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Legislative obstacles that prevent supervisory authorities from providing information to the ECB on specific banking and financial institutions have to be eliminated, Lorenzo Smaghi, Member of the Executive Board of the ECB said. It should be a priority in the European Union to guarantee the duty of co-operation between central banks and supervisory authorities, he added.
“If we examine closely the current EU legal framework applicable to the exchange of information between central banks and supervisory authorities, we note that the EU Treaty is ‘asymmetric’”, Smaghi said underlining that it does not contain any provisions requiring banking supervisory authorities to contribute to the performance of the tasks under the responsibility of the ECB or the ESCB
Before the outbreak of the market turmoil in mid-2007, conventional wisdom held that banks had successfully removed credit risk from their balance sheets, thanks to financial innovations such as mortgage-backed securities, collateralised debt obligations and the use of structured investment vehicles (SIVs), Smaghi explained. Relatively little was known about the role and activities of SIVs and the exact nature of their relationship with banks.
However, the recent financial market turmoil has confirmed the importance of a smooth and efficient relationship between the central banking and supervisory functions, he said.
Overall, a wide access by central banks, including the ECB, to supervisory information would render their financial stability assessment more effective both to monitor and prevent financial stresses.