The European Central Bank (ECB) has published a speech by Sabine Lautenschlager, ECB Executive Board Member and ECB Supervisory Board Vice-Chair, entitled European banking supervision – achievements, challenges and the way forward.

In her speech Ms Lautenschlager focusses on three themes:

  • supervisors and the single rulebook. In this part of her speech Ms Lautenschlager states that there should be further harmonisation of the single rulebook. In particular she states that instead of EU Directives, there should be more reliance on EU Regulations, which are directly applicable. She also adds that care should be taken so that the single rulebook is not too detailed. Trying to have a rule for every eventuality is an elusive goal as the business of banking is so complex and fast changing that no rulebook would be able to fully cover it. In conclusion Ms Lautenschlager adds: “we need clear-cut rules, and we need sound supervisory judgement. Adding more and more details to the rules might come at the expense of supervisory judgement. With the recent reforms we have struck a balance in this regard. If we were to upset this balance, it would become much harder to ensure that banks remain safe and sound”;
  • supervisors and their toolbox. Ms Lautenschlager notes that the toolbox of European banking supervisors needs to be expanded, harmonised and streamlined. In addition, the supervisory review and evaluation process (SREP) needs to be refined as there is a need to consider how best to assess the risk management of banks in the SREP. This involves not only what is expected with regard to the management of IT risks, outsourcing or leverage finance but also further defining the fully fledged minimum expectations for the risk management of banks. Other tools, such as on-site inspections of banks also require improvement because they are applied in different ways in different countries. In addition, the overlap between early intervention tools and standard tools should be removed; and
  • supervisors and the market. Ms Lautenschlager argues that the EU regime for bank recovery and resolution has been shown to work. The ECB, the Single Resolution Board, the European Commission and the relevant national authorities have proved that they can cooperate closely and have demonstrated that they can deal with failing banks. However, she accepts that the regime can be improved not just in relation to when a bank fails but also what can be done before it comes to that. On this issue Ms Lautenschlager mentions precautionary recapitalisation, noting that under European rules on state aid banks can be given public money. However, these rules may need updating in order to align them with the EU regime for recovery and resolution. In this context, further thought is needed as to how solvency is defined. Ms Lautenschlager also mentions that further tools should be added to the European toolbox in order to resolve a bank. Such additional tools include a moratorium. Finally, Ms Lautenschlager notes that only systemically relevant banks will be resolved at the European level, all other banks will be subject to national insolvency regimes. Ms Lautenschlager states that it “might thus be warranted to harmonise these regimes across Europe to ensure a level playing field.”

View ECB speech on European banking supervision highlights need to improve and harmonise, 28 September 2017