German Bank Sets Precedent: Sues The ECB

Can you say “precedent-setter”? In a move presaged by objections from politicians and some smaller EU financial institutions, Landeskreditbank Baden-Württemberg (or “L-Bank”, as its friends affectionately call it) is suing the ECB in a bid to avoid falling under the central bank’s direct supervision. L-Bank, a German development bank with some €71 billion in assets, argues that ECB supervision will subject it to onerous bureaucratic procedures and fees (imagine that), which it contends will prevent it from extending credit to local borrowers.

Further, the small lender says that unlike the eurozone’s banking behemoths, its business model is straightforward and given its size, it would not represent a systemic risk even if it were to fail. Here’s more via WSJ:

The lawsuit, filed March 12, is the most radical step by a European bank against ECB supervision, a cornerstone of the eurozone’s integration project. It highlights the headwinds the ECB is facing from some politicians and smaller lenders in Germany, Europe’s biggest economy.


L-Bank said that higher costs tied to ECB supervision would undermine its ability to support local families and businesses. Instead it wants to be supervised by BaFin and the Bundesbank, which L-Bank says would be more appropriate, given its local focus.


L-Bank argues that its business model is simple and clear, while the ECB has been tasked with regulating more complex banks through a structure known as the single supervisory mechanism. Being under ECB scrutiny “goes against the guidelines of the single supervisory mechanism,” L-Bank said.


The ECB is supposed to take direct responsibility for all banks whose assets either exceed €30 billion ($32.35 billion) and/or make up more than 20% of their home country’s gross domestic product. In countries where banks don’t hit that threshold at least three banks will come under ECB oversight unless their assets are below €5 billion, as will any bank that has received help from one of the eurozone’s bailout funds. In addition, the ECB can claim supervisory powers over any bank that has significant operations in at least two countries.


L-Bank is one of 21 German banks under the ECB’s direct watch. It had around €70 billion in assets at the end of 2013, the most recent figures available, and recorded slightly more than €100 million in profit. In 2013, it supplied €7.4 billion in low-cost credit to support local projects, businesses and families.


L-Bank’s concern about ECB supervision resonates with the mood of many German regionally-focused lenders, which frequently argue that the ECB shouldn’t monitor small lenders that don’t pose a systematic risk to Europe’s financial system.


L-Bank’s move also highlights the cost of meeting the regulatory burden, an issue that executives at small German banks have until now only discussed privately. Similar-sized German lenders had to shell out between €5 million and €10 million for external auditors and internal staff to complete the ECB’s asset quality review last year, people familiar with the matter said. Meeting previous BaFin and Bundesbank regulations cost significantly less.

And a bit more from FT

“Supervision under the terms of the SSM [Single Supervisory Mechanism] is associated with significant bureaucracy and costs. These costs impact on the funding available for providing, for example, low-interest loans for housing development, support for new business start-ups, and finance for [small businesses],” the bank added.


The ECB is required to fund its supervisory activities by levying fees on the banks in the countries that participate in its supervisory framework.


For 2014 and 2015, about 85 per cent of these fees are expected to be borne by the 123 large banks under direct ECB supervision. The remaining 15 per cent are set to be paid by the 3,500 or so other banks in the eurozone. Beyond its fees, complying with the ECB’s reporting requirements can also cause banks significant outlay.

Banks who believe they should not come under the central bank’s direct supervision are allowed to file a request for review and as of now, three have gone that route. Here’s the ECB: 

The Administrative Board began its activities in September 2014. So far, it has received three requests for review concerning the ECB decisions on significance that were notified to significant supervised entities in September 2014. The significant supervised entities argued, on different grounds, that they should not be considered significant and therefore asked the Administrative Board to review the ECB’s assessment. 

And if you are a small lender who believes you have been wrongfully subsumed under the central bank’s sometimes not-so-watchful eye, here are the folks to whom you will be sending your appeal:

And here is the process the ECB will undertake in the course of deciding that you are wrong:

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It looks like full integration of the currency bloc's financial institutions may turn out to be as contentious a process as attempting to fully integrate its political systems although, on the bright side for banks, it's all smooth sailing once you scrape up enough money to complete your AQR because as we showed last October, even if you fail, you don't really have to do anything.