Andreas Dombret: Moving together - one year of European banking
supervision
Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at the ESE Conference 2015 "Financial supervision in Europe - on the right
track?", Prague, 2 October 2015.
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1. A courageous mission
Ladies and gentlemen
Ever since the idea of an integrated Europe first arose, political convergence has been
accompanied by scepticism and even by fears. How could nations and cultures with various
languages, mentalities and histories develop a common understanding of government and
administration? Without a blueprint solution, Europeans adopted a best-practice approach
that is nicely captured by a quote from Shakespeare: "Wisely and slow. They stumble that
run fast."
Against this backdrop, the mission of a unified banking supervision network must have
appeared almost illusionary. Nevertheless, on 4 November 2014 it became a reality, and the
ECB was designated as its leading authority, thereby becoming directly responsible for what
turned out to be 85% of banking balance sheets in the euro area. Such a transition naturally
involves acquiring skills and expertise: with that in mind, human resources equating to
roughly 1,100 full-time equivalents were newly appointed by the ECB. And it also meant
developing administration systems and procedures from scratch.
Admittedly, Europe has by now witnessed quite a few very influential developments on a
European scale. But while the European Union developed over decades and the euro was
implemented as a common currency over a period of approximately ten years, the Single
Supervisory Mechanism, or SSM for short, became a fully fledged and operational
organisation after around only two years of preparations.
Such a courageous mission could only be ratified under very specific circumstances. In fact, I
believe that it was only realisable in the face of the financial and sovereign debt crises and
the vulnerability of the common currency area that was revealed as a result. We experienced
banks that were "too big to fail" and needed to be rescued. We also experienced banks that
were caught in a vicious cycle together with their governments due to debt amalgamation.
As a consequence, national supervisors were overburdened. Good rules for the financial
sector are not enough - they also need to be enforceable under bad circumstances. Rules
are worth little if you do not ensure that banks abide by them. Therefore, one of the SSM's
primary goals was, and still is, to promote a trusted financial regime by protecting the
common currency area from banks' exploitative potential.
In addition, the SSM was designed to harmonise supervision, eliminate home biases,
alleviate cross-border supervision and get an early and reliable overview of emerging risks -
in short, to enhance the path towards a fully integrated financial sector in Europe.
The SSM was doomed to be successful because it had to be a key servant of financial
stability as soon as it came into being. It also attracted attention because it had potential to
serve as a compass for Europe. Moving together - is it working? After one year of the SSM,
it is about time for a review.
2. Components of the SSM's success
One year after its establishment, I can confirm that the launch of the SSM has been a
success. But its success goes beyond a mere change of supervisory responsibilities.
Harmonisation and quality enhancement got underway beforehand with a comprehensive
assessment that made sure that banks were well-capitalised from the outset.
Take a look at German banks - we witnessed recapitalisation even before the
comprehensive assessment was carried out in 2014. In other countries, an overall
€ 25 billion capital shortfall had to be straightened out as a result of the comprehensive
assessment. Corrections to banks' assets worth € 48 billion and harmonisation of the
definition of non-performing loans (leading to corrections of € 136 billion) also made clear
that the need for harmonisation was truly significant and that the new supervisory player was
recognised as a serious authority from the beginning.
Putting such "hard facts" to one side, we are also seeing the benefits of the new regime in
our daily business. There are 123 joint supervisory teams - or JSTs for short - for those
banks that are directly supervised by the ECB. Bundesbank supervisors are participating in
22 JSTs for German banks as well as in 12 host JSTs for foreign banks. This multinational
interaction noticeably helps preclude home bias. However, we cannot rule out the continued
existence of some preconceptions because they may be unintentionally masked by habits
and different attitudes towards supervision. But a cross-national dialogue is probably the
most productive way to discover and discuss partial supervisory routines.
Furthermore, a level playing field and cross-border supervision are facilitated within the SSM
area. Of course, the European Single Rulebook and the European Banking Authority have
their part to play in this development. But when it comes to the cross-border supervision of a
banking group, institutional exchanges within JSTs have proved rewarding. In addition, the
ECB has already harmonised its use of roughly 100 regulatory options and discretions that
were meant for specific national situations but led to an inconsistent framework in the SSM
area.
Overall, banks are said to mark their new supervisory counterpart as tough but fair. In today's
difficult financial environment, I am inclined to read this feedback as a compliment for the
SSM as a whole because we seem to manage two roles at once: the role of a referee to
ensure fair play and a level playing field and the role of a diligent doctor to ensure that our
patients remain sound and healthy - prescribing a bitter pill when necessary.
3. European supervision - a continuing everyday challenge
Improving processes and cultural learning take time. And there is no doubt that it will be an
ongoing challenge to ensure steady and high supervision quality that reflects both banks'
individual risks and their changing environment.
Let me emphasise a few challenges the SSM faces with direct relation to supervisory quality.
My first example deals with our own impact on the sector's diversity, which is reflected in the
differentiation between 120 significant institutions that are directly supervised by the ECB
and about 3,500 less significant institutions that are supervised by national authorities.
