Alessandra Perrazzelli: The visionary project of a Single Supervisory
Mechanism - where do we stand after 10 years?
Speech by Ms Alessandra Perrazzelli, Deputy Governor of the Bank of Italy, at the
"SSM Regulation, ten years since" conference, organised by the Bank of Italy in
cooperation with the University of Rome "Roma Tre" and the Paolo Ferro-Luzzi
"Grandangolo" Research Centre, Rome, 20 October 2023.
* * *
It is a distinct honour to celebrate a remarkable milestone in the European financial
landscape - the first ten years of the SSM Regulation. This occasion represents a
significant chapter in our financial history, and it is with great pride and enthusiasm that
we come together to reflect on the journey, acknowledge our achievements, and chart
the course for the future.
From its very inception, the Single Supervisory Mechanism was a visionary initiative
that forever changed the paradigm of financial supervision in Europe. The path to
establishing the SSM was far from simple, as it marked a profound shift from highly
fragmented national banking supervision systems, charged with safeguarding their
domestic financial institutions, to a unified European approach with a broader
perspective. Over the past decade, we experienced a remarkable evolution in our
approach, with the goal of crafting a truly European spirit.
In fact, the fragmentation of supervisory powers was not fully adequate when it came to
addressing cross-border financial challenges and crises. As we have witnessed in
recent years, these challenges can take various forms, such as the COVID-19
pandemic, the Russia-Ukraine conflict or the impact of rising interest rates. Had we still
been left to address these challenges separately, we would have likely found our
financial system less resilient and less able to adapt to rapidly changing circumstances.
Today, I would like to focus on the main achievements and challenges that lie ahead in
the field of banking supervision.
Achievements...
First and foremost, the supervisory framework has undergone a profound maturation
process. One key point worth highlighting is that the European supervisory framework
has emerged as a synthesis of the best national practices. The creation of the SSM
allowed us to establish a new standard in supervisory activities, creating a
comprehensive framework that ensures fairness, transparency, and accountability.
Fairness, as a guiding principle, guarantees that all supervised entities are on a level
playing field; this has been achieved by leveraging a powerful benchmarking approach,
meaning that each institution is subject to the same rigorous standards thereby
preventing any undue advantages or disadvantages.
Moreover, the SSM places a strong emphasis on transparency and accountability. It is
essential that both the market and the entities under supervision have a clear view of
our policy stances and of our supervisory process and its results. This is not only a
good practice for financial authorities, it is the backbone of mutual trust and confidence.
The SSM has integrated our voices and efforts, in the pursuit of the 'one team spirit',
enabling us to leverage different supervisory cultures and diverse operational
experiences under a unified SSM methodology. Thus, the SSM has capitalized on the
histories of the national supervisory authorities, guided by a shared European vision.
However, as we reflect on our accomplishments, we must not rest on our laurels. The
global financial landscape is continually evolving, and our European framework must
evolve with it.
As we chart our path forward, there are specific aspects that warrant our continuous
attention and effort.
First, there are the differences in national regulatory regimes: while the SSM has made
significant strides in harmonizing supervisory practices across Europe, we must remain
committed to working on the progressive reduction of disparities between national
regulatory regimes in several areas. By the same token, we are still awaiting the
completion of the third pillar, the European Deposit Insurance Scheme (EDIS). The
puzzle is not yet complete, but we remain confident that we will ultimately get there.
Second, the sense of belonging to a single system for our resources: this is an issue
that has been at the forefront of discussions, particularly with the initiation of the SSM
Integration project.
...and challenges ahead
While we take pride in our achievements, it is equally important that we address the
challenges and potential vulnerabilities affecting the financial industry, calling for
changes in our supervisory approach. One of the critical areas of concern pertains to
the SSM's primary focus on supervising banking groups, which constitute just one facet
of the broader financial landscape. However, non-bank financial intermediation,
encompassing entities such as financial intermediaries, asset management firms,
investment funds and payment service providers, has seen significant growth over the
past decade and is strongly interconnected with the banking system. While this
evolution is a positive development in terms of fostering financial integration and
bolstering economic growth, it also introduces heightened risks to the financial system.
Increasing competition and potential spill-over effects cannot be disregarded from a
supervisory point of view.
Another significant challenge is that non-bank financial intermediation, in particular the
most innovative ones, often fall outside the traditional regulatory perimeter. This
regulatory gap can create a blind spot for supervisors, as non-bank financial entities
may engage in activities that could pose systemic risks without adequate oversight. It is
vital that we strike a balance between regulating non-bank entities to mitigate risks and
allowing them to innovate and provide essential financial services.
