‘Bank sector nothing to fear from ECB’

Ireland’s massive banking sector largely located in the Financial Services Centre should not be under threat from the EU that worries about financial institutions sinking sovereign states, according to ECB executive board member Jorg Asmussen.

Regional investment hubs such as in Cyprus require extra supervision to avoid and prevent a build-up of unsustainable banking sectors in the future, warned Economics Commissioner Olli Rehn.

But it was too simplistic to judge the dangers posed by a bank just in relation to the host country’s GDP, Mr Asmussen told members of the European Parliament’s economics committee. The structure of its assets and liabilities must also be considered.

“What makes a banking sector vulnerable? It depends, not simply the size in relation to GDP — that is too simplistic. It is well known that the banking sector in Slovenia faces some difficulties and is in need very likely of additional capital but the overall banking sector is just 150% of the overall GDP.

“The size of the sector in Malta, Ireland and Luxembourg — but I want to be very clear, there is no banking sector in the EU comparable to Cyprus,” he said.

Ireland’s banking sector was eight times the size of the country’s GDP, Malta’s is 7.8 times, Luxembourg is 24 times and Cyprus 7.5 times. The island that needed a €10bn bailout has been told to cut the sector by half to 3.5% the size of its GDP — the EU average.

Indications of vulnerability may include: if the sector is attracting large inflows of foreign deposits, what currency they are accepting as some foreign exchange can pose a risk for the overall banking sector, and how quickly the balance sheets of the banks expand.

Also to be taken into consideration is whether there is a risk for the domestic banking sector or if there is a situation as in Malta where the majority is in the hands of large international banks that can internally shield risks to the bank or country concerned, he said.

Economic growth is not possible without credit growth, said Mr Rehn, but the EU was behind the US in repairing its financial sector and this had to be completed, together with recapitalising the banking system, building a banking union and resolving the liquidity trap, he said.

Mr Asmussen said the banks will be asked for an asset quality review before the Single Supervisory Mechanism, with the ECB taking responsibility for overseeing the EU’s banks expected early next year.