Sabine Lautenschläger, Member of the ECB Executive Board and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism (SSM), spoke at the Seventeenth Annual Conference on Policy Challenges for the Financial Sector in Washington DC. She highlighted that banks in the euro area "differ in terms of size, business model, legacy issues, and their preparedness for whatever the future may hold," followed by a discussion on the challenges faced by the banks and the need to assess their business models.
Ms. Lautenschläger mentioned that banks face challenges in the form of geopolitical risks, an uncertain macroeconomic environment, overcapacities in the European banking market, technological change, and tougher rules, including higher capital requirements, more reporting, and higher demands on the scope and quality of risk management. To this end, she highlighted the need to "take a very close look at how banks in the euro area make profits and how their business models work," as that is "a core element of" the annual Supervisory Review and Evaluation Process (SREP). While assessing the business models, two factors are combined, thus helping the assessor to be unbiased, holistic, and forward-looking: an analysis of hard data and the judgement of experienced supervisors. She described the process for used by ECB to assess the business models of banks, also highlighting the importance and need for such an assessment.
In particular, "Quite a few banks still have homework to do or need to implement what they have already decided to do to cope with the new challenges. This variety makes life a bit more difficult for investors and supervisors, " said Ms. Lautenschläger. "But as diverse as the banks might be, they all play an important role—and, by and large, they are the ones, and not so much the capital markets, who keep the European economy running and growing. Thus, we need performing and stable banks in Europe to provide loans and other services. We need banks that are not held back by the mistakes of the past, but which have been cleaned up and are able to do business. We also need tough rules and tough supervisors who challenge banks' business models. In the long run, only banks that make profits can be stable. And only stable banks can handle uncertainty, deal with a changing environment, and reliably serve the economy."
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