François Villeroy de Galhau: Ten years of Single Supervisory
Mechanism (SSM) - great achievements, and new journeys to
complete
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France and Chair
of the Prudential Supervision and Resolution Authority (ACPR), at the Conference held
at the ACPR, Paris, 24 June 2024.
* * *
Ladies and Gentlemen,
I am pleased to welcome you, alongside Denis Beau, First Deputy Governor of the
Banque de France, and Nathalie Aufauvre, Secretary General of the ACPR, to this
conference organised by the ACPR (Autorité de contrôle prudentiel et de résolution ), in
this year when the ECB is celebrating the 10th anniversary of our single supervisory
mechanism (SSM). It is also a very great pleasure and honour to welcome prominent
architects and builders of the SSM: Jean-Claude Trichet, the three consecutive Chairs
of the SSM, Danièle Nouy, Andrea Enria and Claudia Buch, as well as Christian Noyer,
Elizabeth McCaul and Edouard Fernandez-Bollo.
The SSM is undeniably a success story; it is acknowledged as one of the most efficient
supervisory bodies in the world. It has a key human foundation: the successful
integration of teams, and ever greater convergence. I would like to pay tribute to the
remarkable commitment of the staff at the ECB and the national supervisors, including
that of the women and men at the ACPR. The ACPR provided the SSM with its first
Chair, the talented and highly-committed Danièle Nouy, and more than 80 colleagues.
The ACPR was also a major driver in the adoption of an integrated and intrusive
supervision model, in which independent on-site inspections play an important role.
Building on these strong credentials, the SSM can now evolve towards a more
qualitative and risk-focused supervision (I). Taking a broader perspective, completing
the Banking Union remains an utmost necessity to further strengthen European banks
(II).
I. Relying on its strong credentials, the SSM can now evolve towards
a more risk-focused supervision
The SSM is the result of the strong and common determination of European political
authorities and supervisors alike, in the wake of the great financial crisis. From its
inception in 2014, the SSM went to tremendous lengths to reduce European banks'
vulnerabilities and enhance their risk management, and quickly created the conditions
for effective supervisory harmonisation. All in all, the SSM significantly improved
resilience of, and confidence in the European banking sector. It forcefully demonstrated
its ability to prevent crises - notably in 2023 after the bank failures in the United States
and the forced takeover of Credit Suisse. Basel rules and European macroprudential
policies have also served our financial system well. Together, these elements have
effectively protected the euro area - throughout the pandemic and then the sharp rise in
interest rates.
Now is the time for regulatory stabilisation. European supervisors and legislators are
determined to ensure a level playing field between different jurisdictions and,
consequently, a fair application of Basel III everywhere. With this in mind, the
Commission envisages a one-year delay for implementing the FRTB; but we strongly
hope the US authorities will transpose Basel 3 in a full and consistent way and in the
not too distant future.
Coming back to the SSM, its supervisory practices are now sufficiently mature to make
processes leaner, in order to enhance risk-based supervision and make use of the full
supervisory toolkit - notably by focusing on qualitative measures. That was the main
i
conclusion of the Wise Persons report in April 2023 . Fernando Restoy is also with us
today, and I would like to take this opportunity to pay tribute to this collective work. This
report paved the way for the improvement of the existing Supervisory Review and
Evaluation Process (SREP) and the launch of several new projects and initiatives.
Last month, the Supervisory Board decided on concrete measures to incorporate a
more risk-proportionate approach into the SSM's methodologies, processes and tools,
ii
starting in the second half of 2024 as recently stated by Claudia Buch. Let me
highlight a few complementary upcoming improvements in the SREP. First, the
reinforcement of the multi-year approach to better plan and spread the detailed analysis
over time and, provided there is no material change in a bank's risk profile, the
possibility to update SREP decisions every two years instead of yearly. Second, a
greater focus on key expectations and results, with a better use of the escalation ladder
should deficiencies remain non-remediated for a long time. Overall, we will have a
shorter SREP process, with decisions to be sent to the majority of banks by the end of
September, compared with December as currently the case. All these measures are
significant steps forward: they will make supervision swifter, more responsive and more
intrusive where needed.
To go further, we can and should pursue our efforts towards a more qualitative and
riskfocused supervision. The forthcoming new SREP methodology is a real opportunity to
prioritise our supervisory tasks according to our risk assessment and incentivise further
SSM banks to achieve the necessary changes to improve their risk profiles. With regard
to our internal functioning, there is still room to fine-tune the articulation between
vertical and horizontal supervisory activities to enhance our effectiveness, optimise our
resource allocation and thereby reduce the "supervisory burden" both for banks and
supervisors. As bottom-line, we need to engage even further into a constructive
supervisory dialogue; and this requires commitment on both sides of the table, we as
supervisors, and banks alike.
