sabine lautenschlager : european banking supervision - towards a common culture statement by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the european central bank, at the eurofi financial forum 2018, vienna, 6 september 2018. * * * since 2014, we have made huge steps towards establishing a truly european system of banking supervision and embracing a common supervisory culture. does this mean nothing more needs to be done? not quite. for a fully - fledged common culture you need to have three things : first, you need a truly unified legal basis. you simply cannot build a comprehensive common supervisory culture if you have to apply a different set of rules in each of the 19 countries. just think how we need to treat fit and proper assessments differently from one country to the next. second, you need harmonised administrative practices. and here, we have made good progress in the last four years – wherever the legislator granted us scope. we established practices for all the major areas of supervision, such as the srep, the treatment of npls, stress tests, the icaap, the ilaap, and so on. third, you need time and cooperation. after all, staff from 19 countries and 26 authorities have to be persuaded to leave their cultural comfort zone and align how they think, assess and act. i measure how far we have come by the frequency with which banks ask about changes in supervisory actions. in other words : how often do banks complain about changes in the way they are being supervised? they complain a great deal, i can tell you. and we keep pushing forward. let me give you just a few examples : we strive to increase the number of cross - border on - site missions, with even more on - site supervisors working on banks outside their home country. the success of this initiative will largely depend on the number of on - site supervisors the national authorities are willing to send. we have established a rotation scheme for members of our joint supervisory teams. this too will help to spread a common culture. at the same time, it helps to avoid supervisory capture. we foster exchange between supervisors from across the euro area. we bring them together in many different working groups to devise training manuals and supervisory guidance. but the ecb cannot create a common supervisory culture by itself. the national authorities can and should contribute, too. i understand, of course, that it is difficult to let

also fuelled by confidence in the ability and incentives of the major financial institutions to manage their risks. i witnessed an historic debate on the matter in jackson hole in 2005, as the then chief economist of the imf, professor raghuram rajan, questioned the faith in self - regulating financial markets. professor rajan analysed three problems : front - loaded bonuses gave incentives for higher risktaking, too much confidence was placed in risk diversification, and it was believed that there would be an endless amount of liquidity available. he concluded that these developments have not made the global financial system safer ; they have made it even riskier. he was criticised strongly, even called a luddite. history has proven professor rajan right. finally, there was the problem of ‘ too - big - to - fail ’ : financial institutions that had become too large and complex, with potentially excessive risk - taking incentives. what has been done to prevent the recurrence of the problems? 2. major changes in financial regulation and supervision at least four reforms in particular deserve closer attention. first, banks ’ loss - absorption capacity has been significantly strengthened. second, banks ’ ability to withstand liquidity crises has also been strengthened. the global financial crisis began as a liquidity crisis when banks lost their confidence in one another. banks have also been required to reduce the share of short - term funding in their funding profile. 3 / 7 bis central bankers'speeches third, no bank can be regarded as too big to fail any more. supervision and capital requirements have been strengthened the most for banks that are systemically important. authorities have been granted new powers to resolve banks efficiently. in relation to that, requirements on banks ’ total loss absorbing capacity have been introduced, especially in the form of debt that can be ‘ bailed - in ’. fourth, the global financial crisis demonstrated that price stability - oriented monetary policy and supervision that controls individual financial institutions ’ capital adequacy and risk - taking do not automatically safeguard financial stability. authorities needed a stronger mandate to ensure the stability of the financial system as a whole. identification of risks alone is insufficient to prevent financial crises. the authorities also need macroprudential tools to react to financial system imbalances. examples of these tools include counter - cyclical capital buffers and loan - to - value constraints. banking union strengthens supervision and crisis resolution in europe although the seeds of the global financial crisis were sown in the united states, many european countries