in day-to-day supervisory decisions) to advocate for greater integration and the development of “genuine European banking groups”.

Defensive posture

The ECB thus seems to enter its second decade as a banking supervisor in a rather defensive mood. Buch and her leadership team celebrate the achievements of the past 10 years. Looking ahead, though, their narrative prioritises protecting and preserving those achievements over using them as the starting point to move forward to the next endeavour. In the face of many challenges and great uncertainty, the ECB seems to feel it will need all its energy to maintain the status quo.