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Banking union will make lenders safer – ECB’s Enria

The man responsible for leading the supervision of banks across Europe has said success in making lenders safer and sounder hinges on completing the banking union, particularly a European wide deposit protection scheme. 

The man responsible for leading the supervision of banks across Europe has said success in making lenders safer and sounder hinges on completing the banking union, particularly a European wide deposit protection scheme. 

Andrea Enria, who is Chair of the Supervisory Board of the European Central Bank, said the organisation hopes to see signs that there is “a bit more openness” to move ahead in this project.  

“Depositors must be sure that their money is well protected, no matter whether it is deposited with a bank in France, Italy, Greece or Germany,” Mr Enria said. 

“And only a European deposit insurance scheme can decouple this protection from the financial firepower of national schemes,” he said. 

“At the same time, it would instantly justify the removal of the remaining obstacles that still hinder full integration of banking business across the entire banking union,” he added. 

Banking union was proposed in the wake of the financial crisis in an effort to make the system stronger and more resilient. 

The first two pillars – a single supervision regime and a single resolution mechanism for dealing with failed banks – are largely in place. 

However, the third pillar – a deposit insurance scheme – has proven difficult to deliver, due to political opposition among some member states, including Germany and the Netherlands.  

They are concerned that taxpayers may be left on the hook for the failure of banks in other states. 

But this position has led to growing frustration among ECB and EU bosses who feel the three-pronged plan must be completed. 

Some hope of a breakthrough emerged this morning, with the German finance minister outlining proposals to break the logjam. 

Writing in the Financial Times, Olaf Scholz said the need to deepen and complete European banking union is undeniable and after years of discussion, the deadlock has to end. 

Although he did not address Mr Scholz’s comments directly, Mr Enria told an ECB Forum on Banking Supervision in Frankfurt this morning that the ring-fencing of national banking systems during the crash had led to a burdensome legacy of segmentation in the European banking market. 

He said as a result, banks cannot yet consider the banking union as their domestic market, as a truly single jurisdiction. 

“I am well aware that a political agreement could be difficult to achieve and take time to be practically implemented,” he told the audience. 

“But we cannot accept that the current segmentation of the market remains unaddressed. Hence, even without European deposit insurance, we have a duty to pursue the goal of a more integrated market with all the tools that we have at our disposal,” he added. 

Mr Scholz’s proposals were welcomed by the Director General of the European Commission’s Directorate on Financial Stability, Financial Services and Capital Markets Union, Olivier Guersent. 

Mr Guersent told the forum he thinks the suggestions are a very good starting basis but under ambitious vis-a-vis what the European Commission think is necessary, as what it proposes is a reinsurance system and that’s it.  

“It has a number of downsides, but certainly it is a bold move, it is very welcome,” he said. 

“There are a number of ideas that are worth discussing and exploring,” he said.

Earlier, Mr Enria also called for further harmonisation of the European banking regulation rule book.

“From fit and proper rules for new bank managers to insolvency laws…we often have to deal with 19 different legal frameworks,” he said. 

“This makes European banking supervision less effective and more costly. So, we do need to harmonise regulation further, and sooner rather than later,” he added. 

However, Mr Enria also praised the success of the single supervisory regime to date, saying it had greatly helped to speed up the post-crisis repair of banks’ balance sheets. 

ECB pressure has led to non-performing loans being reduced from about €1 trillion five years ago to less than €600 billion at the end of last year.  

“In other words, we are approaching a steady state – we are not there yet but we are approaching it – and our actions now have to become more and more predictable,” he claimed. 

“In practice, we can only be predictable when we are transparent. Because only then will banks, markets and the public be able to understand our principles and policies; only then will they be able to anticipate our actions,” he stated.

“This is crucial. After all, banking supervision should be a source of stability, not of surprises,” he added.

Mr Enria also noted a lack of restructuring in the European banking sector, with consolidation not taking place to the extent expected in order to absorb the excess capacity that had built up before the crisis. 

As a result, he said, the system remains highly fragmented, with low interest rates putting pressure on banks’ margins and most managers struggling to reduce costs. 

This has led to a drag on the rollout of new technologies and as a result European banks lag their competitors, he claimed. 

The supervision boss also defended the level of regulation that has been put in place and the increased capital requirements. 

“The markets seem to feel that European banks have to deal with steadily increasing capital requirements,” he said.

“I strongly dispute this idea and believe there is plenty of evidence in support of my disagreement. Still, we have to address this perception and go the extra mile to provide clear targets and rules of engagement”.

Mr Enria also said other factors rather than tighter regulation and stricter supervision are to blame for lower bank profits. 

