sabine lautenschlager : how can prudential regulation foster growth? speech by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the single supervisory mechanism, at the frankfurt finance summit, frankfurt am main, 16 march 2015. * * * supervisors can contribute to sustainable economic growth by ensuring that supervised entities are resilient to plausible shocks, properly managed, adequately capitalised and subject to an efficient risk management and the right incentives. the european single supervisory mechanism takes a medium to long - term perspective on this, resisting those who argue for short - term relief. the ssm ensures that banks can deliver in their tasks in all phases of the economic cycle and thus are able to provide the economy with the financial services that corporations, smaller firms and citizens need. * * * it is my pleasure to open this dinner with a question that may seem quite straightforward, but whose answer is far from intuitive, especially from the perspective of a supervisor : “ how can prudential regulation foster growth? ” i must admit that when i first saw the topic of this short speech i was tempted to turn this into a brainstorming session. i am sure that many of you have innovative ideas on how to foster growth by means of prudential regulation and supervisory action. some might suggest restraint on the side of regulators and supervisors as a way of fostering growth – and they may be right regarding some of the many topics that were regulated over the last seven years. but if you now expect me to provide comfort with a regulatory break or even promise supervisory leniency, i am afraid you are in for a disappointment. the financial crisis has shown that there is little more damaging for sustainable growth than a malfunctioning banking sector. that is why – after a long period of deregulation – governments around the world decided to strengthen regulation and supervision. the ultimate objective of these reforms has been the same since the 1930s : regulators and supervisors have to ensure that the banking sector is resilient and provides the economy and society at large with its key services, even under severe stress. as a supervisor, our most valuable contribution to economic growth is to do our job – by implementing regulation consistently, by closely monitoring supervised institutions in a forward - looking, risk - based and proportionate way and by taking timely and determined action when needed. the ssm has the responsibility and privilege to go a step further. by harmonising

the first place. banks have to improve their risk culture regardless of the “ too big to fail ” problem. at the spring meeting of the financial stability board, recommendations for action were agreed on and subsequently announced. according to the financial stability board, the foundational elements of a sound risk culture are effective risk governance, an effective risk appetite framework and, in particular, the alignment of compensation with prudent risk taking. four practices may help in assessing the soundness of a risk culture. • first, the tone from the top : the board and senior management are the starting point for setting the financial institution ’ s core values and the expectations for its risk culture, and their behaviour must reflect the values being espoused. • second, accountability : employees must understand the institution ’ s core values and its approach to risk. and they have to be aware that they are responsible for their actions and risk taking. • third, effective communication and challenge : a sound risk culture promotes an environment of open communication and effective challenge, within which decisionmaking processes encourage a range of views. • last but not least, incentives : performance and talent management encourage and reinforce maintenance of the financial institution ’ s desired risk management behaviour. this includes changing the banks ’ in - house incentive schemes. one example here would be to cap bonus payments and link them to the long - term development of institutions ’ profits. we must succeed in embedding awareness of sustainable business practices more firmly in the risk culture of banks. 3. profitability of course, a new risk culture has its price, which will unquestionably also have a short - term impact on the banks ’ profitability. what ’ s more, the current low - interest - rate environment also remains a major challenge for the profitability of banks. german savings banks and credit cooperatives in particular rely on net interest income as the most important earnings bis central bankers ’ speeches component. consequently, they expect a further decline in profitability in the current interest rate environment. in addition, competitive pressure is high due to the sheer number of institutions in the marketplace, and this will no doubt increase as the integration of the banking market across europe deepens. last but not least, the implementation of the new banking rules will come at a cost – to raise fresh capital, say, or to draw up recovery plans and build up a restructuring fund. against this backdrop, it is essential that german credit institutions recognise their weaknesses and counteract them at an early stage. this could