ECB concerned by impact of draft German law on supervision

A draft German law could hamper the European Central Bank's (ECB) ability to establish a "consistent, harmonised and effective" approach to banking supervision, the ECB said today (September 8).

It published its opinion on proposed changes to national banking resolution practices in Germany, finding much to agree with, but also raising concerns over its impact on the wider supervisory landscape.

One facet of the draft law, the ECB said, empowers the Federal Ministry of Finance to issue regulations relating to "the internal governance, risk management, outsourcing and recovery plans of credit institutions".

The ECB is concerned about the outcome of this, warning against any "binding national prudential legislation that leads to fragmentation of the prudential rules" across countries.

Fragmentation would, it said, impose and "additional burden" both on the single supervisory mechanism (SSM) and the banking groups, while also upsetting the competitive balance between countries.

It could also impact the ECB's ability to exercise supervisory discretion. Specifically, that it could hinder the central bank's ability to incorporate guidelines from the European Banking Authority (EBA) into its practices.

"Member States should refrain from setting obstacles both to uniform supervisory practice and to the exercise of supervisory discretion by the ECB within the SSM," it said.

The ECB met other aspects of the draft law, which is principally designed to align German practices with European rules, with approval, including the statutory subordination of "certain senior unsecured debt instruments" in insolvency proceedings.

The change is, it said, expected to "facilitate resolution action" including the use of bail-in powers. "Such statutory subordination is therefore expected to improve the resolvability of credit institutions under the Union resolution regime and enhance market discipline," the ECB said.

It also welcomed a provision that will allow contributions to the German resolution fund between 2011 and 2014 to be used as an "alternative funding measure" for German banks, until the Single Resolution Fund becomes operational.