FRANKFURT--A small German lender has filed a lawsuit against the
European Central Bank in a bid to avoid coming under its
supervision, marking the first legal challenge to the ECB's new
monitoring role.
In November the ECB took over direct supervision of Europe's 120
largest banks, assuming that responsibility from national
supervisors such as Germany's financial watchdog BaFin and the
German Central Bank, or Bundesbank.
The move has raised objections from some politicians and smaller
banks that are concerned about the additional regulatory costs,
among other issues.
Development bank Landeskreditbank Baden-Württemberg filed a
lawsuit with the European Court of Justice--the European Union's
highest court--to "legally challenge that it was put under direct
supervision of the ECB," the bank told The Wall Street Journal.
L-Bank, as it is known, claims ECB oversight entails significantly
higher bureaucratic expenses.
An ECB spokeswoman confirmed the central bank had received
notice of the court case but declined to comment further.
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-Banks 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 EUR30 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 EUR5 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 EUR70 billion in assets at the end of 2013, the most
recent figures available, and recorded slightly more than EUR100
million in profit. In 2013, it supplied EUR7.4 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 EUR5 million and EUR10 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.
The shift to ECB oversight has prompted other German banks to
take action, such as shifting assets. Germany's state-owned
development bank Kreditanstalt fuer Wiederaufbau, for example, took
over activities from its project and trade financing unit, KfW
Ipex-Bank. The unit was initially on the list of institutes
directly supervised by the ECB while KfW itself isn't. The transfer
reduced KfW Ipex's balance sheet to below the EUR30 billion
threshold. The ECB therefore excluded the bank from the final list
of lenders it would supervise.
KfW Chief Executive Ulrich Schröder last September welcomed that
decision, saying that "having a uniform supervisory regime for the
entire KfW Group is a sensible and efficient solution, both for KfW
and for the supervisors." KfW and its Ipex unit are now monitored
by Germany's BaFin and Bundesbank.
Write to Eyk Henning at eyk.henning@wsj.com and Laura Stevens at
laura.stevens@wsj.com
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