It’s not always honorable to be at the front. The Landesbank Hessen-Thüringen (Helaba) was allowed to experience this because it had to as the first German bank pay a fine to the ECB Banking Supervision. The reason for the sanction: From 2020 onwards, the state bank “consciously” ignored the price turbulence when the Corona crisis broke out when assessing its balance sheet risks and subsequently “knowingly” supplied incorrect figures to the supervisors.
The punishment is a manageable 6.8 million euros, but on a scale from one (minor serious) to five (extremely serious), the ECB still rates the violation at three (severe). In its eight-year history, ECB supervision has only imposed 15 sanctions on major European banks. So it is not a trifle. That would be even nicer, since there are allegations of willful concealment of banking risks, which Helaba denies. At no time was a breach of obligations intended.
The ECB monitors 125 major banks in the monetary union, and the inspectors often discover flaw after flaw. In the rarest of cases, this is followed by a sanction. Regulatory teams often give banks a deadline to resolve the issue. But the question still remains: why do credit institutions violate the rules so often? Is it sloppiness or on purpose? Or both?
Andrea Enria, the head of ECB banking supervision who is to leave next year, has recently attempted an explanation that is rarely mentioned in the public debate: it is about the professional suitability of bank executives and supervisory boards.
Andrea Enria, Head of ECB Banking Supervision, complains that board members are often not sufficiently qualified for the job.
(Photo: Afolabi Sotunde/Reuters)
In more than half of all banks in Europe, the supervisory authorities had to intervene in the selection of top staff last year, i.e. the candidates did not have the necessary know-how and had to do further work. In addition, Enria complained that many bankers did not have sufficient IT knowledge. As a result, institutes are not always able to obtain the necessary data to measure balance sheet risks. Perhaps the most important point: Enria is also bothered by the fact that decisions are rarely questioned: “The debates in the management floors should be more controversial in order to lay the foundation for better decisions,” he warned when presenting the results of the annual bank audit.
In addition, supervisory boards, which are supposed to control the boardrooms of banks, are often not independent enough and do not always do their job adequately. In many European banks there is a lack of strategic control and effective leadership. A pretty harsh judgment for someone who has been watching over the European banking sector for years.
In fact, the supervisor sits at the table when it comes to the question of how good the board members are. Anyone who has risen to the management of a bank has comparatively much power, but also great responsibility: Managers who fail can drive a financial institution into bankruptcy and thus cause great economic damage. Prospective bank directors must therefore present themselves to the financial supervisory authority and have the promotion approved. You have to prove all sorts of things, above all sufficient experience in lending, unlike bosses of industrial companies, for whom there are no such rules. The larger the bank, the more important the check, which can take months.
102 board candidates withdrew
A current example is provided by Commerzbank, where the Appointment of the designated Chief Risk Officer according to SZ information, it takes an unusually long time. According to the Commerzbank supervisory board, it has “no doubts about the suitability of the proposed successor”. And according to reports, the test should “go well” and be completed by March. The banking supervisor at the ECB, however, apparently does not want to be pushed and beforehand wants to find out exactly what role the manager played in Commerzbank’s loss-making lending to Wirecard.
After all, there is always criticism that it is the supervision that does not examine the candidates well enough. Three years ago, the ECB tightened the suitability test again and also called for more uniform rules in Europe. The main problem was that in some EU countries there are bank executives in office who have been involved in endless court proceedings for years.
Did it do anything? The latest figures show that since it was founded in 2014, the authority has checked around 20,000 people by 2022 to determine whether they have the necessary suitability for a position on the board of directors or the supervisory board of a bank. On request, the ECB would not say how many official rejections there were. From 2019 onwards – when the number was first published – there have been 102 people who “voluntarily” withdrew from the application process because they had received the appropriate signals from the ECB. In 2021 alone there were 52 people. This could indicate that the ECB is now taking more action. But the supervisor is apparently still not satisfied, otherwise Enria would not have expressed such sharp criticism.
Perhaps that is also a reason why the ECB now wants to examine the bonus practices of the banks again, as the supervisors wrote in their newsletter this week. The agency is still – or has been – criticizing the wrong financial incentives for bankers: according to the supervisors, the remuneration structures are too often based on earnings – and not on the risks that are taken.