The December 13 agreement outlining the terms under which the European Central Bank will assume direct supervision of up to 200 eurozone banks raised as many questions as it answered.
There has always been a sense that European banking union, while desirable, is being rushed, running the risk of unintended consequences.
|Piet Moerland, chairman and chief executive of the Rabobank Group|
"Eventually, we need eurozone banking union," he says. "The integration of the eurozone is a good objective and banking union is the cornerstone of monetary and fiscal union. But it is a long way to get to that."
The single supervisory mechanism that is now on the table will give the ECB direct responsibility for banks with assets of more than €30 billion. Between 150 and 200 European banks fall into this category. German lobbying to exclude smaller banks from the deal has paid fruit: the Bundesbank will remain in charge of most of its large retail and savings banking network.
The ECB will have the ability to overrule a national regulator in extreme circumstances, but the proposals suggest a two-tier regulatory environment for banks within the union.
"Before you can have banking union, you need to have a level playing field in pan-European supervision," Moerland warns. "Banking union can only be undertaken responsibly when all banks are Basle III-proof. They have to have strong buffers and be completely healthy and sound. Otherwise, you are just filling holes in some banks by weakening other banks.
"It will be another three years before you can responsibly take further steps towards the mutualization of the system. There are banks that need until 2018 to recover their buffers."
Moerland is justifiably proud of his bank’s standing in the bank funding market, pointing out that its recent €1.5 billion dual-tranche tier 2 subordinated issuance attracted €8 billion of orders and enabled it to fund at only 10 basis points more than it paid for unsecured debt in January. It has a €160 billion funding surplus, liquidity coverage of 110% and a core tier 1 ratio of 12.67%. "We are Basle III-proof," he declares.
Like many in his industry, Moerland is all too aware how much this is due to the actions of Mario Draghi at the ECB. "One year ago, bank funding was not easy – even for Rabobank," he says. "But now US dollar appetite is back. The ECB is the most important factor in this."
This is not without its drawbacks. "By having such deep involvement in the eurozone, the ECB becomes part of the problem," he says. "The balance sheet of the ECB may become an issue."
In the six months to June, Rabobank increased its long-term funding by 11% to €189 billion, reduced short-term debt by 6% to €66.5 billion and increased capital by 0.5% due to retained earnings. It raised more than €30 billion in the markets last year, but regulatory uncertainty remains a worry.
"The biggest problem we face is the avalanche of regulation," says Moerland. "Each and every individual line of regulation I can understand but there is no coordination. This comes close to stifling the banking business."
The bank was downgraded from triple-A to double-A by Standard & Poor’s in November 2011 and from triple-A to Aa2 by Moody’s in June 2012, so Moerland is acutely sensitive to the importance that the rating agencies ascribe to the bank’s domestic economic environment.