There is no peace for the EBA, the London-based European Banking Authority, which according to the European accounting judges has collected various shortcomings in the supervision and analysis of the resistance of banks in the 2011 stress tests. , EBA's resources during its start-up phase were not commensurate with the fulfillment of its mandate. Now there is also the risk that, with sole supervision passed to the ECB, due to lack of clarity in the legislation, his functions will overlap with those of Frankfurt. This is the conclusion of a report by the European Court of Auditors, the Union's accounting judiciary.
The European Court of Auditors is particularly harsh on the Abe's 2011 stress tests, the first that the EU carried out in response to the financial crisis: “The EBA's stress test concerned a calculation of the potential capital shortage. The stress test was part of a set of supervisory tools used to assess the resilience of individual institutions, as well as the overall resilience of the system. The test did not include an assessment of the quality of banks' assets or underlying collateral, or a check of banks' liquidity. In short, there were serious methodological shortcomings.
For this reason “they could not identify the problems of those European banks that would later need to be bailed out”. Which? The Court of Auditors lists in detail the "errors" of evaluation and then correctly reports also the contraindications of Abe who explains his position and the difficult situation he found himself facing.
“January 2011: EBA announces 2011 stress test. 15 July 2011: EBA publishes stress test results for 90 banks. Eight banks (five from Spain, two from Greece and one from Austria) fall below the 5% capital threshold. In total, the capital shortfall amounted to 2,5 billion euros. Not much, but instead the situation has evolved differently. The Court of Auditors notes all the stages in detail: “On 10 October 2011: Belgium, France and Luxembourg decide to restructure Dexia and to grant a loan guarantee of up to 90 billion euros. Dexia had been rated in the stress test as one of the safest banks in Europe (ranked 91th out of XNUMX banks)”.
“May 2012: Bankia, the largest real estate holding institution in Spain, is nationalized and calls for a bailout plan of 19 billion euros. It also revises its 2011 income statement, going from an initial profit of €309 million to a loss of €4,3 billion. In the stress test (unfavorable scenario), Bankia's Common Equity Tier 1 ratio would have fallen to 5,4% by the end of 2012, still above the required minimum threshold of 5%. 2012: The Spanish authorities commission a stress test for 14 banking groups, representing 90% of the Spanish banking system. This study predicts that, in an unfavorable scenario, the overall capital requirement will amount to 60 billion euros. It also estimates that over the course of three years, Spanish banks will have cumulatively suffered credit losses of €270 billion.
“Early 2013: SNS Bank (daughter company of SNS Reaal) is nationalized by the Dutch government. The bank had suffered heavy losses in real estate holdings, in particular, in those abroad. In the 2011 stress tests, SNS Bank's core tier 1 capital ratio was 8,4%, well above the required minimum of 5%, and would have decreased to 7% by the end of 2012”.
“End of 2013: The two largest banks in Slovenia – Nova Ljubljanska banka (NLB dd) and Nova Kreditna Banka Maribor (NKBM dd) underwent an asset quality review and stress test. Compared to the assessment carried out by the EBA in 2011 where no capital shortfall was identified, the 2013 exercise led the Slovenian government to recapitalize NLB dd for €1.551 million and NKBM dd for €870 million”. In short, a long series of risk underestimation.
The EBA's response to the European Court of Auditors in Luxembourg was ready: “The EBA firmly believes that it has managed to achieve its objectives within the constraints placed on its regulatory and supervisory powers and functions. It considers that the limitations in protecting financial stability within the EU stem from shortcomings in the institutional model of monetary union, in particular the absence of an integrated supervisory system and a common financial safety net, and not from a failure to fulfill EBA's tasks. These shortcomings are now being addressed by the banking union”.
In more detail, the EBA replies to the findings on the three banks that passed the 2011 stress tests but then had to be bailed out by the governments. “Concerning Dexia: in the context of the stress test carried out in 2011 at EU level, Dexia was rated as one of the safest banks in Europe (ranked 91th out of XNUMX banks), but, before the decision on the participation of the private sector in Greece, the EBA has not been able to reduce its sovereign debt without going against the statements of the EU Council. Nonetheless, the transparency guaranteed by the EBA at the end of the year made it possible to clearly indicate Dexia's sovereign exposures and the weakness of its capital position once these exposures had been valued at market price”.
“Regarding Bankia: in the EU-wide stress test (unfavorable scenario) Bankia's Common Equity Tier 1 capital would have fallen to 5,4% by the end of 2012, still above the minimum required threshold of 5 %. However, the EBA has recommended that banks above but close to the floor also strengthen their capital position. The findings were also based on baseline data that had not been subjected to an asset quality review and therefore did not highlight certain losses discovered later.”
“Relating to SNS Bank: In the EU-wide stress tests, SNS Bank's Common Equity Tier 1 capital was 8,4%, above the required minimum of 5%, and would have fallen to 7% at the end of 2012. However, this level was based on baseline data which had not been subject to an asset quality review and which only came to light two years later, highlighting the need for a rolling stress testing programme. The EBA also notes that the bank was forced to undertake a restructuring beyond the time horizon of the stress test.
The overlaps with the ECB
But the things to improve did not end there. Furthermore, according to the report of the European accounting judges, the EBA lacks the authority to take and enforce decisions on supervisory convergence, a serious lack given that his task is precisely to coordinate the national supervisory authorities. What's more, with day-to-day oversight left to national authorities, the EBA has never had direct access to financial institutions. His activity as coordinator was carried out through the colleges of supervisors with very limited usefulness, as “the colleges spent more time discussing procedures than focusing on risks”.
The EBA lacks the authority to resolve disputes between national supervisors
Another issue raised is the future of the EBA: from autumn 2014 the ECB will have the authority to supervise the banks that join the Banking Union, and the ECB will also pass many of the responsibilities now in the hands of the national authorities. For the Court it is necessary to establish "clearly", in a Memorandum of Understanding, "the roles and responsibilities between the EBA, the ECB and the national Authorities, to avoid the risk of overlapping and unclear tasks". But even in this case, Abe is of a different opinion, stating that more than just a memorandum is needed. “The EBA welcomes this recommendation and believes that memoranda of understanding are not the right tools to clarify the roles and responsibilities between the EBA, the ECB and the relevant national authorities. It also believes that any clarification in this regard can only take place through an amendment at the level of primary legislation".
