U.S. claims that a Latvian bank laundered money and violated sanctions on North Korea led to the lender’s demise in little over a week, turning the spotlight on the European Central Bank’s role as chief supervisor for euro-zone lenders.
The U.S. Treasury proposed banning ABLV Bank from doing business in dollars, but the ECB doesn’t have the power to police money laundering. It is responsible for ensuring senior bankers are up to the task of running their firms, though, and on the weekend was forced to declare the lender failing or likely to fail after depositors fled.
The Frankfurt-based institution has said it can only act when national authorities point out money laundering at banks. That stoked criticism officials are only reacting to events and have done too little, too late. And it comes at a critical time for the ECB, which is in the midst of trying to force euro-region lenders to clear their balance sheets of bad loans.
“The ECB could be embarrassed if it had gaps in its fit-and-proper assessment of ABLV executives,” Nicolas Veron, a senior fellow at the Peterson Institute for International Economics, said before the central bank announced the closure of the Latvian lender. “The ECB relies on input from national authorities to prepare, but they have to form their own opinion and the decision is down to the ECB.”
An ABLV spokesman declined to comment on the lender’s relations with the ECB regarding its assessment of the firm’s management. An ECB spokeswoman declined to comment.
The issue illustrates the challenge the ECB faces since taking over banking supervision from the euro area’s national authorities in 2014, a move aimed at restoring confidence after the financial crisis. Its efforts since then to keep lenders in line are seen by many as having been ineffectual given that Italy’s biggest bank nationalizations since the 1930s happened on its watch.
The ECB’s guidelines show the institution relied on national authorities’ previous approvals of banks’ management when it started supervising lenders, but that it can conduct fresh assessments where necessary.
The ECB’s “hands were tied” on the issue of money laundering, “but one can wonder why it wasn’t higher on the agenda and debated more strongly with the local authorities,” said Mascia Bedendo, a professor of finance at Audencia Business School in Nantes, France. “The ECB must just have gone by priorities, and Europe’s non-performing loans would have been higher on the list.”
The euro-zone central bank, which had already placed a freeze on outgoing payments to stabilize ABLV, has now handed the lender over to Europe’s Single Resolution Board.
With 3.6 billion euros ($4.4 billion) of assets at the end of September, ABLV has been one of the smaller lenders directly supervised by the ECB. The Latvian bank’s seven-member executive board, led by Chief Executive Officer Ernests Bernis, was re-elected last year for a five-year term, “having received the approval from the European Central Bank,” the lender said in its second-quarter report.
“The ECB are embarrassed already today, it’s not good to have this kind of publicity,” Pierre Willot, who counts bank securities among the 350 million euros he helps manage at Montaigne Capital in Paris, said before the announcement ABLV would be shuttered. “Plenty of things can be done to give the ECB more comfort on management.”
Heavy on Deposits
ABLV was plunged into crisis after the U.S. Treasury this month accused it of helping blacklisted companies tied to North Korea’s nuclear-weapons program to do deals. ABLV denied the allegations and said it was working to provide the Treasury with information that would help overturn its proposed punishment.
The bank lost 600 million euros in deposits and securities in less than a week of the U.S.’s announcement — equivalent to 18 percent of its total liabilities as of the end of September. That prompted the ECB to issue its order to Latvia to stem outflows.
“I wouldn’t have expected a fully-functioning, pan-European regulator to have been able to prevent this or make it less spectacular,” though “maybe you could say they acted a little late,” Claus Vistesen, an economist at Pantheon Macroeconomics, said last week.
This article was originally published on www.bloomberg.com viewed 26th February 2018.