(Adds Swedish regulator)
By Francesco Canepa
FRANKFURT, April 25 A European Commission
proposal to limit the European Central Bank's power to supervise
banks is "much too tight" and risks hampering ECB efforts to
make the sector safer, Frankfurt's top supervisor said on
Speaking at the European Parliament, Daniele Nouy questioned
part of the Commission's package setting out rules for deciding
how much Pillar 2 capital banks must hold to absorb losses --
effectively the ECB's most powerful tool as a supervisor of euro
This was likely to rekindle a simmering conflict between the
ECB's Single Supervisory Mechanism, which has been trying to
establish itself as a tough watchdog since 2014, and other
policymakers in Frankfurt and Brussels, who worry about the risk
of choking off bank lending and growth.
"The proposed legislation on Pillar 2, while rightly seeking
to further supervisory convergence, seeks to put a frame around
supervisory actions that is much too tight in essential
aspects," said Nouy, who chairs the ECB's supervisory board.
Nouy argued supervisors should be allowed to demand that
banks meet their Pillar 2 requirements using the most
restrictive definition of capital, known as Core Equity Tier 1.
Erik Thedeen, director general of the FSA, Sweden's
financial watchdog, told the same parliament session that he had
"considerable problems" with limitations on "supervisory
flexibility" in the European Commission proposals.
Sweden, not part of the euro zone, has a large banking
sector and Thedeen said flexibility in supervising lenders does
not mean regulators would go soft on their own banks in a "race
to the bottom".
"Diverse implementation of Pillar 2 is not maybe a bad
thing, but a reflection of how reality looks like," Thedeen
Nouy also said Additional Tier 1 instruments -- a form of
convertible bonds that banks have extensively used since the
crisis to raise funds -- posed "significantly supervisory
issues" and are mainly useful when a firm is already bust.
Nouy added the Commision did not go far enough in certain
areas, such as non-performing loans, and that she was not in
favour of a proposed reduction of the frequency of regulatory
reporting by small banks.
She did however welcome other aspects of the proposal, such
as closer prudential supervision of financial holding companies
and of significant foreign banking groups located in the
Britain has been lobbying against the measure as it could
affect UK lenders who want to serve EU customers after Brexit.
(Additional reporting by Huw Jones in London; Editing by Keith