francois villeroy de galhau : banking turmoil - three blessings and a funeral speech by mr francois villeroy de galhau, governor of the bank of france, at the eurofi high - level seminar 2023, stockholm, 28 april 2023. * * * ladies and gentlemen, i am delighted to address you at this eurofi seminar in stockholm, and i would like to extend my warmest thanks to david wright and didier cahen. this speech, as the two previous ones, seems like a perfect opportunity to take a first look at the lessons to be learnt from the banking turmoil of 2023. as i have the privilege to speak after my friends pablo hernandez de cos and klaas knot, my task is made simpler : they have already covered a lot of ground, and hence i will be able to speak still more freely, and to call my speech " three blessings and a funeral ". let me start with the funeral, at least the one that we can welcome, but which, unfortunately, is not final. it should be the condemnation and the funeral of mismanagement. indeed, blatant mismanagement of the risks and of the business model in some banks explains first and foremost the recent turmoil. as pablo said in washington, " jumping straight to discussions about the regulatory and supervisory implications of recent events is akin to forgiving banks for not fulfilling their primary responsibilities ". 1 to put it even more bluntly, when some people act like reckless drivers on the road, they are the ones who are guilty, not the police. after the ( temporary, alas ) funeral, let me return to the three blessings. this word is a bit selfcentered, i confess, since i am referring to public policies, and each of them today raises questions : ( i ) regulation, ( ii ) supervision, ( iii ) resolution. therefore, how could we revisit each of them? i. regulation : a plea for an effective implementation allegedly, if regulation had been more effective, it could have prevented the banking turmoil. for its critics, basel iii was too focused on liquidity and counterparty risks, and not enough on interest rate risk. well - let me call into question those ideas. such criticism is ironic : didn't anyone notice that the first blast of turbulence came from a bank not subject to the full set of basel standards? while the basel framework applies in its entirety to every single european bank – several thousands of them

. the answer is clear : good regulation is necessary ; it's never sufficient. the risks generated by specific business models such as the asset - liability mismatch at svb or the weak profitability and weak internal controls that dogged credit suisse should typically have led to higher supervisory requirements. supervision should not be seen as a static business ; it must be active and tailored to banks characteristics. this is precisely the spirit of the " pillar 2 " in the basel framework, with the annual supervisory review process. i sometimes hear doubts about supervision, which some believe should be treated as a legal dialogue, cautious in its form, and slow in its effects. no : supervision can and must be intrusive – including on - site –, exercised by highly skilled practitioners, quick in its reaction, strong in its powers. this is not wishful thinking : it has been our experience for decades in the french acpr, and now for years in the european ssm. active supervision is indeed one of the great successes of our european banking union. in light of the recent reality test, i believe there are two lessons to be learnt from our model. first, the experience of the single supervisory mechanism shows the advantages of all the players being subject to one leading authority in an integrated banking space, with clearly defined responsibilities and coordination. this single supervision allows for comparisons across a vast sample of comparable institutions, and thematic campaigns of on - site missions. second, our active supervision features regular and comprehensive stress testing including on interest rate risks, which is also applied to less significant institutions. the 2 / 3 bis - central bankers'speeches european banking authority ( eba ) conducts an eu - wide banking stress test every two years, taking into account the latest macro - financial developments : in 2023, stress test scenarios are typically based on a sharp rise in short - term and long - term interest rates. moreover, following the eba guidelines on interest rate risk of the banking book ( irrbb ) – as part of the rigorous application of the pillar 2 process –, published in 2018 and enhanced in 2022, european banks are required to perform regular supervisory tests to measure the impact of interest rate movements on their interest margins and economic value of equity ; us regional banks such as svb are not. iii. resolution : how to make it work now for our last blessing. since the global financial crisis, banks and authorities have strengthened their ability to deal with crisis events by developing a resolution framework. however,