Sabine Lautenschläger, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB, gave a speech on what ECB regards as the four key priorities for successful bank supervision:
- Global approach to regulation: banking is conducted globally and requires regulation on an equivalent scale. Banking reforms have dominated European discussions for 10 years but new rules are futile unless accompanied by proper application. ESB wants to open up dialogue internationally so that regulators from around the world can draw on their differences to strengthen the global market.
- Brexit: Lautenschläger is concerned that time is running out for UK banks that will need to get authorised within the EU in the event of a hard Brexit, and urges firms to be more proactive in applying for the relevant licences. There is also a chance that, as a result of Brexit, more broker-dealers or third-country branches will leave the UK market. These entities will be supervised at national level, but because the market is likely to become more fragmented, it will be necessary for supervision to be conducted at a European level too. The current review of the European rulebook offers a chance to adapt the relevant rules.
- Non-performing loans (NPLs): in some parts of the euro area, banks still have large exposures to NPLs on their balance sheets which it takes time and effort and the right support and structure to get rid of. The ECB has called on governments to improve their legal and judicial systems as the price of NPLs depends largely on whether national legal systems are effective and efficient. In addition, ECB has published guidance for banks on how to deal with NPLs, and its supervisors continue to closely monitor the strategies banks devise and the progress they make.
- Risk management: this includes internal models, which have become very complex and as such are prone to error or manipulation. ECB has launched a major and targeted review of internal models. It wants to (a) harmonise the supervisory treatment of internal models and ensure a level playing field (b) ensure that the results of internal models are conservative and driven by actual risks, and not by modelling choices. It hopes this will strengthen trust in the banks’ calculation of risk and, ultimately, in the adequacy of capital buffers.