18 September 2017

ECB: Regulation, supervision and market discipline – striking a balance

In fact, there are three pillars that support a stable banking sector: regulation, supervision and market discipline. The crisis made clear that all of these pillars were in need of some repairs.

Once the crisis had started, everyone agreed that the rulebook needed to be rewritten. And back then, everyone agreed that the revised rulebook needed to be a global one. The crisis clearly demonstrated that banking is a global business, so the rules that govern it should also be global.

Today, however, it is much less clear whether everyone still subscribes to the idea of a global rulebook.

It worries her because it shows that people are starting to forget the lessons we learned from the crisis.

That’s why there is need to finalise the global rulebook, Basel III, as quickly as possible.

But that is just the first step.

The second step is to implement and apply the rules in a broadly consistent manner at regional and national level. And this is a challenge – sometimes it is possible to see quite a different interpretation of the standards when it comes to implementing and applying them at national level.

So regulation in the euro area remains fragmented. But this runs counter to the idea of “same business, same risk, same rules”; and it runs counter to the idea of the European banking union. So there is a clear case to be made for further harmonising the rules. There is need for a well-written rulebook to keep risks in the banking sector in check.

But rules are just one of the pillars that support a stable banking sector. The second pillar is supervision. And here there is need to strike a delicate balance because these two pillars interact in a subtle way.

The third pillar of a stable banking sector is market discipline. With all this talk about rules and supervision, we must not forget that banks operate in a market economy. So why not use market forces to keep risks in check?

There is nothing like the prospect of failure and financial loss to keep a lid on risk-taking. And this, as a general rule, is the essence of market discipline. Investors who stand to lose their own money will be more cautious than investors who can offload losses onto someone else.

Sabine Lautenschläger sum up: “a stable banking sector is supported by three pillars: regulation, supervision and market discipline. Since the crisis, we have made these three pillars stronger. Now we have to make sure that they remain in good shape and share the load in a balanced way. Otherwise, we will not reap all the benefits of the transformation that has taken place in banking supervision.”

Full speech

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