October 30, 2018

While speaking at the 13th ASBA-BCBS-FSI High-Level Meeting on Global and Regional Supervisory Priorities in Bahamas, Sabine Lautenschläger of ECB took stock of risks, rules, and supervision ten years after the global financial crisis. She examined importance of the effective global implementation of Basel III reforms, outlined the new approach for banking supervision, and discussed the risks looming in the horizon.

She examined the importance of the global implementation of Basel III reforms and highlighted the need to watch out for regulatory arbitrage by banks. With respect to a better approach to banking supervision, she mentioned that supervisors must be adaptive and must take a risk-based and forward-looking approach. They need not rely on what the banks tell them, but can form their own opinion and challenge the views of banks. For example, ECB benchmarks banks that pursue the same line of business. Supervising the 118 largest banking groups from across the euro area means that ECB can benefit from a deep quantitative and qualitative analysis. This allows ECB to challenge banks in a more credible manner. Next, she discussed the importance and need for international cooperation, adding that the Financial Stability Institute plays an important role in bringing together supervisors at all levels from around the world.

She mentioned various risks facing the banking sector, including geopolitical uncertainties related to trade tensions and Brexit, legacy assets such as non-performing loans, cyber risk and other risks associated with digitalization, shadow banking risks, and climate change risks. In terms of climate change, she sees three challenges for banks. First, there are physical risks. More frequent and more severe storms, floods, droughts, heatwaves, and rising sea levels have already caused losses for businesses. When these risks were uninsured, they had very direct effects on banks’ credit risk, for example, through damaged collateral. Second, “green finance” is a growing area of business. As all supervisors know well, financial innovation can bring a lot of good—but it can also spin out of control. So, green finance must be monitored, just as any other type of financial innovation is monitored.

The third challenge is related the transition to a low-carbon economy. Policies to encourage a more sustainable way of doing business will have far-reaching consequences. For one, they could impact the banks’ customers. Think of car manufacturers or energy suppliers. They could affect commodity and energy prices. This in turn could change market risks for banks. The policies required to shift to a more sustainable economy could upset financial stability. However, this should not scare us into inaction. This is because the true risk is that banks do not adjust or adjust in the wrong way. She added that supervisors should keep expanding their horizons. In practice, this could mean encouraging banks to recognize the potential impact of climate risk on their exposures. 

 

Related Link: Speech

Keywords: Europe, EU, Banking, Banking Supervision, Basel III, Climate Change Risks, ECB

Related Articles
News

FSB to Evaluate Effects of Too-Big-To-Fail Reforms for Systemic Banks

FSB is seeking feedback as part of its evaluation of the effects of the too-big-to-fail reforms for banks.

May 23, 2019 WebPage Regulatory News
News

APRA Releases Minor Changes to Reporting Standards on SA-CCR for Banks

APRA released minor changes to the three reporting standards for the standardized approach for measuring counterparty credit risk exposures (SA-CCR).

May 22, 2019 WebPage Regulatory News
News

APRA on Industry Self-Assessments into Governance and Accountability

APRA released an information paper analyzing the self-assessments performed by 36 of the country’s largest banks, insurers, and superannuation licensees in response to the final report on the Prudential Inquiry into the Commonwealth Bank of Australia (CBA).

May 22, 2019 WebPage Regulatory News
News

PRA Consults on Maintenance of TMTP Under Solvency II

PRA published a consultation paper (CP11/19) that sets out its approach to update supervisory statement (SS6/16) on maintenance of the transitional measure on technical provisions (TMTP) under Solvency II.

May 22, 2019 WebPage Regulatory News
News

APRA Proposes to Amend Guidance on Residential Mortgage Lending

APRA is consulting on revisions to the prudential practice guide APG 223 on residential mortgage lending in Australia.

May 21, 2019 WebPage Regulatory News
News

IASB Proposes Improvements to IFRS 9 and IFRS 16

IASB published the exposure draft ED 2019/2 that proposes amendments to four IFRS standards, including IFRS 9 on Financial Instruments and IFRS 16 on Leases.

May 21, 2019 WebPage Regulatory News
News

Denis Beau of BDF on Supervisory Priorities for Climate-Change Risks

Denis Beau, the First Deputy Governor of BDF, delivered opening remarks at the BCBS-BSCEE-FSI High-level Meeting for Europe on banking supervision.

May 21, 2019 WebPage Regulatory News
News

ISDA CDM to be Deployed for UK Digital Regulatory Reporting Pilot

ISDA announced deployment of the ISDA Common Domain Model (ISDA CDM 2.0) to support the UK FCA, BoE, and participating financial institutions in testing phase two of the Digital Regulatory Reporting pilot for derivatives.

May 21, 2019 WebPage Regulatory News
News

MAS to Consolidate Regulation of Merchant Banks Under Banking Act

MAS published a consultation paper that proposes to consolidate the regulation of merchant banks under the Banking Act and to move merchant banks to a licensing regime under the MAS Act.

May 21, 2019 WebPage Regulatory News
News

ESAs Amend Technical Standards on Mapping of ECAIs Under CRR

ESAs published a second amendment to the implementing technical standards on the mapping of credit assessments of External Credit Assessment Institutions (ECAIs) for credit risk under the Capital Requirements Regulation (CRR).

May 20, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3118