German Bank Challenge ECB Supervision

        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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        (END) Dow Jones Newswires

        April 02, 2015 03:00 ET (07:00 GMT)

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