“One has to be prepared for the unexpected”

Interview with Anneli Tuominen, Member of the Supervisory Board of the ECB, Supervision Newsletter

17 August 2022

As the new ECB representative to the Supervisory Board, you also support ECB Banking Supervision’s crisis management function. What are your key priorities in that area?

First, let me highlight that banks have made substantial progress in their efforts to prepare for crisis situations. But in the current environment, it’s imperative to be prepared for the unexpected. While banks have enhanced their recovery plans, various areas still need improvement. Recovery plans should be a tool for improving banks’ overall risk management. So recovery planning should be more closely connected with banks’ regular risk management frameworks. As an example, we would like to see more consistency in banks’ sets of indicators, limits and overall stress testing frameworks, as these are still rather separate in many banks. We expect to see capital and liquidity frameworks on the one hand, and recovery planning on the other, as consistent parts of a continuum that ensure effective risk management. We would also welcome a more agile, internally driven update process, where scenarios and recovery options are revised promptly in response to material external developments.

I appreciate the constructive dialogue between the banking industry and the supervisory community on identifying best practices for crisis preparedness and response. We are working very effectively with different stakeholders on crisis management topics within the EU and also beyond, for example with authorities in the United States and United Kingdom.

Finally, the banking union is not yet complete, and fragmentation is still an issue from a crisis management perspective. It is therefore important to support the discussion on completing this project, especially in relation to the European deposit insurance scheme and the role of the deposit guarantee schemes (DGSs). 

In terms of enhancing crisis preparedness, what do you think banks and supervisors can learn from Russia’s invasion of Ukraine? And what broader lessons can be drawn?

As I said, one has to be prepared for the unexpected. When banks assess the riskiness of different business areas, they need to carefully evaluate concentration risk in its various forms – be it the dependency on one funding source, one business area, one income stream or one geographical region – and have necessary backup plans. In practice this also means that they need to have adequate capital and liquidity buffers, high-quality risk management and a particular emphasis on operational risks. Russia’s aggressive invasion of Ukraine, with its spillover effects on energy supply and inflation and the knock-on effects on interest rates, clearly demonstrates the need for banks to think outside the box when it comes to crisis preparedness. This relates to both financial and non-financial risks. One example of the latter is that the sanctions imposed on Russia have exposed banks to several challenges that affect not only their asset quality, but also their operations and the services they both offer and rely on. Considering the ongoing trend of digitalisation and outsourcing, operational resilience is becoming even more important. Banks and supervisors need to pay more attention to these developments, also from a qualitative point of view. Crisis preparedness needs to be embedded in a robust internal governance framework, with well-established escalation procedures to ensure banks respond effectively to emerging risks.

The European Commission is planning to review the crisis management and deposit insurance (CMDI) framework in the coming months. What should be the key objectives of this review?

Though I would have liked to see faster progress on completing the banking union, the agreement reached by the Eurogroup to move forward with improving the CMDI framework is a positive step in the right direction. The ECB has made a number of proposals in this area and we are looking forward to contributing to the future legislative work.

Pragmatic steps should be taken to broaden the resolution framework so that small and medium-sized banks are covered to a greater degree. Such steps could include a wider public interest assessment and a consideration of more flexible conditions for accessing the Single Resolution Fund by also allowing leverage on national DGSs with the aim of finding the least costly solution for a failing bank.

For banks that would still not qualify for resolution, we are advocating a harmonisation of liquidation tools at national level – what we call “alternative measures” – along with a broader use of DGSs. Additionally, DGS “preventive” measures − which might benefit banks that are distressed but still viable − are a useful crisis management tool and we recommend extending their usage across the EU in a harmonised way.

We are also assessing the conclusions we can draw from recent crises. Possible avenues for change could include improving the early intervention framework by nominating temporary administrators, for example. And we certainly need more harmonised national insolvency rules, as manoeuvring through the current patchwork of national rules can be very complex and difficult. I know some people may see this as a “lifetime endeavour”, but we need to start with some targeted elements.

Finally, the ECB has recently responded to the European Commission’s public consultation on the review of the State aid framework and made proposals for enhancing the level playing field between liquidation and resolution. Given the strong links between State aid rules and the CMDI framework, the review of both regimes should go hand in hand.

One of your responsibilities is fit and proper supervision. There are still significant discrepancies between countries. What possibilities do you see for further harmonisation at EU level?

Supervising the fitness and propriety of members of banks’ management bodies (boards of directors) is a key supervisory tool to improve the governance of banks. Within its remit, the ECB still sees a need to close gaps and to raise the bar in the quality of governance arrangements.

Currently, due to the divergence of national laws implementing the Capital Requirements Directive, the fit and proper framework is one of the least harmonised areas of supervisory law. These differences hinder the level playing field we are aiming for within the EU in general, and the efficiency and effectiveness of the ECB’s fit and proper supervision in particular.

Within its area of competence, the ECB has taken various steps to foster further harmonisation. These include publishing the ECB Guide to fit and proper assessments and developing a new fit and proper questionnaire, ensuring our supervisory expectations are harmonised and transparent. In addition, the creation of a dedicated portal where banks can submit their fit and proper applications should contribute to making the entire process more efficient.

Having said this, there are areas which would benefit from further harmonisation at EU level.

First, the timing of the fit and proper assessment varies depending on where you are. In some countries, board members are assessed before they take up their positions (ex ante assessments), while other countries have ex post assessments, where board members are assessed after they have already taken up their position. When the outcome of the ECB’s assessment is only known ex post, this may entail reputational risks for the respective person and bank if the supervisory assessment turns out to be negative.

