François Galhau on Banking Risks, Regulations, and Supervision

He said that the banking and financial system is substantially more resilient now than it was ten years ago. He added that considering the cost of the financial crisis (based on the IMF data), the potential cost of financial regulation is very small. "For banks, the priority is to stabilize the regulatory framework and, therefore, we must finalize Basel III." He also said that, " I must stress that our goal is to finalize Basel III, based on improved models that remain risk-sensitive, and not to move onto Basel IV, which would use the standardized approach." Additionally, an agreement must be reached on a lower output floor, along with a tightening of controls over the banks' internal models. This is quite similar to the targeted review of internal models (TRIM) that was approved for the Single Supervisory Mechanism and "the results of which we are more than willing to submit to peer-review." This stance is shared by the EC and other European countries, such as Germany and the Netherlands.

He also stressed the need to avoid regulatory arbitrage. For non-bank players, significant progress is required on liquidity management by funds and asset management companies. Fintechs and the major digital platforms that conduct financial activities will also have to comply with similar regulations sooner or later, said Mr. Galhau. He acknowledged the value of EC proposals on central counterparties (CCPs) "to insist that those CCPs whose activities are 'super-systemic' for the EU market establish themselves in the European Union. They are a step in the right direction." They represent the only viable mechanism to guarantee that European authorities and national central banks can control and manage the risks that CCPs are likely to pose to the financial stability of the EU. Once the provisions on the resolution of CCPs have been finalized, the compensation framework within the EU will have been improved considerably. He concluded by saying that Europe, including Germany and France, now has a special duty to protect financial regulation—a regulation that is sensitive to risk, balanced in its treatment of banks and non-banks, and binds the entire international community.

Related Link: Speech

Keywords: International, BIS, ACPR, Europe, Banking, Banking Supervision, Basel III