Europe's Top Bank Regulator 'The Crisis Has Reached a Systemic Level'

A stress test performed on European banks last week found a capital shortfall of some 115 billion euros. In a SPIEGEL interview, European Banking Authority head Andrea Enria defends the decision to perform the stress test and discusses the huge challenges facing the European banking sector.

Some European banks may ultimately need state help to meet new capital ratio requirements.

Some European banks may ultimately need state help to meet new capital ratio requirements.

SPIEGEL: Mr. Enria, the European Banking Authority was established with the aim of stabilizing the banking system. Has that plan worked out?

Andrea Enria: It is far too early to say. We started in January, in a very difficult market environment. It is like we are building our house and living in it, while outside there is a storm. But there are some very positive indications: One of the major shortcomings before the establishment of the EBA was the inability to decide and coordinate policy actions within the European Union. Already in the first months of its activity, the EBA has shown that this is different now.

SPIEGEL: At the moment it looks like the European banking system is more fragile than ever. What went wrong?

Enria: The banking sector has made major efforts to strengthen since the collapse of Lehman Brothers. But now the sovereign debt crisis is putting a lot of pressure on bank funding, especially in countries under stress. Since July, only a few banks have been able to finance their operations, and only at very high prices. If banks don't have funding, they don't lend, and this affects the real economy. We are locked in a vicious circle and we must try to break it.

SPIEGEL: Yet last week's stress test and the new capital requirements seem to have destabilized the situation even further.

Enria: The problem is that everybody seems to look at the exercise as a sort of beauty contest: Are German banks better than Italian banks or the British ones? But that is not the point. We have to look at what is needed for the European banking sector. We have to put enough capital into European banks to make sure they can withstand shock and continue supporting the economy. The crisis has reached a systemic level. This is not about finger-pointing at weak banks.

SPIEGEL: German banks are complaining about how it has been done. They say your actions have been chaotic and that criteria have been continuously changed.

Enria: To some extent, I can understand the complaints of banks about us creating uncertainty and changing the rules, but this is necessitated by the need to ensure a level playing field. Every time we start an exercise, we realise how diverse the regulatory environments are. So we have to adjust as we move along, giving instructions that are the same for each bank in the European Union.

SPIEGEL: Is it asking too much of you and your small team to regulate the European banking system?

Enria: It is very difficult. But the European system for financial supervision is the EBA and the national supervisors. We do not have to supervise the whole system on our own. Our mandate is to make sure that the authorities work together in a coordinated way.

SPIEGEL: The head of CONSOB, the Italian securities and exchange commission, has accused you of acting like Iran's autocratic Ayatollah Khomeini.

Enria: Despite all these reports about quarrels, cooperation with national authorities is very good. But in September, there was a fundamental change: the crisis got worse. And during a crisis there is a natural reaction to erect national barriers. Governments concentrate more on protecting their national banks, there is too much uncoordinated action.

SPIEGEL: The results for the German banking sector were shocking: Your calculations for capital requirements in Germany grew from €5 billion to €13.5 billion. Is the German banking system really that weak?

Enria: High figures don't necessarily mean that the banks are in bad shape.

SPIEGEL: But that is exactly how such numbers are interpreted.

Enria: Regarding the most difficult problem for banks -- the problem of funding -- German banks are better off than others. This does not mean they are out of the storm. They also need to strengthen their capital.

SPIEGEL: Politicians, supervisors and bankers have accused you of sticking obstinately to formalities. For example Helaba and NordLB both failed the test because they missed your deadline with some of their agreements.

Enria: My understanding is that NordLB and Helaba have not yet completed today the process to convert or strengthen their silent participations. The first deadline was the end of April, but the conversion didn't happen. Then a new date was set, the first of December. But BaFin (eds. note: Germany 's financial regulatory authority) informed us that neither bank would meet this deadline either. Once we have all the necessary documents, they will be assessed by a group of supervisors, not only by the bad boys in London. This procedure is the only way to ensure that there is consistency in the single market.

SPIEGEL: As things stand now, banks have to find billions in fresh capital by the end of June, despite the markets being practically frozen. Why such an extreme timetable?

Enria: There are major risks in the EU financial markets that can materialize any day. We simply cannot wait any longer to prepare banks for this.

SPIEGEL: But you may be forcing many banks to ask for public money.

Enria: There are other ways to raise the capital ratio: Banks can issue new equity...

SPIEGEL: ...which no one will buy.

Enria: ...and they can retain earnings...

SPIEGEL: ...which won't be too high in a difficult year like 2011.

Enria: The first half of the year was not bad. But still there are other ways, like issuing contingent capital or selling lines of business.

SPIEGEL: Banks like Commerzbank have made clear that they are going to downsize their business and their credit portfolios. Are you choking off the economy by sharpening capital requirements?

Enria: We are not allowing banks to reduce lending.

SPIEGEL: You can hardly forbid them from doing so.

Enria: Certainly not, we are not the Big Brother. But banks have to present plans to national supervisors explaining how they want to fill the gap we have detected. The shortfall is a fixed figure and can be filled by selling a line of business or a subsidiary; but if a bank shrinks lending to small and middle-sized enterprises, for instance, this will not be counted toward achieving our target.

SPIEGEL: Is it possible to sell credit-portfolios to hedge funds for example?

Enria: Yes, because if you sell something to another financial institution, the credit is still there...

SPIEGEL: ...but you are not making the financial system any safer. Risks are only being shuffled around.

Enria: We have to make the banks safer. This is a clear political decision coming from the European Council and the G-20. Banks need to have more capital and less debt. Anyway you always have to look at the whole package: Once there is a solution for the sovereign debt crisis, banks will be better off.

SPIEGEL: Public outrage directed against the banking industry is on the rise. Have bankers learned any lessons from this crisis?

Enria: Banks are changing their behavior and their business models much more significantly than is publicly acknowledged. I have the opposite concern at the moment: The problem we may have now is that banks are becoming far too risk averse. This can lead to a severe credit crunch in the end.

Interview conducted by Martin Hesse and Anne Seith


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