Blog post | 16-12-2020 | Ewout Irrgang

More than ten years after the 2008 financial meltdown, the world is once again in the throes of an unprecedented crisis. And once again, the crisis has led to the rapid shrinking of European economies, with predictable repercussions for the size of the European banks’ portfolios of irrecoverable loans. As was the case ten years ago, some observers are now wondering whether the banks are capable of taking this type of hit. Fortunately, the Dutch central bank believes that the banks are now sufficiently capitalised to handle even a desperate scenario. This was not true in 2008, however, when national governments were forced to prop up a number of banks teetering on the edge of bankruptcy. It was an operation that cost the state over €46 billion in the Netherlands alone.

European banking union: a dual task

The European banking union was set up in 2012 precisely in order to prevent a repetition of such a situation. It was given the dual task of exercising stricter supervision of EU banks with the backing of harmonised EU laws, and ensuring that failing banks are ‘resolved’ in an orderly fashion – that is, without any adverse impact on financial stability and without the taxpayer having to foot the bill. In 2014, the European Central Bank (ECB) was made responsible for the supervision of all EU banks, and in 2016, a Single Resolution Board (SRB) was set up to handle the controlled resolution of failing banks. The ECB and the SRB are themselves responsible for the 130 or so largest (‘significant’) banks in the euro area, including Dutch banks such as ING, ABN AMRO and Rabobank. National authorities (i.e. the Dutch central bank in the Netherlands) have been given responsibility for medium-sized and small banks – banks such as Van Lanschot, Triodos, Achmea Bank and so on here in the Netherlands.

Discrepancies

The question is, though: are these national authorities doing a good job? Are banks supervised in the same way throughout the euro area? Have similar resolution plans for failing banks been drawn up throughout the euro area? In 2017, an audit performed by five supreme audit institutions in the euro area (i.e. the national audit offices of Austria, Cyprus, Finland, Germany and the Netherlands) uncovered a number of discrepancies in the way in which different countries supervise medium-sized and small banks. And now, an audit by a group of seven national audit offices (once again, those of Austria, Finland, Germany and the Netherlands, this time joined by Estonia, Portugal and Spain) has shown that there are also differences among countries in the resolution plans made for medium-sized and small banks in financial difficulties. The plans vary from one country to another, in both organisational and technical respects. One of the reasons for this is that, in formulating guidance for the compilation of these plans, the SRB concentrated on the large banks rather than on the smaller ones.

Small banks matter

But does that matter? I mean, they’re only small banks after all. Yes, it does. We’re talking about almost 6,000 banks in the euro area, together servicing a vast number of European citizens. Moreover, if the worst comes to the worst, even small banks are capable of sparking off an economic and financial crisis. If the plans for resolving failing banks are not the same in all countries, some countries may still end up bailing out banks. If this happens, the banking union will have failed to fully achieve its stated purpose of guaranteeing the consistent and harmonised application of rules in the euro area.

No access to documents

There was another finding that was more than merely concerning. It was in fact unacceptable. As I mentioned, the ECB is responsible for the confidential supervision of the bulk of the banking industry. As a result, national audit offices have not been allowed access to the documents they need for their independent audits of the supervision of medium-sized and small banks. Although the ECB recently reached agreement with the European Court of Auditors on access to information on the supervision of large banks, this has not resolved the problems encountered by national audit offices.

And now a similar situation has arisen at the SRB, which was planning to impose all sorts of conditions on national audit offices wishing to access information. The latter were unable to satisfy these conditions without compromising their independent status. The end result was that they were not allowed access to key documents. In other words, EU institutions are preventing national audit offices from discharging their statutory duty of performing independent audits.

An age-old European tradition

The court of audit has been an institution in the Netherlands since the Middle Ages. Its history goes back to the proto-European Burgundian empire. In that sense, the principle that power must be balanced by a countervailing power in the form of an independent office that audits the spending of public funds, may rightfully be described as an age-old European tradition. Today, with a growing number of responsibilities being transferred to European institutions, it is absolutely vital that the same system of checks and balances remains in place. Without it, we would find ourselves moving backwards rather than forwards. Bear in mind that the audits performed by national audit offices in the EU have shown that banking supervision has improved since 2008, and that a system of resolution planning has been built up from scratch. Public confidence in the banks and their supervisors will only grow if the ECB and SRB allow independent auditors unconditional access to all the information they need.