The eurozone’s new banking watchdog has begun to bare its teeth, investigating for the first time three “significant” lenders across the currency bloc for breaching EU law.
A total of 11 alleged breaches had been reported to the European Central Bank’s Single Supervisory Mechanism in the past four months, with three “appropriate for follow-up”, according to the watchdog’s first annual report published on Tuesday.
The SSM, set up in 2013, has never yet sanctioned a company or launched enforcement proceedings, but has expressed a desire to be tougher and more intrusive. It has the power to fine companies for misconduct and it can demand lenders put away more capital to mitigate against risk. Fines can be as high as 10 per cent of annual turnover.
“This paints a picture of the SSM as a full-scale regulator that has appropriate teeth,” said Gerald Podobnik, head of capital solutions at Deutsche Bank.
No details of the breaches were given, although the SSM — which checks the safety and soundness of 123 banks across the eurozone — said the remaining eight reports related to alleged breaches of national rather than ECB rules.
The ECB declined to comment further.
The report on the SSM’s first full year of operations since it took over supervisory duties from national regulators last year forms an expression of intent for the new banking supervisor. It put lenders on notice that leveraged corporate loans — particularly those issued by banks in countries hit hardest by the euro crisis — would come under particular scrutiny in 2015, with the supervisor examining how corporate defaults are managed by lenders, according to Tuesday’s report.
The SSM has sweeping powers that focus not only on how sound lenders’ balance sheets are but also on issues such as risk management and who sits on their boards.
The SSM will also make harmonisation of rules across the eurozone a priority over the next 12 months, according to the report, focusing on discrepancies that allow banks to define capital in different ways. Danièle Nouy, who heads the SSM, told the Financial Times in February that this drive could lead some of the eurozone’s biggest banks to raise more capital.
The SSM will examine banks’ internal models and how they define risk-weighted assets, the report says. This is important because such assets are used to calculate banks’ capital ratios. Regulators around the world suspect that banks can play the system by using their own approaches to measuring risk, and work is being undertaken at a global level by the Basel Committee on Banking Supervision to try to iron out these differences.
“If Basel and the SSM change the rationale for how risk-weighted assets are calculated, this could have a meaningful impact on the European banking sector,” said Mr Podobnik.