I deeply believe that we can now leverage on SSM expertise and in-depth knowledge of
the European banking sector to trust our supervisory judgement, and adopt a more
strategic and holistic approach to risk assessment. While benchmarking is an important
input into the process, notably to ensure a level playing field, it is clearly not the only
one; the individual assessment of each bank's risk profile, based on constrained expert
judgement, should remain the core of our assessment.
II. Banking Union: why and how to move forward again
Let me now turn to a far-reaching issue that we still need to tackle, after several years
of deadlock: a fully integrated banking market in Europe. Let us acknowledge it: we
have been very successful in building a Supervision Union - which we celebrate today
- less so in a complete Banking Union. This slowness has hampered the emergence of
pan-European banks, and our banks are becoming smaller compared with their global
rivals. In 2023, the domestic market share of the top five US banks stood at 42%,
iii
compared with around 28% for the top five in Europe. Meanwhile, the most active
European bank on investment banking activities ranks only ninth worldwide, far behind
the top five - which are all American. Euro area banks accounted for only 29% of
investment banking fees generated by the top 10 players in Europe in 2023, compared
with 34% a year earlier.iv
For banks - and we see this in the United States - scale is objectively a major
determinant of competitiveness, particularly as it enables banks to amortise the cost of
critical investments in digital technology and artificial intelligence. European banks will
have to innovate in the tokenisation of their deposits, and in building "cutting-edge"
payment and market infrastructures in conjunction with public authorities. We shouldn't
fear larger, cross-border European banks, provided they are managed and supervised
closely; on the contrary, we should foster them. It is high time we took advantage of the
size of the European market. We Europeans need to find a way to make real and
significant progress: step by step, in the right direction, and I know dear Claudia you
share this conviction.
In particular, efforts still need to be made to put into practice the notion of a "single
jurisdiction", and to put aside some of the nationalistic debates and ring-fencing
practices, particularly in "host" countries. The effective implementation of cross-border
liquidity waivers, although prescribed by the European legislation, remains far too
limited in practice. Waivers for capital requirements should not only be treated as a
heritage but new ones should be envisaged as well, including the extension of
intragroup waivers for resolution purposes. Consequently, many of us have proposed
solutions for completing the Banking Union, notably Andrea Enria and his concrete
v
proposed ways-forward; our workaround solutions need to tackle the home/host issue
to succeed.
In the same vein, I suggested a few years ago that instead of a fully-fledged EDIS
vi
(European deposit insurance scheme) we could work on more targeted solutions. In
vii
the words of my German colleague Joachim Nagel last April, "a hybrid model would
offer multiple benefits over a centralised, purely European model". We could keep the
national deposit insurance schemes as they currently exist, but support them when
specific payout interventions require additional liquidity. We could also significantly
improve the coordination between supervision and resolution, and better incorporate
the cross-border dimension in our requirements for MREL and own funds.
One final word to state the obvious: French banks are very solid in their liquidity as well
as in their capital, and these strengths have not been anyway affected by the recent
moves in stock exchanges due to political uncertainty. Still more important, the French
banking model is conducive to sound financing of the real economy and favourable to
banks' customers (households as well as businesses), with its three components:
moderate intermediation margins, high lending volumes and a low cost of risk. French
banks are and will remain a positive asset for the French economy, and for Europe as
well, being among the largest and most resilient ones.
* *
I will conclude with Marcel Proust and Swann's Way - the first volume of In Search of
Lost Time. "The real voyage of discovery consists not in seeking new landscapes, but
in having new eyes" (« Le véritable voyage de découverte ne consiste pas à chercher
de nouveaux paysages, mais à avoir de nouveaux yeux »). Well, when it comes to our
matters, new eyes can enable us not only to complete our supervisory and Banking
Union journeys, but also to change the European landscape on competitiveness,
growth and innovation. The former goal will support the latter. Thank you for your
attention.
i
Assessment of the European
Dahlgren (S.), Himini (R.), Restoy (F.) and Rogers (C.),
Central Bank's Supervisory Review and Evaluation Process, Report by the Expert
Group to the Chair of the Supervisory Board of the ECB, April 2023
ii
Buch (C.), Reforming the SREP: an important milestone towards more efficient and
effective supervision in a new risk environment (europa.eu)
iii
Expressed in terms of consolidated domestic assets. Sources: Federal Reserve, ECB
and Banque de France calculations.
iv
London Stock Exchange group, ACPR calculations
v
Of temples and trees: on the road to completing the European banking
Enria (A.),
union, speech, 17 May 2022
vi
Villeroy de Galhau (F.), The Banking Union: Time to move forward again, speech
delivered at Eurofi Financial Forum, 10 September 2021
vii
Monetary union, capital markets union, banking union - a triad for
Nagel (J.),
Europe's prosperity and resilience, speech, 23 April 2024