“If you have different realities, then either you need to create the same reality -- i.e. Sweden gets to look like Italy or Germany -- or you make a rule that fits the reality", said Clausen. “But making a rule that is designed for another reality is of course not that smart.”
The criticism strikes at the heart of Europe’s vision to create common standards across borders to be overseen by a single supervisory authority. Tension around the project has grown as industry representatives say regulatory plans to treat sovereign debt as risk-free fly in the face of experience. The EBA’s proposal would give bonds sold by bailed-out nations including Greece and Portugal a higher liquidity status than top-rated covered bonds sold in Denmark or Sweden. “It’s a bit awkward that Europe cannot make these adjustments", Clausen said. “You must be able to accommodate rules to the system.”
The Danes want the European Commission to dismiss the EBA’s proposal, arguing failure to do so would risk destabilising a market that survived the global financial crisis better than most. Denmark has won backing from industry groups across Scandinavia and in Germany. “The Danish banking system is challenged because of rigid rules that are well applied to other countries but not to Denmark", Clausen said. Danish banks use covered bonds to fill about 75 per cent of their liquidity buffers, compared with an EBA proposal to cap use at 40 per cent. “We need to calibrate it gradually", Clausen said. “It’s not about getting different rules but to acknowledge that the system is different -- unless you want to create exactly the same economic system in each country.”
Once the industry has made it through the [stress] tests, some banks may start selling assets that don’t satisfy return goals, Clausen said. “There is still pressure on banks to get their return back to more than their cost of capital.” It’s likely that a number of lenders will make “some structural changes to get their return up to where the market requires it to be for them to get capital", he said.
For the rest of Europe’s financial industry, investors no longer need to fear the worst, Clausen said. “The asset quality reviews and the stress tests coming up now will toward the end of the year clarify and once and for all settle the trust issue in European banks", he said. “That will clarify things enough to say OK, European banks are fine. Some have more to do, but they won’t go bankrupt tomorrow.”
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