We have raised the standards of supervision, but the job is not yet done
Interview with Julie Dickson, member of the Supervisory Board of the ECB, published in Supervision Newsletter (Spring 2017) on 17 May 2017
Julie Dickson, one of the four ECB representatives in the Supervisory Board and the only appointee from outside the euro area, will complete her three-year term in July 2017. Looking back on this experience, the former Superintendent of Canada’s Office of the Superintendent of Financial Institutions (OSFI) talks about the differences between supervision in Canada and the EU as well as her vision for supervision and regulation on the international level.
More than two and a half years after the creation of European Banking Supervision, what is your verdict: does it work?
The creation of the Single Supervisory Mechanism has contributed hugely to the quality of banking supervision in Europe. It was a bold decision and a difficult decision, but the right decision. It is working. But to be a truly European, world-class supervisor we need to do more. The job is not yet done.
What are the biggest differences between banking supervision in Canada and the euro area? Can they learn from each other?
There are a lot of differences! I will mention a few. First, I think our job at the ECB is more challenging, because of the large number of banks, the health of the banks, and the fact that we are bringing supervisors together from many parts of Europe, for the first time, to implement tough but fair supervision. Second, compared to Canada, the European environment is more legalistic, and we have less power than Canadian supervisors have. For example, the Office of the Superintendent of Financial Institutions has full authority to set all capital requirements. Some people at the ECB have asked why I would ever have left, with such powers! Third, there is a lack of delegation at the ECB, whereby thousands of decisions – often immaterial decisions – must be approved by the Supervisory Board. Some of these decisions would not require any approval by a supervisor in Canada. Lastly, a major thing I have noticed is that Canada always placed a lot of emphasis on whether the supervisor and banks met or exceeded Basel Core principles and global best practices. Meeting Basel and Financial Stability Board expectations was in the OSFI’s DNA, and was constantly discussed. In Europe it is different, possibly due to the different structures in place.
Can Canada and Europe learn from one another? I always think that supervisors can learn from one another. For example, supervisors could focus on (1) how we are dealing with new threats (such as cyber risk and Fintech), (2) comparing and contrasting our methodologies to see whether we are as risk-based and effective as we can be, and (3) discussing ways to enhance best practices at banks. There can be big differences among supervisors globally on basic things such as how an on-site is done; I think the differences should be discussed. Globally, many people prefer to talk about the rules and about resolution. They talk less about the importance of supervision and how supervisors are spending their time. We need to talk more about that.
What are, in your view, the key milestones of ECB Banking Supervision so far?
First and foremost I think we have raised the standards of supervision and made supervision more consistent across significant institutions. The Supervisory Review and Evaluation Process (SREP) has enabled us to do this. It was a key milestone and keeps improving. Relatedly, we have worked with national supervisors on the supervision of less significant institutions.
The work of the task force on non-performing loans has been a key achievement, helping to deal with one of Europe’s biggest challenges. The options and national discretions work also deserves to be noted. Also, the steps the Joint Supervisory Teams have taken to work together, improve communication, and get their arms around banks have been phenomenal.
While we should be proud of these achievements, so much more needs to be done, such as more deep dives, more (and more timely) on-site inspections, and rigorous follow-up of previous findings at banks.
What needs to happen for a truly European banking sector to emerge?
At the Supervisory Board level we need to be more focused on the interests of Europe, versus how particular countries or banks are affected by decisions. We need to clean up the problems we have at banks in Europe and have strong follow-up on our findings. We need to act on deposit insurance. We need clearer powers – such as clearer early intervention powers.
What impact do you think Brexit will have on European, if not global, banking?
I think it is too early to tell. We have been doing a lot of work to examine the implications of Brexit so that we are ready for whatever comes. We have just published some guidance on our website for banks who may be considering relocating to the euro area which spells out that the same rules and procedures apply across all euro area countries. It is important to assure banks of consistent and equal treatment and to prevent supervisory arbitrage.
How do you see the future of international cooperation in supervision and regulation given that the US seems to shift priorities?
International cooperation and regulation have been around for a long, long time. The Basel Committee on Banking Supervision (BCBS) was created after the failure of Herstatt bank in 1974, which provided a tough lesson in cross-border settlement risk. The Financial Stability Forum (FSF) was created around 1998 as a result of the turmoil in international financial systems caused by the Asian financial crisis, and the impact of the Long-Term Capital Management debacle. The FSF faded from view as memories faded, and then the global financial crisis hit. That led to the transformation of the FSF into the Financial Stability Board with more members (increasing from G7 to G20 countries) and more clout, and more demands on the BCBS to be vigilant. Now we are seeing that memories are starting to fade again. People who have been through crises know that we need international cooperation and regulation, as well as vigilance (versus complacency) to try to avoid another crisis. We all need to continue to focus on strong supervision and regulation at a global level.
What is your most memorable experience from your time on the Supervisory Board?
My first meeting, in August 2014, was definitely memorable. My counsellor at the time was worried I might change my mind about being an ECB representative! It was a very heated meeting because major decisions were being taken on the comprehensive assessment and the asset quality review. But that meeting just showed how important the work was. The Greek crisis in 2015 was also an important time – there were many challenges, and a lot of effort on the part of many to deal with those challenges.
My best memories of course are about the people I have met at the ECB and on the Supervisory Board. The ECB staff work so hard to allow us to get to where we want to go. On every visit I am struck by their accomplishments. In recent meetings I have seen a live demo of an amazing new system to track certain risky loans of banks, the results of huge efforts by JST Coordinators to collaborate and communicate with non-ECB JST members, and concrete steps forward to oversee leveraged finance as well as the use of models by banks – the list goes on and on. It has been exciting to see results so quickly, and that is primarily due to our hard working staff.