First the good news: the European banking sector is much improved since 2012, with greater stability and resiliency. Most already exceed minimum capital thresholds set by regulators. The challenge, however, is to ensure consistent and equal rulemaking among regulators and the institutions they oversee throughout 28 member states.

That was the prognosis offered by Danièle Nouy, chair of the supervisory board of the European Central Bank during a Feb. 16 address to European Parliament.

“In fulfilling our supervisory role, a cornerstone of our approach is to treat all supervised banks with the same characteristics equally, in other words, to be a truly single supervisor,” Nouy said. “In order to fully achieve this objective, the ECB needs two things: homogeneous rules and a homogeneous way of applying them.”

In recent weeks, Nouy has expressed concern that the use of directives, which must be approved by each member state, can hamper the regulatory process and lead to inconsistency.  

As for banking sector resiliency, Nouy said that Common Equity Tier 1 ratios of significant institutions increased, on average, from approximately 9 percent in 2012 to nearly 13 percent following the European Banking Authority’s Supervisory Review and Evaluation Process (SREP). In addition, the quality of the banks’ capital has also been substantially improved.

“The sector is much more able to absorb unexpected financial or economic head winds than a few years ago,” Nouy said, Although there remains a subset of banks with elevated levels of non-performing loans, they have been identified through the comprehensive assessment process using, for the first time, a harmonised definition. “All other things equal,” she does not expect capital requirements to be increased further.

The significant banks under ECB supervision are well prepared to meet the capital requirements of the European Union’s Capital Requirements Regulation (CRR) and Directive (CRD IV) by 2019. “Indeed the vast majority are already there,” she said. “The others are meeting phased-in requirements and have profit distribution policies in place which allow them to meet the new requirements by the 2019 deadline.

In 2015, she noted, banks under ECB supervision increased profits relative to 2014. This permits banks to have appropriate profit distribution policies, while still meeting regulatory capital requirements and buffers.

“With the Bank Recovery and Resolution Directive, we now have a resolution regime that ensures the banking sector bears the costs of recapitalisation, should a bank need to be resolved, and not the taxpayer,” Nouy said.

While the establishment of ECB Banking Supervision as the supervisor for the whole euro area “has been an unprecedented achievement” concerns remain Nouy said.

“Since the Single Supervisory Mechanism was established…we have established a common methodology for the SREP applicable to all significant institutions,” she explained. “This means that we now set rigorous and fair supervisory requirements across the board and move towards a level playing field within the applicable legal framework. However, we do not have a truly single rule book yet, and therefore a full harmonisation of supervisory practices is not possible.”

A substantial source of regulatory divergence arises from the use of directives instead of regulations. “The ECB is confronted with 19 different legislations to follow in the euro area,” Nouy said. “Consistent legislation in this field, ideally through EU Regulations, is, in my view, not just desirable but necessary.”

National legislation can also be a problem for establishing a level playing field in the banking union. “The discretion available to the ECB for harmonising the rules in the banking union is constrained by additional rules and obligations which are introduced by national law,” Nouy said. “In some countries, for example, non-binding supervisory practices are converted into binding legal acts. In order to achieve a genuine banking union, member states should thus refrain from setting obstacles both to uniform supervisory practice and to the exercise of supervisory discretion by ECB Banking Supervision.”

“We need to work together to reduce existing fragmentation and we need to be vigilant on draft legislation, both at national and Union level, to ensure that prudential rules for banks are fully harmonised, to accomplish the mission that you have entrusted us with,” Nouy told legislators.