sabine lautenschlager : caution should be the life of banking introductory statement 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 association for financial markets in europe ( afme ) board meeting, frankfurt am main, 22 march 2017. * * * ladies and gentlemen, taking risks is at the heart of any healthy business, including banks. after all, it is the job of banks to take and allocate risks. but as walter bagehot said : “ adventure is the life of commerce, but caution is the life of banking ”. i agree with him. banks are far too important for the economy to indulge in adventures. they enable business by providing loans to companies or by helping them to tap the capital markets. and they also facilitate business by providing services in fields such as payments, mergers and acquisitions, and global trade. banks help the economy to grow and prosper. but they can also badly hurt it ; we saw that in the financial crisis. that ’ s why banks need to be cautious. in practical terms that requires, among other things, sound risk management. and this sets the scene for my short statement today. the topic is risk management. i will begin with some smaller, or rather bank - specific, risk management topics and end with a few big issues. sound risk management depends on good data. it also depends on firm - wide risk aggregation and reporting. those who take decisions must be in the picture. but are they? well, in the crisis we learnt that decision - makers often were not. it systems, data architecture and related processes were not up to the mark. against that backdrop, we assessed how banks aggregate data and report risks. the yardstick was a set of global best practices that were defined by the basel committee on banking supervision. these are known as the bcbs 239 principles. the result of our review : many banks do not meet the global standards. as usual, we will therefore be very explicit on how these banks should improve. and we will closely monitor the progress made by the respective banks to ensure that they meet relevant standards. ladies and gentlemen, good risk data is one thing. but processing such data is another matter. and that leads me to my next topic : internal models. many large banks use these models to calculate their risk - weighted assets, which then serve as a basis for calculating capital

, it is easier for the central bank to support the economy as healthier banks tend to lend more. the worst case, to say it very bluntly, is of a central bank providing liquidity to banks just to buy or carry legacy assets, and the banking sector doesn ’ t restructure. this was typically the japanese situation in the early 2000s. perhaps paradoxically, a rigorous aqr and stress test helps monetary policy. appropriately treating banks ’ holdings of sovereign debt according to the risk that they pose to banks ’ capital makes it unlikely that the banks will use central bank liquidity to excessively increase their exposure to sovereign debt. this is because banks will be wary of the constraints placed on sovereign debt by the stress tests to which they are subject at the same time. therefore, should the procyclical impact of the aqr be significant, then monetary policy would be able to act – without hesitation and being reassured that the side effects of a liquidity injection that we have seen for the 2011 – 2012 operations would be minimised. so how would you assess whether the aqr was procyclical? don ’ t forget we have our two pillar approach : we analyse the business cycle, but we also look at money and credit. we will see from the second pillar very quickly if the credit situation doesn ’ t improve. at this stage of the recovery, what we see at the moment is quite normal. the big corporate firms do not have as many constraints as the smes. they have around €2trn in excess cash, they can access debt markets. the reluctance to invest comes more from the business confidence side. and if you did act because of the impact of the aqr, what exactly would you do? depending on the situation, the central bank can decide on the most effective way liquidity provision can be provided. there are no restrictions on the way a central bank provides liquidity to the banks via repo, a priori. bis central bankers ’ speeches you want to reach your price stability objective. at the same time, you want to be sure that when you provide liquidity against adequate collateral, it doesn ’ t reduce the incentive to restructure the banking sector. and so by having a well - designed comprehensive assessment – like the one we ’ re preparing now – we are easing the job of the central bank. bis central bankers ’ speeches