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The March 2023 turmoil sent shockwaves through the financial world. It brought back ominous memories of the fall of Northern Rock and Lehman Brothers, and the ensuing great financial crisis.
Start-ups and venture capitalists that deposited money at Silicon Valley Bank (SVB) were in a bind.
People worried that more banks would start to wobble.
Investor trust suddenly eroded and banks’ stock prices plummeted.
The collapse of SVB and takeover of Credit Suisse became the most serious system-wide banking stress since 2008.
Several reports have now been published on the lessons learned from this crisis episode and they all highlight the importance of effective banking supervision.
In its candid investigation report into the failure of SVB, the US Federal Reserve concludes that supervisors were too focused on accumulating supporting evidence, instead of pushing banks to fix their risk management.[1]
The report issued by the Basel Committee on Banking Supervision (BCBS) invites supervisors to ‘’review their supervisory toolkits to ensure they are sufficient to drive concrete action at banks’’.[2]
And the IMF report “Good supervision: Lessons from the Field” concludes that supervisors around the world would be well advised to reflect on whether they have the appropriate powers, ability and willingness to act.[3]
In my remarks today, I am taking up the question posed by the IMF. Do we, at the ECB, possess the necessary powers, ability and, crucially, the willingness to act in banking supervision? The short answer is an unequivocal yes. And we are increasingly focused on taking action to get banks to remedy deficiencies that have so far remained unaddressed.
Strong and intrusive supervision is pivotal in ensuring financial stability.
As a dozen US senators wrote to the Federal Reserve following the collapse of SVB, “Irresponsible and excessive risk taking by SVB should serve as a clear reminder that banks cannot be left to supervise themselves.”
But why is that the case? In other words, what is the rationale for prudential supervision? What is it that we are trying to be effective at?
Clearly, supervisors do not run banks. The primary responsibility for ensuring that banks manage risks properly lies with their management bodies.
The ECB’s banking supervision mandate is given by the SSM Regulation, according to which we should carry out our tasks “with a view to ensuring the safety and soundness of credit institutions and the stability of the financial system”.[4]
Such a mandate is fairly typical for prudential supervisors. But where does it come from?
Citizens usually have neither the time nor the expertise to inspect banks’ balance sheets, so they “delegate” the duty of ensuring financial stability to supervisory authorities.
Another reason is moral hazard. The fundamental difference between a bank and any other company is that banks inherently operate with high leverage. This gives them an incentive to take on excessive risks to maximise returns. Prudential supervision helps to curb moral hazard by encouraging responsible risk-taking and monitoring banks' risk management practices. This is especially relevant because financial markets are prone to market failures. Information asymmetry is a common problem, as banks have more information about their financial health than depositors or investors. Prudential supervision is needed to mitigate this imbalance by ensuring that banks disclose accurate information and maintain sufficient capital to absorb losses....
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