Armed and ready for action: Farkas arrives at the EBA

Adam Farkas is the new head of the most powerful banking regulator in Europe. As executive director of the EBA he will oversee the implementation of a new rulebook for European banks, ranging from remuneration to capital definition.

Adam Farkas arrived in London in April to head the European Banking Authority (EBA) and was immediately plunged into the critical and controversial stress testing period for banks. The daily routine for the Hungarian national until at least July will be dominated by this one big issue: stress tests for 90 banks in Europe. But Farkas is just getting started. The stress test is the first step to revamp European banking and certainly not the last.

In the background, EBA staff are preparing further steps to align Europe’s multi-faceted regulatory framework. And the range of issues is vast: remuneration, capital definitions, Basel III framework, systemically important financial institutions, risk monitoring and of course, stress testing. Farkas sees his core role as a coordinator for Europe’s national regulators: “One of the main priorities of the EBA is to achieve and implement single rules in European financial regulation,” he says.

Increasing firepower

To achieve this, Farkas will oversee an unprecedented hiring plan at an European supranational regulator. “There is a very ambitious recruitment plan set out and approved by the EBA, which will see our staff double in 2011 and reach between 100 and 120 people in three years. We will increase the firepower of the EBA considerably.” Thus London will become the new centre for banking reform in Europe, as regulatory harmonisation tops the priority list of the EBA.

The single rules the regulator wants to implement seek to level Europe’s playing field. As Andrea Enria, who chairs the EBA, told InvestmentEurope at a discussion in Vienna, these are at the heart of the new European framework. “In a single Europe, there must not be 27 definitions of capital,” she said.

Farkas agrees: “Regarding the definition of capital, we need common ground about the different categories of capital that can absorb losses. We have to acknowledge and recognise that currently there are differences between countries. However, the aim is to achieve a single definition and the use of this throughout Europe. Every stakeholder understands this.“

A big step in this regard has already been taken. As the EBA constructed this year’s stress test, regulators had to jointly come up with a single capital definition. “If you look at the capital definition issued by the EBA for the stress test, there was an agreement reached. And we would like to stick to that definition,” says Farkas.

Yet, in the process of levelling the playing field, national banks and regulators voiced their dissent. This year’s stress tests were accompanied by massive criticism of German regulators for excluding the prevalent ‘stille Einlage’ (‘investment by silent partner’) as core capital. But the EBA did not relent, making some of the German Landesbanken look vulnerable to this year’s stress test results.

Banks and financial economists have been vocal in airing the broader risks of regulation. The Institute for International Finance, the international banking lobby, has several times voiced alarm at the impact on growth of Basel III, saying it may shave three percentage points off gross domestic product growth in the US, Europe and Japan by 2015, if regulation was put into effect swiftly.

Farkas dismisses this pessimistic reasoning. He sides with the Basel committee in assessing the long-term consequences of the new capital framework, which imply minimal effects on economic growth, but major effects on macroeconomic volatility. “The objective is not to reduce profitability, nor is it to change the landscape. It is simply trying to increase the security of the system, 
to increase the capacity to absorb risk by the financial sector as a whole, and by individual institutions.“


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