Ed Sibley, the Deputy Governor (Prudential Regulation) of the Central Bank of Ireland, spoke about how new measures to address financial stability have changed and discussed how supervision promotes and contributes to safeguarding financial stability. He highlighted that a comprehensive approach to financial stability is needed for all segments of the financial system—not just at the national level but also at a European level. In addition to outlining the priorities for Banking Union, he said that more needs to be done in Europe with respect to resolution, deposit insurance, Capital Markets Union, and the cultures within financial institutions.
Mr. Sibley highlighted the increasing importance of non-bank finance. Since the crisis in 2008, globally (as reported by FSB), banks’ share of total global financial assets has declined from 45% to 39%, as other financial intermediaries take larger shares (from 26% to 31%). This evolution can bring with it different types of systemic risks, which can threaten financial stability, be they via direct exposures or indirect exposures. In terms of supervision, it means all sectoral supervisors must have a wider view of the financial system in which firms are operating. Supervisors must increasingly focus on macro-financial dynamics while financial stability assessments must be fully embedded in supervisory risk frameworks. It also means that where national competent authorities for banking are separate from funds or insurance for example, they must cooperate more intensively. This is not easy to achieve. However, to maintain financial stability a holistic perspective is required and an integrated approach must be pursued.
Mr. Sibley noted that, since the crisis, progress has been made to increase financial stability in the EU and euro area—initially with the establishment of the European System of Financial Supervision encompassing the ESAs and ESRB and then with the establishment of the Banking Union—notably with the establishment of the Single Supervisory Mechanism (SSM) and Single Resolution Mechanism (SRM). However, he said that the job is not yet complete and outlined a few priority areas, including the following:
- Significant work is required in the banking sector to ensure adequate risk reduction in the level of non-performing loans and a build-up of Minimum Requirement for own funds and Eligible Liabilities, or MREL.
- The issue of liquidity in resolution will need to be addressed within Banking Union to ensure there is a lender of last resort to provide liquidity support if and when required.
- More is needed to ensure that banks are resolvable without recourse to the taxpayer. Therefore, the second pillar of Banking Union remains incomplete.
- The third pillar of the Banking Union—a European Deposit Insurance Scheme or EDIS—remains missing. Deposit protection should transfer to the European level, as has already happened with banking supervision and bank resolution.
- Completing the Capital Markets Union should also be a priority. Deep and liquid capital markets have the potential for private risk-sharing to smooth economic shocks, thus increasing stability.
He mentioned that much has changed for prudential supervision in response to the measures enacted to preserve financial stability going forward. In the years ahead, it is expected from regulators and supervisors of all segments of the financial sector, from central banks, from macro-prudential authorities, from resolution authorities, and indeed from governments to ensure that the right legislative and institutional frameworks and incentives exist for a stable financial system.
Related Link: Speech
Keywords: Europe, EU, Ireland, Banking, Insurance, Securities, Systemic Risk, Financial Stability, Banking Union, Capital Markets Union, NPLs, MREL, Central Bank of Ireland, BIS
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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