12 September 2008

Trichet calls for closer cooperation between central banks and supervisors

The ECB considers a bigger role in supervising commercial banks, ECB President Jean-Claude Trichet said in a speech at the Eurofi conference in Nice.

The supervision of individual institutions should be enhanced with central banks’ financial stability assessments, the ECB president said. This presupposes an effective interaction between the assessment of risks faced by the EU banking sector made by central banks and supervisors”, he said.

Further areas for co-operation include the liquidity provisions and cross-border crisis management. Central banks should have access to banks’ contingency funding plans prepared for the supervisors. Also, the most directly involved supervisors and central banks should establish a small group to address specific cross-border crisis management planning issues.

Also with regard to the banks’ liquidity management there is room for more co-ordinated action by the regulatory and supervisory authorities, Trichet said. First findings of industry practices show a wide diversity as regards the components and details of liquidity stress tests and contingency plans with central bank facilities beeing an essential part of banks’ contingency funding plans, he noted. Therefore, public authorities should improve their monitoring of the liquidity situation of the financial system and its components by drawing on the liquidity stress tests results of individual banks.

Analysing the financial turmoil Trichet said that although the pros of the ‘originate to distribute’ model might have been overemphasize in the pase, the present situation may well create a reverse tendency. He also reiterated that complexity, leverage and opacity of the securitisation market have raises serious concerns.

“When self-regulation and/or industry initiatives turn out to be insufficient regulators have to step in”, he warned.

However, he was very supportive with regard to the role of the covered bonds market. “From a financial stability perspective, they have a number of attractive features, not least the fact that the credit risk stays with the originator, which strengthens the incentives for prudent risk management”, Trichet said. “Generally they are also more transparently accounted for in banks’ published accounts than securitisation transactions.”

Full speech

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