Many of these are related to how well, or how poorly, the banks are managed, he said. 

“So weakening regulation simply to give banks a helping hand would not solve the problem,” he concluded.

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Bank to the future: online banking set for big changes

Bank to the future: online banking set for big changes

In the past few weeks it’s likely that your bank, credit union or building society has been in touch to ensure that the contact details they have on file for you are correct. That’s so they can comply with new European rules, coming into force this weekend, that aim to make online transactions more secure.

The addition of ‘Strong Customer Authentication’ is part of the second Payment Services Directive (PSD2) and requires consumers to regularly verify their identity when banking and buying online.

That will most likely involve a code being sent to a user’s designated phone number each time they want to perform certain tasks – like transferring money or making a purchase over a certain value.

This added security measure will be the most instantly apparent change ushered in by PSD2 – but in the long term it probably won’t be the most significant.

That’s because another pillar of the rule changes forces banks to become more open – potentially upending the way people interact with their money online.

The current account

As it stands all Irish banks offer customers access to their accounts via online and mobile – with the features available to users largely the same from one brand to the next.

“All of the core functionalities are the all the same,” said Daragh Cassidy, head of communications and comparison site

Where the big differences lie currently is around ease-of-use, he said.

“How the apps work and intuitive they are, I think there’s a difference.”

This may include the ability to apply for new products online – rather than having to deal with paperwork or branches. Differences can also be seen in the design of certain online banking sites or apps, with some including the ability to log-in with a fingerprint or check an account’s balance at a glance.

All relatively small things, but with the potential to have a big cumulative impact on a user’s day-to-day experience.

“For some banks you still need to type in all of your details [to log in], you then need to type in your personal access code,” Mr Cassidy said. “And it can be really, really time consuming and labourious for something that should really just take a second – if you’re just trying to quickly see how much you have left in your account before payday.”

Even amongst the banks that may be seen as laggards in the area, it is clear that the growing importance of online has not passed them by. Bank of Ireland, for example, has promised a completely new app later this year as part of its massive investment in IT.

But PSD2 represents a more significant shift for all banks in Ireland.

The API’s the limit

The open banking requirements introduced by Europe are technically challenging, however the idea behind them is relatively simple.

All EU-based banks now have to offer a doorway for other, authorised firms to link in to a customer’s account details. That may include other banks, financial services firms or even tech startups.

This doorway is known as an application programming interface – or API – and is the same concept used by Apple and Google to give app developers access to a smartphone’s features, like its microphone or GPS data.

Similar to the best practice there, it also requires customer approval – meaning the user will only share their details with the third parties of their choice.

The value of this may take some time to become clear – however early applications include being able to automatically feed your transactions into budgeting software, or being able to view accounts from multiple banks in one place.

“Perhaps they could be a company that’s involved in lending and rather than you having to give your data in a form, you give them permission to scrape the detail from your account and they can say ‘yep, we can see that that’s your income, it’s coming in every month and here’s where your outgoings are’,” said Peter Oakes, founder of FinTech Ireland.

There are currently just a handful of firms authorised by the Irish Central Bank to provide these kinds of added services, however many others that have approval from other European authorities will also be available here under ‘passporting’ rules.

That means there may be many new functions available to online banking customers in the near future.

“There’s likely to be quite a demand for these sort of things from consumers,” said Peter Oakes, founder of FinTech Ireland.

“Accenture did a study on this and it found that 50% of consumers said they would use one of these products provided it’s secure.”

Bank to the future

Open banking aims to give people more flexibility in how they handle their finances – and more control over their valuable data. That is a big risk to legacy players here, who have often benefited from customers’ reluctance to change providers.

However lenders do not have the luxury of blocking the incoming changes, nor can they afford to sit back and hope that customers do not engage third parties of their own accord.

Such an approach could leave them playing catch up with rivals that take a more proactive attitude. Meanwhile new entrants, like Germany-based N26 and British firm Revolut, are increasingly gaining traction in Ireland; eschewing physical branches for a purely digital-based service.

“For me, those two banks have really gone above and beyond what any of the other banks in Ireland do,” said Mr Cassidy.

As a result incumbent banks here may, somewhat ironically, become the strongest proponents of open banking.

In response to queries Bank of Ireland, AIB and Permanent TSB all said they were engaging with third parties with a view to integrating their services into their online platforms.

Such services are unlikely to suddenly appear on 14 September – but over time online users may be presented with new functions and services through their bank’s interface.

That should be good news for customers – as well as the Irish financial technology firms that are hoping to realise the potential of open banking.

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