Transparency Means Banks Won't Need to Be Saved

THE NEXT CHALLENGES FACING THE SINGLE SUPERVISORY MECHANISM, ACCORDING TO BRUNELLA BRUNO, ELENA CARLETTI AND ANDREA RESTI

When the term of the head of the European Central Bank Single Supervisory Mechanism (SSM), France’s Danièle Nouy, was about to expire, the European Parliament’s Economic and Monetary Affairs Committee asked a selected group of academics to scrutiny, in four different reports, the first SSM term and to identify the challenges facing its new head, Italy’s Andrea Enria. The authors of two of these four reports are Bocconi professors: Andrea Resti and Elena Carletti with Brunella Bruno.
 
Professor Resti focuses on three challenges and three possible improvements. Low profitability is probably the the worst danger facing the banking sector. Andrea Resti proposes to alleviate the burden of compliance costs and overlapping requirements. “Banks that protect themselves with heavy armor are safer, but they move like turtles”.
 
Shadow banking is another source of concern. It accounts for 40% of the assets held by the EU financial system and it is deep interconnected with banks: an implosion would have dramatic repercussions. “The key issue, though, is poor governance. Misconduct by managers is not rare. Their power is not counterbalanced by board members equipped with an adequate technical background”.
 
Professor Resti suggests simplifying the regulatory framework and sanctions, and giving the head of the SSM control of budgets and staffing. The head of the SSM currently relies heavily on staff supplied by national authorities. This negatively affects the effectiveness of supervisory action. To overcome this constraint, the ECB has made significant use of external consultants that raise concerns in terms of conflict of interest. “Accountability is the third challenge for the SSM. The ECB has been criticized for not making its processes clear enough and supervisory processes uniformly implemented. Tasks, methods and decisions must be transparent”.
 
Elena Carletti and Brunella Bruno agree on the latter recommendation. If professor Resti sees the glass half empty in the first part of his report, they see it half full. In the first term, the SSM has addressed capital inadequacy; has rebuilt confidence in regulatory capital ratios; has addressed the non performing loans issue; made stress tests an important component of the supervisory assessment; and has enhanced financial integration. “This is the area in which least has been done”, professors Carletti and Bruno say. “We recommend weakening the bank-sovereign nexus in order to avoid the so-called diabolical loop. One way of doing this is to introduce safe assets and a European deposit guarantee scheme. It would be beneficial in encouraging cross-border consolidation”.
 
Other challenges for the head of the SSM highlighted by professors Carletti and Bruno are the strengthening of transparency and accountability and the reduction of costs of banking supervision. “An over-demanding supervision may lead banks to try to circumvent rules and to become overly risk-averse, thus dampening credit supply”.

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by Claudio Todesco