their services are completely unimportant and so do not require good supervision? not at all! this 18 % of the balance sheet total for the entire euro area banking system is not evenly spread across all countries, but is essentially concentrated in three : germany, austria and italy. these three countries alone are home to four - fifths of all the supposedly “ less significant ” institutions, whose balance sheet total amounts to 80 % of annual economic output in austria and germany. and in germany, it is precisely these institutions that provide funding to small and mediumsized enterprises, which, in turn, form the bedrock of the economy. all in all, the “ less significant ” institutions in germany finance 70 % of the regional economy. bis central bankers ’ speeches i ’ m therefore not going to discuss at this point whether or not these institutions are important for the real economy – everyone knows that they are. and everyone knows that the “ less significant ” institutions can indeed be significant for the stability of the banking system – not individually, but collectively as associations of savings banks and cooperative banks. that is particularly true when you consider that many small and medium - sized institutions in the euro area belong to institutional protection schemes and are hence closely interlinked – and often they are also in protection schemes with large, systemically relevant banks. i ’ ll come back to this topic later on. ladies and gentlemen, at this point, i ’ m going to have to disappoint one or two of you : i do not think it is a good idea to leave the “ less significant ” banks to regulate themselves or to encourage a form of supervision that is more akin to gravedigging than supervising, focusing solely on resolvability. and, the type of supervision being advocated by some, whereby supervision is exercised over the association rather than over the individual institution, is also no solution as long as there is no legal basis or tools for the appropriate, effective and efficient supervision of associations. for all the reasons i have just mentioned, and i could give many more, the supervision of “ less significant ” institutions, which tend to have a regional focus, needs to take into account national particularities on the one hand and meet high quality standards on the other hand. after all, the aim is to have a functioning banking sector over the medium and long term, providing the real economy with the services that it requires – and it is precisely small and medium - sized institutions that make for a functioning banking sector, as

institutions, the trick will be to innovate, without losing sight of their roots. ladies and gentlemen, business models and earnings performance are currently the biggest challenges facing the banking sector – but they are not the only ones. for example, the activities of small and medium - sized institutions are often very concentrated – on certain sectors or regions. while that is in the nature of small and medium - sized institutions with a regional focus, it also creates a dependency which makes them vulnerable. so it is all the more important to take this concentration risk into consideration in risk management – particularly with regard to its qualitative elements. if there is no way to avoid concentration risks, the principle of “ know your customer ” gradually becomes more critical. and that is exactly where the strength of small and medium - sized institutions lies. they know the risk profile of the individual borrowers as well as the value of their collateral. and they know the regional markets and their potential. all this needs to be used by banks in the context of their risk management and must continuously be taken into account in their decision - making in order to ensure their success and survival. it will come as no surprise to you that for me, as a representative of the ssm, it is not just about business models, earnings performance and the concentration of risks when it comes to small and medium - sized institutions. as the ssm, we are always having to ask ourselves how we can support our colleagues at the national supervisors. bis central bankers ’ speeches supervision – division of roles between the ecb and national supervisors now let ’ s move on to the division of roles that has been in place since november 2014 for the supervision of small and medium - sized institutions in the euro area. as you know, within european banking supervision, the national supervisors are responsible for supervising small and medium - sized institutions – so in germany, it ’ s bafin and the bundesbank. the ecb only plays an indirect role in respect of supervising small and medium - sized banks – the point of contact is not the institutions themselves, but rather the national supervisors. direct contact between the ecb and the institutions only occurs in exceptional cases – for example with regard to the granting or withdrawal of banking licences. this indirect approach reflects two major principles underlying european banking supervision : subsidiarity and proportionality. most small and medium - sized institutions have relatively lowrisk business models that are tailored to their region – direct european supervision is generally not required here.