Second, procedural and legal requirements concerning fit and proper procedures differ across countries. Specifically, the fit and proper process is subject to deadlines in some countries but not in others. These deadlines vary across countries and can in some cases be suspended or interrupted if additional information needs to be collected. Furthermore, in some countries a decision has to be taken, while others either do not require a decision, or foresee either tacit approval or tacit rejection.

Third, in terms of the scope of the assessment, in some countries key function holders are also assessed, while in others they are not. And when they are assessed, the criteria used also vary from country to country.

Against this background, the ECB published a legal opinion on 27 April 2022 in which it strongly welcomed the strengthening of the supervisory toolkit as proposed by the European Commission in the new CRD VI draft dated October 2021.

In your view, what measures can be taken to improve the composition of banks’ boards? How can we ensure enough challenging capacity and informed decision-making? And what can be done to make sure they draw on a broad range of expertise in areas of increasing relevance, such as IT and climate risks?

Diversity within banks’ boards is the cornerstone of sound governance and, therefore, the basis for well-functioning banks. Diverse boards allow management bodies to draw on a variety of views and experiences, which in turn facilitates comprehensive discussion and constructive debate, allowing banks to adequately respond to both current and future challenges.

In my view, responsibility for ensuring boards are appropriately diverse lies primarily with the banks themselves, as they are responsible for nominating their management bodies. This means that nomination committees and the development of high-quality internal recruitment and assessment policies (also setting out adequate succession planning) are essential to ensuring that boards are diverse.

As supervisors we act as gatekeepers and promoters of best internal practices. Notably, we assess the choices banks make within ongoing supervision, as well as within fit and proper assessments. Specifically, we stress that banks need to adopt diversity policies. If they already have such policies in place, we make the banks aware of any deficiencies in them. This includes ensuring that the appropriate level and breadth of expertise is represented within the management bodies, including on key issues such as IT, cyber and climate risks. It is important that board members understand, challenge and address proposals and information given and that they are independent to avoid group thinking. This, in turn, requires the relevant information to be passed on to the board in a timely and adequate manner so it can have meaningful discussions and take informed decisions.

When assessing a new board member, both banks and supervisors should consider whether the candidate would fill an identified gap on the board. In particular, this will help ensure that the makeup of the board appropriately reflects the bank’s business model and geographic presence.

Statistics and data reporting are essential for supervisors. How efficient is the current data reporting framework and where do you see room for improvement?

In recent years, the ECB has introduced changes to increase the efficiency of data collection and reduce the reporting burden while, at the same time, ensuring the data remain of a high quality.

One important element is the cooperation between the ECB, national competent authorities (NCAs), the European Banking Authority (EBA) and other authorities, combined with input from the banking industry, on the harmonisation of existing requirements for collecting supervisory data, thereby further improving data processing and quality.

Since 2014, the sequential approach foresees that the ECB receives the supervisory data submissions from NCAs. The ECB then forwards these data to the EBA. This approach means that supervised entities only have to report these data once, to one single authority. More recently, the ECB has streamlined the additional requirements for the Supervisory Review and Evaluation Process, beyond the requirements harmonised by the EBA.

In the medium term, and following the European Parliament and Council’s request that the EBA examines the feasibility of integrating statistical, prudential and resolution reporting, the ECB and the EBA are collaborating on building a common dictionary to ensure that concepts are standardised – this may pave the way for reporting redundancies across supervisory and statistical domains to be reduced. ECB statisticians have worked hand in hand with the banking industry to develop the Banks’ Integrated Reporting Dictionary (BIRD). When finalised, the BIRD could help banks to efficiently organise the information stored in their internal systems in order to fulfil their reporting requirements. Regarding statistics, the Integrated Reporting Framework, which should go live in 2027, is being developed closely together with the BIRD. The results of a recent feasibility study performed by the German Federal Financial Supervisory Authority shows that the BIRD will benefit both banks and authorities.

Nevertheless, we are not there yet and much still needs to be done. I would encourage us, for example, to further reduce the number of data points we request from the banks. To achieve this goal and reach a good compromise, we can build on the positive initiatives that have already begun, as well as our cooperation with other authorities that are also working to minimise banks’ reporting burden. One relevant example is the system being applied in the United States, which relies to a large extent on data collected from standardised regulatory reporting.

You have been part of European banking supervision from the very beginning. One of its aspirations was to adopt best practices from national authorities. What are the good practices that European supervision could take over from national supervisors?

The practices in national authorities vary, so I can only speak based on my own experience. Overall, our goal is the same: to have a stable and healthy banking sector in Europe. To achieve this, good communication is key. We need to be open and have a constructive dialogue with banks, sharing our thoughts and concerns and listening to theirs.

As an example, to support this mutual understanding, the Finnish Financial Supervisory Authority organises an annual hearing where the supervised entities and their service users can express their views on the supervisor and supervision. I think this is a good practice that could be emulated.

I also consider supervisors’ knowledge and experience to be of utmost importance. As you know, European banking supervision was, to a large extent, built on the expertise of national supervisors, who brought with them best practices from all over Europe, as well as deep knowledge of their domestic markets and banks. The constant exchange of thoughts and experience between the national supervisors and the ECB remains crucial, now and in the future, if we are to conduct good and thorough supervision.