In this regard, the rise of FinTech companies adds another layer of complexity to this
interconnected landscape. FinTech firms often collaborate with banks to offer innovative
financial services. Their rapid growth and evolution present regulatory challenges, as
they can bridge the gap between traditional banking and non-bank financial
intermediation, transforming traditional risks into new or different ones, that are harder
to grasp.
Therefore, recognizing and addressing these interconnections and the related risks is
crucial. However, we cannot wait for the regulatory framework to address this issue.
While we recognize the importance of a thorough legislative process in crafting robust
and lasting rules, banking supervision often requires proactive measures to stay ahead
of evolving market dynamics, as we are presently witnessing.
Thus, as we await the establishment of a clearly defined regulatory framework, as
supervisors, we are compelled to address the challenge of ensuring thorough and
efficient supervision across these interrelated sectors. This responsibility becomes even
more critical as we gear up for the implementation of the MiCAR and DORA
regulations, which will introduce new dynamics in the financial landscape. The SSM is
then tasked with fostering collaboration and information-sharing with other relevant
authorities, to ensure a coordinated response and consistent oversight across the
financial spectrum.
This process will entail adaptability, proactive issue identification and resource
allocation to address priorities. It will be crucial to follow the risks wherever they may
arise. This will indeed pose a significant challenge for the SSM and the Supervisory
Board.
In this context, continuing the dialogue with the market will be crucial. The Bank of Italy
initiated this process some years ago, developing three integrated channels of dialogue
with the market: Milano Hub, the Regulatory Sandbox and the Fintech Channel.
It is clear that as we celebrate the first ten years of the SSM Regulation, we stand at a
crossroads. In a continuous learning-by-doing process, we are still open to discussing
further improvements in our supervisory review and evaluation process, as the last
Strategic Retreat meeting held in Rome demonstrated.
It is therefore essential that we adapt to these changes, anticipate new challenges while
supporting financial innovation, addressing the grey areas of the regulatory/supervisory
framework.
What's next? The outer reach of AI
Currently, banks and supervisors are in the midst of a digital transformation process, a
significant shift that has brought about not only heightened traditional risks but also the
emergence of entirely new challenges.
Amid this ongoing transformation, one topic has particularly captured the spotlight in the
realm of innovative tools, and that is Artificial Intelligence. European regulators are
actively engaging with the advent of AI, recognizing its far-reaching implications across
numerous sectors, including supervised entities and authorities.
In particular, the use of technology and artificial intelligence for banks and supervisors
is already a strategic issue. Banks could make use of AI in several ways to improve
efficiency, such as in credit scoring models, fraud detection, risk management or
predictive customer behaviour. As well, AI also has potential application in the realm of
banking supervision. AI could help supervisors in assessing banks' compliance with
regulatory requirements by analysing vast amounts of data and helping build early
warning systems for identifying emerging threats or vulnerabilities. It is imperative that
we strategically enhance our competencies, approaches and tools to stay aligned with
the rapid evolution of technology and AI.
Nevertheless, banks and supervisory bodies must not disregard the ethical
considerations posed by AI adoption. AI models have the potential to produce biased
decisions and result in discriminatory bank lending. Furthermore, given that banks and
supervisors deal with sensitive data, it is imperative that the use of AI aligns with
stringent data privacy regulations to mitigate the risk of misuse in the event of data
breaches. In conclusion, the advent of artificial intelligence offers substantial
opportunities and an expanded toolkit for banks, provided they can effectively manage
associated risks. As we embrace the potential of AI, we must be vigilant in our
approach to risk management. These new horizons, while promising, also introduce
complexities that demand our close attention. We need to safeguard against the appeal
of automation and ensure that the role of human expertise remains central in our
decision-making processes. We must remember that, no matter how sophisticated and
powerful the technology becomes, the ultimate responsibility for decisions cannot be
transferred to automated processes. AI can complement and assist, but it cannot
replace the judgment and experience of supervisory authorities and a good banker.
Conclusions
We must be proud of what we have achieved with the SSM. It was indeed a very
ambitious undertaking, but we have achieved, in a relatively short span of time, many
significant milestones through a common effort aimed at integrating diverse supervisory
traditions and incorporating the best national practices into a unified SSM approach.
At the same time, we should acknowledge that there is still a long road ahead. Three
concepts must remain our guiding stars: a rigorous approach, cooperation and
openness to innovation.