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When thinking about topics that would keep an audience of prominent bankers sufficiently engaged, a quote from Hartley Withers, the English financial journalist who was editor of “The Economist” during the early part of the 20th century, came to mind. He once said that good banking is produced not by good laws, but by good bankers. While this characterisation of the banking industry was probably accurate back then, I hope you agree that, nowadays, good laws and efficient supervision are also essential for resilient and prosperous banks. With this in mind, I hope that my remarks will provide you with a good platform for your discussions during the rest of the conference.
In my speech today, I would like to talk about banks and banking after the end of the extended period of historically low interest rates which we have come to know as “low for long”. I will first consider the current state of the European banking sector, by which I mean those banks that are directly supervised by the ECB. I will then go on to discuss the potential lessons to be learnt from the market turmoil which we saw on both sides of the Atlantic in the spring of this year. I will also outline a few refinements to the supervisory framework which could be warranted as a result. Lastly, looking beyond recent events, I will highlight the challenges which banks need to tackle over the medium term – and hence also the issues which top the agenda for us supervisors.
Over the course of my remarks, I would like to convey three main messages.
The first is that the reforms to underpin banking activity enacted by global policymakers and regulators in the Basel setting in the wake of the global financial crisis have proven their worth. They have enabled banks to withstand the test of large and unexpected external shocks in recent years – first with the outbreak of the coronavirus (COVID-19) pandemic, and then with the fallout stemming from Russia’s war in Ukraine. Better regulation and more efficient supervision have thus helped to deliver a more resilient banking sector.
The second message has to do with the challenges posed by a rapidly changing monetary policy and interest rate environment. The global banking sector as a whole has benefited from the normalisation of monetary policy by major central banks, with higher net interest margins boosting bank earnings. We should not, however, lose sight of the fact that this trend is producing relative winners and losers among banks, partly on account of their size and their business models. More fundamentally, rising interest rates per se carry a number of risks which need to be appropriately managed by banks, as shown by the market turmoil this spring triggered by the failure of Silicon Valley Bank in the United States. So while the framework underpinning banking activity is not in need of major reform, in the current environment banks need to pay close attention to credit, valuation and liquidity risks. Adjustments in both reporting frequencies and the definition of certain liquidity requirements should be considered in order to help prudential authorities monitor risks to banks. Beyond the supervisory remit, it would also seem essential to enhance the transparency of credit default swap (CDS) markets.
Moreover, it is important to realise that weaknesses on the risk management side often go hand-in-hand with deficiencies in banks’ governance frameworks. This common feature of the banking failures which we saw in the United States and Switzerland this spring has also been at the core of several banking crises in the past. This is why I believe that, going forward, bankers and supervisors alike should continue to focus on both bank governance and risk management....
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