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May 02, 2018

Ignazio Angeloni of ECB spoke about ECB Banking Supervision at the Financial Times–Fitch Global Banking Conference in London. He described the accomplishments of ECB Banking Supervision, pointed out the missing or incomplete elements, and examined the challenges and developments that lie ahead. He also elaborated on the four strategic directions that he considers to be important for ECB Banking Supervision: enhancing the quality of supervision, strengthening the focus on market risks, strengthening macro-prudential linkages, and further developing crisis management and prevention frameworks.

Regarding quality of supervision, he examined fairness, transparency, and independence as more complex requirements that are particularly necessary for an international organization. He noted the factors that suggest that some supervisory attention should be redirected onto market risks. He stated that the expected normalization of interest rates is already accompanied by higher volatility in the financial markets. Recent ECB analysis of interest rate risk in the banking book has revealed that internal models tend to be based solely on a period of decreasing interest rates. Some banks are still burdened by precrisis exposures, unprofitable, and illiquid. Another factor is Brexit, which will be a game changer with respect to the mix of business models in the euro area. Increased competition and the prospective launch of a Capital Markets Union in the EU will force euro area banks to rethink their own traditional models as well.

He further mentioned that, in the 2016 EU-wide stress test, market risks were a component of the overall short-term capital impact under the adverse scenario. Market risks in banking and trading books should be captured more systematically in stress tests and other supervisory analysis. ECB Banking Supervision should also find ways to improve its linkage with macro-prudential policy. The legal framework sets certain boundaries and modalities for this to happen. The Single Supervisory Mechanism (SSM) Regulation of 2013 established ECB as a macro-prudential authority, but only for a limited set of instruments covered by EU law (risk weights on certain exposures, liquidity requirements, own funds, and capital buffers). Borrower-based measures, such as loan-to-value and loan-to-deposit ratio caps, often recognized as having a greater impact, remain with national authorities. For the instruments set out in EU law, ECB can only tighten the policy stance—a decision that ECB has so far never taken. Coordination among stakeholders involves complex and cumbersome notification and consultation procedures. EC has recently reviewed the framework and sent to the other European legislators (Council and Parliament) a proposal broadly confirming the existing approach. This does not prevent ECB from engaging further in a number of areas.

He mentioned that the crisis management framework of the Banking Union has performed adequately: the few cases of bank failures were addressed smoothly, without disruptions or contagion. However, two areas need to be flagged for further improvement. One pertains to regulation, the other to supervision. On the regulatory side, state aid and resolution arrangements issued at different times may lead to contradictory outcomes. On the supervisory side, experience highlights the importance of conduct risks as potential triggers of bank crises. Money laundering has recently come to the fore. National anti-money laundering frameworks are not harmonized across the EU and their remits are not aligned with prudential supervision. A European authority for combating money laundering, distinct from but actively cooperating with the ECB supervision, remains the desirable goal in the medium term. In conclusion, he highlighted that “The first five years of ECB Banking Supervision are coming to an end; that offers us an opportunity to review our performance and, potentially, to plan for new directions to explore in future. The advent of ECB Banking Supervision marked a quantum leap forward in the quality of banking supervision on the Continent ... ."


Related Link: Speech

Keywords: Europe, EU, Banking, Banking Supervision, Market Risk, Macro-prudential Policy, Crisis Management Framework, Stress Testing, ECB

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