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Little banks fear ECB supervision

Monday, September 17 14:36:19

Savings bank Sparkasse Bad Sachsa, run by 46 staff in a small spa town at the foot of the picturesque Harz mountain range in western Germany, will next year come under the supervision of Europe's central bank and it is worried.

It will be one of the smallest of 6,000 banks policed by the European Central Bank (ECB) under ground-breaking European Union plans for a banking union unveiled last week.

"We fear that the regional approach that we have here - we do not have RoE (return on equity) targets of 20-25 percent but seek to book small profits to keep our business alive - will no longer be accepted," board member Ralf Mueller said.

"Regulators unfamiliar with the regional situation will say: this bank has too small earnings and will put us into a bucket with other lenders, which have real problems." Bad Sachsa's reservations lay bare the argument between Berlin and Brussels about how far and deep the banking union should stretch.

"Purely in practical terms it seems impossible for the ECB to monitor 6,000 banks appropriately," German Finance Minister Wolfgang Schaeuble said after European Commission President Jose Manuel Barroso unveiled Brussels' plan last week.

But if they cannot find common ground, a central plank in resolving the region's debt crisis will have been pulled away.

"It has to happen," said Chris Wheeler, analyst at Mediobanca in London. "Without banking union you don't get European union ... it's an essential part of monetary and fiscal union." About 500 miles south, Genoa-based lender Banca Carige , formed more than 500 years ago as a pawnbroker by a Franciscan monk, is under pressure to strengthen its capital to reach the standards laid out for Europe's big banks.

Under the new model it could be told to find cash by the new supervisors in Frankfurt, who will have the clout to police, penalise and even close banks, and will also monitor their liquidity and can demand they hold more capital.

With core capital ratio of just 6.7 percent of assets, Carige falls short of the 9 percent level its bigger rivals have been told they must hold, although it says it will reach that target by year-end thanks to a reorganisation of its structure.

With more than 1,000 branches nationally and holding a fifth of the market in the wealthy northwestern Liguria region, Carige is one of the mid-sized banks that have not been a priority for regulators during the financial crisis but has become stretched as recession has deepened.

It took 7 billion euros of cheap ECB loans to offset higher funding costs and analysts reckon it needs to bolster its capital to comply with tougher global capital rules that are phased in from next year. Its weak capital base has already seen its credit rating cut.

It and other mid-sized banks could prove an early test of how quickly and aggressively the ECB acts in its new role as the policeman of all euro zone banks. Carige said it welcomed the new structure as long as it created more consistency in supervision across the single currency bloc.

"The principle is right. They must be very careful with the implementation to make sure the same rules apply in all the countries, which is not the case today," Carige's director general Ennio La Monica told Reuters.

He said Carige's capital strengthening plan had already received an informal nod by the Bank of Italy, so the bank had nothing to fear from the ECB.

"I am convinced that the Bank of Italy is one of the most stringent regulators, so I am not afraid of European supervision. In Germany or France, for example, the rules on risk-weighted assets are looser," he said. (C ) Reuters