On supervisory architecture
Panel remarks by Andrea Enria, Chair of the Supervisory Board of the ECB, at the Financial Stability Institute 20th anniversary conference, Basel, 12 March 2019
There is no doubt that the architecture of supervision plays a crucial role in making banks safer and sounder. And in order to design the best architecture, one has to strike a balance. On the one hand, there are synergies to be reaped from bundling tasks. On the other, there are downsides such as conflicts of interest.
The role of the central bank in banking supervision is a case in point. Monetary policy can benefit from better knowledge of the banking system. And banking supervision can benefit from the central bank’s macroeconomic perspective, which provides additional context when evaluating the risks to individual banks. At the same time, however, there might be conflicts of interest and reputational issues. So, there isn’t a gold standard in terms of how much central banks should be involved in supervision.
Europe is a special case here. A single currency needs deeply integrated financial markets. This, in turn, calls for harmonised European banking supervision. In the wake of the crisis, such need for harmonised supervision became even more apparent, and with it the benefits of assigning supervisory powers to the ECB. The ECB was an established European institution, known for its strong technical expertise. This made it the right place to establish the new centre of European supervision.
As for the risks, it is clear that a central bank’s reputation is key to its success. Supervisory missteps, whether actual or perceived, may hurt it. To mitigate this risk, it is essential to give supervisors the tools and legal powers they need to do a good job. And beyond supervision, a strong framework for crisis management is needed. After all, it tends to be in times of crisis that the public focuses on supervisors.
The second risk is a conflict of interest between the ECB’s two tasks. Here, I believe the ECB has a strong safeguard in place in the form of the separation principle. This principle is enshrined in the SSM Regulation, and there are specific governance arrangements to protect it. So I think that the risk of a conflict of interest is handled quite well.
The one thing that both the monetary policy and the supervisory side of the ECB share is their independence. And independence is crucial, for monetary policymakers and for supervisors. When it comes to European banking supervision, there is another layer. By taking supervision to the European level, we sought to reduce the influence of national interests. This new architecture enables fair supervision and a level playing field across the euro area.
But this independence needs a counterweight: a strong accountability framework. And this includes transparency, of course. To me transparency is crucial, and I think that we could possibly become more transparent here and there. After all, good communication with all our stakeholders, from banks to citizens, also goes a long way in creating trust and protecting our reputation.
So, the supervisory architecture is a complex thing. And it is made even more complex by the fact that the financial sector is constantly evolving. Supervisors have to keep pace. Fintech just happens to be the latest innovation, but still, we have to take a stance; that much is clear.
And in my view, supervisors should essentially be technology-neutral. It’s not our job to promote fintech at the expense of other business models. We should rather aim to provide a level playing field on which players can compete on an equal footing.
Still, I think that innovation is a good thing in principle. Financial technology can help to make the financial system more efficient. But where there is light, there is shadow. In other words: innovation might create new risks.
And this is where our job begins: we have to deal with any new risks that might follow from fintech. And as more and more banks start to apply fintech, we have to take this quite seriously. One thing we need to do is build expertise in all the new technologies. But beneath the technological surface, the online world is not all that different from the offline world. So, fintech does not require us to overhaul our supervisory approach.
So far, we have launched a number of initiatives to assess and mitigate any new risks. We have conducted in-depth reviews on cyber-risk; we have conducted on-site inspections to examine such risk and will continue to do so; and we have set up a cyber-incident reporting process.
At the same time, we are working on harmonised standards for the new fintech tools. And, most importantly, we are in close contact with relevant stakeholders.
All this applies to banks, of course – so to credit institutions in the legal sense. But what about the new players that have entered the market? Do we need to extend the supervisory perimeter? Well, the principle here should be “same risk, same rules, same supervision”.
And so far, most fintech companies have not involved themselves in the core business of banking: taking deposits and granting loans. Mostly, they are active only in some parts of the value chain – payments in particular. So, it’s not the same risk and it’s not the same supervision; most fintech companies are not credit institutions in the regulatory sense.
It is only when they involve themselves in the core business of banking that they need a banking licence. With that in mind, we issued a licensing guide for fintech banks last year. This guide explains those aspects of our assessment that are most relevant for banks with fintech business models. But even though the supervisory perimeter is clearly defined, we still need to monitor it closely to see whether it needs to be adapted at some point.
Thank you for your attention.
- Prepared remarks in reaction to the panel’s themes — to be checked against delivery.