Regulators need to measure the full impact of new rules on the European banking sector to provide a clear sense of how they are affecting banks, according to the president of the European Banking Federation.
Jean-Pierre Mustier, who is also CEO of Italian banking group UniCredit SpA, said European banks had to answer to several different regulators, including the ECB, national regulators and the European Banking Authority. He said there had been no joint assessment on how regulatory measures such as the ECB's targeted review of internal models, or TRIM, which is designed to reduce risk in calculating risk-weighted assets, or the post-crisis Basel III regulatory framework may be affecting profitability.
"It is urgent that the regulator, probably under the leadership of the ECB, look at that," he said at a conference in Brussels, speaking in his capacity as president of the EBF.
"If we don't have quantitative measure of all these regulatory requirements, how do we know how European banks can be affected?" he said.
Several European bank CEOs have decried increasing regulation on the sector's capital levels and profits, which is already under pressure from negative interest rates.
Profit pressure
He pointed to a recent EBA study, which estimated that the biggest EU banks would need to raise their capital by a weighted average of at least 24.4%, to comply with the tougher capital rules under the Basel III framework, due to be fully implemented in 2027. These banks currently have a total capital shortfall of €135 billion in relation to the requirements, it said.
That could put pressure on banks' profits, pushing return on tangible equity — a key measure of profitability — by as much as 22%, making it difficult for European banks to compete with U.S. banks in attracting capital, he said.
A review of capital requirements could mitigate some of the impact, including how regulation can be transposed to European banks and the timing, which would allow banks to generate enough organic capital to offset the impact on earnings, he told the conference.
One way of attracting capital would be having a more unified banking sector in Europe, he said. The European Union is attempting to build a unified system, with plans to create a banking union and a capital markets union.
Mustier said a banking union was key if European banks want to attract more capital. Investors look at U.S. banks as a whole, not on a state-by-state basis, while in Europe, they tended to view banks by their countries of origin.
Banking union
"We don't have a banking sector" in Europe, Mustier said. "If we don't have a banking sector, then we don't attract capital because we are irrelevant as domestic banks so the completion of the banking union is about making sure that the banking sector is one banking sector."
"We need to make sure we have a homogeneous approach. Maybe the combination of all the regulators will help, maybe we need to make sure that when an investor looks at a European bank, what he sees is what he gets, whether he sees it from Milan, Frankfurt or Paris," Mustier said.
With the European banking sector under pressure from interest rates, Mustier also told the conference that the banking sector needed to pass on the cost of low rates to their customers. While rates were negative for the good of society and the economy, they "shouldn't stop on the bank's balance sheet."
"The ECB needs to come and tell the bank 'make sure you pass your negative rates to your clients.' This is how the transmission mechanism works," he said.
"Bankers need to make sure we pass the negative rates to the clients, otherwise the monetary policy of the ECB will not work."
