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The plan to set up the new European Single Supervisory Mechanism in one year is ambitious …
Yes, to set up a new European supervisory mechanism in such a short time is a great challenge. In the EU there are different approaches to banking supervision, even though supervisory legislation has largely been harmonised. And we plan to combine these different approaches under a single umbrella. It’s a tremendous opportunity in that it allows us to bring together the best that the individual countries have to offer. For the first time, the participating supervisors will evaluate hitherto confidential data and information on institutions from other countries. This will enable us to take meaningful comparisons between Europe’s big banks to a completely new level. The objective is also to anchor supervision not to different supervisory traditions but to different market and risk situations.
The Basel Committee on Banking Supervision has shown in studies that the results of some banks’ risk models deviate by up to 20 per cent – when assessing the risk on one and the same balance sheet.
A certain degree of discretion has to be permitted. In my view, we ought to allow banks a deviation of up to 10 per cent – provided that a generally conservative approach is applied. When the deviation is more than 10 per cent, I need to look closely at how the institutions concerned arrived at their evaluation, and possibly intervene. If a bank has a 10 per cent deviation in favour of low risk values in all areas, which is to say that it always models aggressively, then I most certainly do have to take action.
Why do banks calculate risks so differently?
It is not possible to compare banks’ business activities one to one in any case. Different banks may have the same borrower, but different collateral. That needs to be reflected in the capital requirements. The data history of one bank is not comparable with that of another if it advises and monitors its borrowers better – which means that this institution is right to calculate a lower loss per defaulted borrower. And finally, the essence of any business transaction is that the contracting parties perceive the chances of profit and loss differently.
Some experts want supervisors to focus more on a non-risk-based ratio because they consider the differences to be too great. They are calling for an absolute debt ceiling in the form of the leverage ratio. Does that make sense?
What bothers me most about this discussion is that it goes from one extreme to the other. If the risk weighting is found to have shortcomings, it has to be improved. In my view, placing the main emphasis of supervision on just one risk-sensitive ratio such as the leverage ratio is misguided. A risk-sensitive regulatory framework sets the wrong incentive, namely to invest in risky instruments. And that was ultimately one of the reasons why Basel I had to be replaced. We need an entire toolbox; we have to look at a bank from different angles. That is why both a risk-sensitive and a risk-neutral tool are necessary. There is no such thing as the ideal instrument that can replace all others.