31 January 2013

Bank of Ireland/Elderfield: Single Supervisory Mechanism - Benefits and challenges from a practical supervisory perspective

Elderfield said that establishing operational parameters for the use of the ESM for direct recapitalisation, and agreeing a framework and set of national powers for resolution, were urgently-needed measures to make the banking union a success and to resolve the financial crisis.

There are some important practical implementation challenges that flow from this  new structure. Let me briefly mention three of them. Firstly, the fact that there will necessarily and correctly be a division of labour between  national supervisory authorities and central SSM staff at the ECB raises practical questions of organisation and decision-making. The SSM will have a carefully calibrated governance  structure, involving a Supervisory Board that interacts with the ECB Governing Council. At  the bottom of the system will be the various national supervisors, each feeding up dozens if not hundreds of issues and matters for decision and action, with this volume surging in times of stress. My instinct is that the volume of these decisions is considerably greater in supervision than in monetary policy. It will therefore be important that clear and efficient decision-making procedures, with clear accountability, are put in place.

Second, it is important that supervisory practices and procedures converge quickly into a common approach. Such integration is not easy and will take time, as I know from the FSA which involved the merger of nine and then a tenth organisation into one. In the case of the SSM, we will have at least 17 supervisors from different cultures to meld together. Developing a common framework for risk assessment, with a common language for risk and common approaches to inspection and supervisory reviews, will be a process that forges this integration out of necessity and will involve some important early practical design questions.

Third, and closely related to this last point, it will be important to develop a common supervisory philosophy and risk appetite. Will the SSM under the ECB be a principles-based  supervisor, a rules-based one or some judicious mix of the two? Will staff be encouraged – and firms warned to expect – an intrusive approach or not? It is important to articulate the essential elements of the supervisory approach so that front line staff – and the banks they supervise  – have a clear understanding of senior management expectations and risk appetite. I would like to see the new single supervisory mechanism give its front line staff a clear mandate to be challenging and assertive with banks in ensuring that risks are not just identified but are definitively mitigated in a time-bound manner.

Full speech

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