Latvia-sized hole in European banking supervision
A scandal on the EU’s periphery just threw up an unexpected challenge to the bloc’s efforts to create a safer banking union.
Latvia’s ABLV Bank collapsed Saturday from a problem EU watchdogs had not seen coming — money laundering allegedly involving the North Korean weapons program and U.S. criminal action against the lender.
ABLV’s troubles have dealt another blow to Latvia’s banking system and reputation following recent allegations of bribery made against the governor of the Baltic nation’s central bank, Ilmārs Rimšēvičs. That case is unrelated to ABLV, as Latvia’s Finance Minister Dana Reizniece-Ozola insisted to POLITICO last week, but both have cast a harsh light on a former Soviet republic that joined the euro only four years ago.
While ABLV’s demise may not have a widespread impact on the financial stability of Europe, it reveals a huge hole in the banking supervision architecture that Brussels has constructed following the financial crisis.
The many post-crisis rules currently in force did not prevent Latvia’s third-largest bank from collapsing, as the European Central Bank’s Single Supervisory Mechanism (SSM) framework does not cover money laundering.
If the ECB supervises banks, it should have detected this” — Eurozone diplomat
This has sparked criticism that the EU’s banking regulation framework was just a knee-jerk reaction focused on urgent capital and liquidity concerns, and didn’t take into account all the different ways lenders can run into trouble.
Money laundering wasn’t a widespread concern following the crisis and was therefore never raised to the EU level for supervision — with national regulators arguing that this would be too intrusive to their national sovereignty.
America that done it
The ECB has been quick to avoid responsibility over the ABLV case. In a statement published last week, Danièle Nouy, chair of the ECB’s supervisory board, said: “Breaches of anti-money laundering can be symptomatic of more deeply rooted governance deficiencies within a bank but the ECB does not have the investigative powers to uncover such deficiencies.”
That explanation, however, didn’t convince all critics. “If the ECB supervises banks, it should have detected this,” said one eurozone diplomat. “It’s strange that it’s the U.S. that highlighted the problem.”
The Latvian bank ran into trouble following the U.S. Treasury Department statement on February 13 that it was of “primary money laundering concern,” and measures would be taken against it. When the bank started to experience “significant deterioration” in its financial position, the ECB instructed Latvia’s financial watchdog to freeze all payments by the lender. But on February 24, the ECB was forced to declare the bank “failing or likely to fail,” meaning ABLV would either have to be saved under the EU’s resolution rules or allowed to fail.
It’s not a given if anything will change with the EU’s current approach to banking supervision.
The Single Resolution Board, the EU agency tasked with such decisions, immediately declared that the rescue of the Latvian bank would not be in the public interest. ABLV will now be liquidated under Latvian law — and Luxembourg law, as the ECB also determined a Luxembourg subsidiary of the bank as failing.
Next time, not so lucky?
ABLV is a relatively minor lender with total assets of just €3.6 billion as of September, meaning the ripple effects from its failure are limited. But Brussels may not get so lucky next time if a more systemically important bank collapses for similar reasons.
Yet it’s not a given if anything will change with the EU’s current approach to banking supervision.
Valdis Dombrovskis, the European Commission vice president for financial services, reiterated Friday that enforcement of the anti-money-laundering framework “is at national level,” and “we are looking into” the question of whether a more coordinated European enforcement is needed.
But Nicolas Véron, senior fellow at Brussels-based think tank Bruegel, said the ECB may not be the right supervisor for the job. “I would not recommend giving it to the ECB, which has already accrued a lot of power,” he said. “I would be more in favor of [the European Securities and Markets Authority] being elevated to a more authoritative hub role for financial business conduct generally.”
The ECB itself seems to be split-minded about taking on such a role.
In an interview with a Latvian publication in March 2017, Nouy rejected any calls for the eurozone central bank to take on money-laundering-related responsibilities, saying: “The Single Supervisory Board cannot take on such a responsibility, because we already have many tasks which require our full attention.”
But in a letter to Green MEP Sven Giegold five months later, she admitted that conduct risk — which includes money laundering — is “one of the key risks for the euro area banking system.”
Latvian Prime Minister Māris Kučinskis says he is open to granting the ECB more powers | Philippe Huguen/AFP via Getty Images
“Evidence of money laundering is also of relevance for the ECB’s fit-and-proper assessment of board members and key function holders of significant institutions under its supervision,” Nouy added.
Ultimately, the decision rests with the EU’s politicians, who must weigh questions about the bloc’s ability to respond to banking crises and their right to national oversight of money-laundering breaches.
“It’s not an easy discussion, but the time is right for it,” said another eurozone diplomat. “My sense [at a political level] is that there is a willingness to engage.”
In an interview with POLITICO Friday, Latvia’s Prime Minister Māris Kučinskis said he was “open to the possibility” of extending the ECB’s mandate to grant it powers to investigate eurozone banks for money laundering.