It goes without saying that a broad information base is vital for the purpose of financial
stability. Banks themselves ultimately profit from insights into financial cycles and threats to
the financial sector. But I fear that our data requests require resources in banks that are
more easily provided by large institutions. We should assess in an open-minded manner
whether the costs and benefits of our supervisory curiosity are always aligned with respect to
many small banks. What is more, sector diversity also requires that factors other than size be
taken into account: these include business models, the changing regulatory and financial
environment and even societal trends such as digitalisation.
It should be in our interest to safeguard a level playing field, not only with respect to special
national treatment but also with respect to risk-adequate supervision. Protecting variety in
banking is one way to enhance sector stability. Therefore, I appreciate efforts from the ECB
to widen the perspective of banking supervision beyond the level and quality of capital
towards proportionality.
There are other challenges that concern the supervisory quality and long-term functioning of
the SSM. I am thinking especially of our most valuable resource, namely well-trained and
motivated staff. Therefore, I strongly support initiatives such as the ESE initiative that support
cross-border learning and knowledge sharing.
Staff motivation is a core asset. Anyone working for the SSM should be able to make a
difference. That requires processes to be transparent and unbiased as to the result. We have
to reconsider processes that are overly pre-structured, which will make the mechanism more
productive as a whole. There are promising examples of expert groups in which national
supervisors share and develop their knowledge.
Another area to examine should be decision-making processes themselves: any effective
and timely involvement in a decision requires that it can make a difference. That should help
staff of national supervisory authorities, in particular, feel like they are part of the SSM - the
SSM as a network that makes accurate, high-quality decisions and delivers best-practice
supervision.
There are still incidents of mismatched working cultures in our daily supervisory operations,
one example being on-site inspections. We should ensure that there is no rivalry between
national dogmas but rather a cooperative search for proper solutions. Additionally, language
is obviously an enduring challenge in a European context. The ECB promotes English as a
working language, but institutions often prefer their local language to avoid legal
uncertainties. Language barriers will continue to accompany the SSM.
Lastly, allow me to turn to a fundamental flaw that the SSM still has to overcome in its
construction. Let me restate one of the initial reasons for the mission of a transnational
banking supervision network that I mentioned earlier: it should serve to decouple bank risks
from nation state risks. This, however, should not be substituted for a coupling of bank risks
and central bank risks.
The ECB plays different roles in our monetary union: the role of a microprudential supervisor
as well as that of a responsible authority for monetary policy. So the ECB works with banks
as both a business partner and their supervisor. While there are certainly synergies between
both tasks with respect to financial stability, unintended symbioses are possible as well - and
I believe that they could become more dangerous. It is especially with respect to institutions
that are likely to fail that I fear political incentives could go astray. In the long run, I therefore
call for a strict line between supervisory powers and monetary decisions.
4. Unifying national and European perspectives
Where should the SSM go from here? It seems like a natural response to internal frictions to
cultivate SSM processes and enhance centralisation. This might be interpreted as a blueprint
to overcome frictions with national cultures. One is inclined to question the network character
of European banking supervision at large: wouldn't a single authority do a more efficient job?
I want to iterate two essential arguments against this reasoning. Instead of a steady path
towards more centralised supervision, I am arguing for a balanced mix of centralised
stringency and national diversity.
First - and well known to most in the business - good supervision requires us to be close to
banks. This is not only a matter of physical proximity. Language, business environment,
culture and many other accompanying characteristics of the banking business have local
roots. The generally slow process of European integration aside, we cannot expect regional
diversity to ever become extinct. While the ECB has indeed done a remarkable job of
steering the SSM through its first year, this does not imply that it is bound to solve any
organisational difficulty in a top-down manner. Instead, we should take advantage of
bottomup engagement whenever it is feasible.
Second, we should keep in mind the need for self-control. We have to assure our internal
balance of powers. Again, this is not meant as a subtle reach for national privileges but
instead as a call for institutional diversity. This is not to be confused with harmonised
supervision, which remains ever paramount. Importantly, institutional diversity can only be
maintained if national supervisory authorities have a meaningful voice in the process.
Diversity cannot be maintained by itself. It needs to be actively promoted via the SSM
governance culture.
5. Conclusion
The SSM has gained a reputation as a tough but fair supervisor. I have argued for the
preservation of its network character. In order to retain a power balance, we have to allow for
multi-level governance. We should aim for an open-minded leadership that governs the SSM
according to supreme aims.
Let me reiterate three important aims and implications.
• Risk-adequate supervision implies that we should allow for flexible supervisory
requirements when applicable.
• Efficient processes require us to use our human resources in areas of the SSM
where they will be most useful.
• Maintaining diversity and subsidiarity within the SSM network requires us to actively
promote the involvement of national supervisory authorities.
European integration essentially involves learning to manage diversity. In this respect, the
ECB has proved itself to be a prototype for self-awareness and openness. Recent
SSMinternal analyses of strengths and weaknesses and organisational changes show that it is
not resting on its laurels but rather aiming for long-term success.