Europe Needs German-Style Supervision of Small Banks

The gold standard in stress tests.

Photographer: Mehmet Kaman/Anadolu Agency/Getty Images

The German banking system is hardly a model for the rest of Europe. During the financial crisis, Berlin spent or set aside hundreds of billions of euros to rescue its lenders. From its banking giant, Deutsche Bank, to many smaller savings banks, there is still no shortage of lenders that are struggling with low profitability.

Yet in one sense, the German banking world is offering the rest of Europe a lesson in transparency. Last week, the Bundesbank and Bafin — Germany's central bank and the top financial supervisory authority — published the results of a stress test on the country's less-significant institutions. This level of openness is unique among the euro zone's largest countries and should serve the rest as an example.

Beginning with the creation of the banking union in 2014, euro-zone lenders have faced two different kinds of supervision, depending on their size. Larger banks come under the direct scrutiny of the Single Supervisory Mechanism — where the European Central Bank teams up with national authorities. They are subject to regular stress tests. Smaller institutions, however, are left to national central banks, which can take a variety of approaches in scrutinizing them, even though the SSM can decide to take direct control of the process if it thinks this is necessary.