03 March 2020

ECB's af Jochnick: Challenges for the European banking system

The challenges af Jochnick lays out are common to all – supervisors, regulators and banks. And so are the priorities: deepening the European banking market, restoring banks’ profitability, addressing climate and environmental risks, and tackling the IT and cyber risks posed by technological disruption. After all, a safe and sound banking sector with sustainable business models is indispensable for a well-functioning economy.

Completing the banking union

First, there is need to make the resolution framework more consistent. The legislative status quo does not provide clarity on how non-viable banks that are not subject to resolution will exit the market. It also prevents us from achieving consistent outcomes in resolution and liquidation across the union, and it falls short of providing us with a truly European approach to handling banks in trouble. And, finally, in order to make the banking union fully operational, the third pillar needs to be implemented: a European deposit insurance scheme.

Restoring bank profitability

Too many euro area banks suffer from low profits that fall short of their cost of equity. Banks thus need to become more cost-efficient and must scale up their technological investment – both by digitising their legacy systems and by incorporating advanced analytics into their risk management practices. In parallel, it would be beneficial for the European banking sector to consolidate further and reap the benefits of economies of scale and improved risk-sharing.

Technological disruption

Technology has the potential to change not only the way banks conduct their business, but also the kinds of risk they face. As business models become increasingly digital, IT systems will become more important and the potential for operational and cyber risks will rise. Both banks and supervisors need to prepare for this.

The role of the regulatory and supervisory authorities is essentially to monitor how banks manage these risks, to challenge them in areas of potential weakness and, where necessary, to impel them to improve.

Combatting money laundering and terrorism financing

Technology can also help banks more effectively address another significant challenge: the issue of anti-money laundering and countering the financing of terrorism, or simply AML. Tools based on artificial intelligence can dramatically boost the effectiveness of banks’ AML checks and fraud detection practices, by flagging connections between related entities that would go unnoticed under traditional risk rating models.

European bodies are aware of these issues and are taking measures to address them too. To address the current supervisory fragmentation, they could also consider charging an EU body or a new authority with AML tasks and giving it the independence to act decisively to address AML risks. If supported by co-legislators and primary law, this authority could be assigned direct AML supervisory powers.

Climate change

Last but not least, climate risk will also be high on the agenda. The necessary adjustment towards a more sustainable economy will have an impact on the financial system and pose financial risks to euro area banks. So far, banks have engaged with climate topics mostly by drawing up sustainability strategies that outline how they can reduce their impact on climate change and by pursuing other sustainability objectives. In future, though, banks will also need to adopt a more traditional risk management approach to understand how they are financially exposed to and affected by climate and environmental risks.

Full speech on ECB

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