Quality assurance in European banking supervision – facilitating consistent improvement by measuring success

Introductory remarks by Pentti Hakkarainen, Member of the Supervisory Board of the ECB, at the inaugural meeting of the International Quality Network, Frankfurt, 12 December 2018

Let me express a warm welcome to all of you for having travelled from all over the world to join us here in Frankfurt for this inaugural meeting of the International Quality Network.

I particularly want to express my thanks to Ambika Siva from the Australian Prudential Regulation Authority for reaching out to the ECB last January to set this global gathering in motion.

Cooperation and engagement among authorities is of great importance. Widening our personal network is not only enjoyable, it allows us to gain insights into the different practices used around the world. Collaborating, sharing and learning from one another are crucial drivers for progress – and so I wish the International Quality Network success for the future in pursuing these aims.

In my brief introductory remarks I will explain the key features of European banking supervision, outline the crucial role of quality assurance and audit within this framework, and set out a few of my own perspectives on today’s agenda.

Introducing European banking supervision

Until recently banks across Europe were supervised at the national level. While there was no shortage of talent or good intentions within this old system of national supervisors, the fragmented structure made supervision more difficult than it needed to be.

In recognition of the benefits of a more coordinated cross-border approach to banking supervision, in 2012 European leaders legislated to establish the European banking union.

Since November 2014, banking supervision has been entrusted to the ECB, and we now exercise this function across the euro area. This new framework has been a clear game-changer for European banking supervision, and offers many benefits. With a single supervisor in place, we are now able to analyse risks swiftly and holistically – drawing on peer comparisons from across the banking sector.

But the ECB is not working alone on this – it is supported by the national competent authorities (NCAs) of individual Member States. Together, this collaborative framework is known as the Single Supervisory Mechanism, or SSM. Within this system, the ECB leads the day-to-day supervision of the “significant banks”, whereas day-to-day supervision of the “less significant banks” is entrusted to the NCAs under ECB oversight. The boundary between these two groups of banks is generally set at €30 billion of total assets, with a minimum of three banks directly supervised by the ECB per country. As a result, the ECB directly supervises 118 significant banks, and delegates supervision of over 3,000 less-significant banks to the NCAs.

The ECB’s direct supervision of the significant banks is not performed exclusively by ECB staff, but rather through Joint Supervisory Teams that are staffed by employees of both the ECB and the NCAs. This results in a joint effort which seamlessly combines both European and national perspectives.

Supervisory quality assurance and internal audit within European banking supervision

One of the challenges of building the banking union has been that the various national supervisors that predated European supervision each had their own approaches to banking supervision. So building a harmonised European approach has required significant effort.

To address this challenge, we have had to develop various ways to ensure our supervisory approaches are consistent.

The Supervisory Quality Assurance (SQA) Division and our internal auditors have each made important contributions to our efforts to harmonise our approaches, while also helping us safeguard the consistency and quality of supervisory activities at the ECB.

Let me mention a few of their specific contributions, starting with the SQA Division.

First, working with its counterparts at the NCAs, the Division created the SQA network and developed its methodology, paving the way for us to work together to ensure good-quality European banking supervision. As a result, almost all of the key supervisory processes have been quality-assured and we have learned valuable lessons about how to improve our processes and deliverables. This has facilitated improvements in both the planning and the practical implementation of our supervision.

Second, following one of the first quality assurance reviews, the need for a single training curriculum for European banking supervision was identified and the task of setting up the new training curriculum was entrusted to the SQA Division.

The SSM training curriculum now offers over 100 different courses, grouped according to four distinct professional profiles. These courses have been very popular with both ECB and NCA staff. I see these courses as key to the future of European banking supervision – they enhance the knowledge and skills of our supervisors, and they also help strengthen the sense of a shared culture across the system.

Recently, the SQA Division has also taken a central role in developing European banking supervision’s management of operational risks. Using a coordinated approach across the ECB and NCAs, the Division has helped us make progress in identifying, assessing and mitigating operational risks within European banking supervision.

Let me now turn to the ECB’s Internal Audit function.

Since the inception of ECB Banking Supervision, our Internal Audit function has followed a risk-based approach to assessing critical supervisory tasks and activities. This has included activities in a range of key areas, including on information management, how we monitor the implementation of supervisory measures, and on the Supervisory Review and Evaluation Process (SREP).

For processes involving intense cooperation between the ECB and national authorities we benefit from the scrutiny of the ECB’s Internal Audit Committee (IAC). The IAC’s audits bring in the wider perspectives from our partners across the euro area thereby providing an additional important safeguard.

The recommendations issued by Internal Audit have helped ECB Banking Supervision identify areas for improvement. Once the internal audit findings are made available, the SQA Division works to help our frontline supervisory staff prepare action plans to ensure appropriate follow-up and risk mitigation. It then coordinates and oversees the timely and consistent implementation of the action plans, reporting annually to our Supervisory Board on the progress that has been made.

As you can see, the interaction between the SQA Division and Internal Audit is an important part of the process. The two functions each retain their distinct nature, but work constantly and fluidly together towards our shared objectives.

Focusing on today’s agenda

Let me move on now to say a few words about today’s agenda, which I think looks very promising.

I am particularly looking forward to hearing what comes out of your discussion on how to measure supervisory effectiveness.

As well as being a core concept for the work of quality assurers and auditors, it could also be highly relevant for senior managers across our organisations. If we can capture the concept of “supervisory effectiveness” in some simple metrics, it could become a useful basis for measuring and managing our performance as supervisors.

People respond well to clear direction, so organisational leaders should seek to incentivise staff by setting clear, fair and achievable targets. Over time, I therefore see a role for setting targets for our business areas in terms of specific improvements to simple metrics of supervisory effectiveness.

In other words, “what gets measured gets done”. I look forward to hearing the results of your discussion as this may help guide our future thinking and practice in this crucial area.

Another theme I find important is exploring how modern supervisory technology can be applied to enhance the efficiency and effectiveness of our quality assurance and audit work.

I firmly believe that we in the supervisory community need to make every effort to get as close as possible to the frontier of technological development. Such efforts will not only help us to understand the risks arising from technological changes within the banking sector, they will also help us to productively take advantage of technology in our day-to-day work.

You are all no doubt aware of discussions taking place across many sectors on the potential of artificial intelligence and machine-learning techniques to boost the efficiency of analysis. I encourage you to be bold within our network, and to share perspectives freely on how such technology might be helpfully applied in the SQA and audit arenas.

Conclusion

I have emphasised that quality assurance and audit are vital components for getting things done correctly. These functions provide reassurance on the quality of our work and can help us find ways to improve.

Working together internationally enhances robustness across borders. This new group will help us to further pool our collective expertise in this respect. Your discussions will help develop our understanding of best practices and give us inspiration for how to improve.

This work is invaluable, and so I encourage you to make as much of this opportunity as possible.

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