ECB must clean up banks or see union collapse: incoming top watchdog

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank must complete a clean-up of the euro zone’s banking sector if it is to survive the next financial crisis, the ECB’s incoming top watchdog Andrea Enria said on Tuesday.

Enria is set to head the ECB’s Single Supervisory Mechanism, which oversees the euro zone’s 118 top lenders, many of which are still reeling from the last recession and facing new challenges from hacking to fintech.

The 57-year old Italian, who has chaired the rule-making European Banking Authority since 2011, touched some raw nerves for struggling lenders in his native country in his confirmatory hearing before European parliamentarians.

He said ridding banks of unpaid loans inherited from the last recession would remain the SSM’s priority under his stewardship in the next five years, and warned about lenders’ excessively large holdings of domestic sovereign bonds.

“The first (priority) is completing the cleaning of bank balance sheets,” he told the European Parliament’s committee on economic affairs in Brussels.

“I’m convinced that the banking union would not survive if the next crisis catches us still dealing with the legacy of bad assets from the previous one, or with the market fragmented along national lines.”

His remarks were likely to ruffle feathers in Italy, where the burden of unpaid loans is large and banks own some 378 billion euros ($430.62 billion) of battered bonds issued by their national government, according to ECB data.

Enria also said banks should mark their holdings of sovereign debt to reflect market prices – an expensive practice at a time when concerns over Rome’s economic policy has caused heavy selling on the debt market.

“If these holdings have to work as liquid buffers under stress, banks need to be able to liquidate them on the market promptly, which means…they should be marked to market,” Enria said.

As widely predicted, the parliamentary committee endorsed his appointment, which now awaits formal approval of the full European Parliament and relevant ministers. He is due to take over from Daniele Nouy at the start of next year when her five-year term runs out.

Enria also pledged to raise the bar for supervisors when it comes to fighting money laundering to stem a raft of scandals that have hit euro zone banks from Malta to Latvia.

“The temporary fixes…are clear anti-money laundering (AML) reviews of national supervisors to ensure the standards are of a sufficient quality throughout the single market,” he said.

Speaking shortly before Enria, Nouy said the SSM would create a network of watchdogs sharing information on money laundering.

It was the first concrete response by the SSM to cases involving Denmark’s Danske Bank (CO:), Malta’s Pilatus and Latvia’s ABLV among others in recent months.

“The AML Office will set up and chair ‘an AML Network’ among Joint Supervisory Teams in charge of the banks whose business model leads to a high level of money-laundering risks,” Nouy told EU parliamentarians.

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