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12 March 2020

BIS: Statement: Joachim Wuermeling: The European financial market after Brexit

Prof Joachim Wuermeling, Member of the Executive Board of the Deutsche Bundesbank, addressed banking and supervisory developments related to the coronavirus and three developments that could restrict supervisory capabilities: Brexit, bigtech and a lenient approach to implementing Basel III.

Even though the Single Supervisory Mechanism (SSM) was launched only around six years ago, it is already hard to imagine a world without it. While there is certainly always room for improvement, European supervisors have the tools and the scope necessary to safeguard the efficiency and stability of individual financial institutions and the financial system as a whole.

At present, there is no indication that the functioning of the financial and banking system in Germany or the financing of the real economy are at risk.

Since the financial crisis in 2008 significant progress was made. Qualitative and quantitative requirements for capital and liquidity have been strengthened substantially. In aggregate, capital and liquidity buffers of banks are much higher than twelve years ago. Indeed, the framework for banks' capital contains several "breathing" buffers such as the Capital Conservation Buffer (CCoB), the Countercyclical Capital Buffer (CCyB) or the Pillar 2 Guidance (P2G). These buffers would be available as a cushion in a severe economic downturn.

If necessary, the supervisory system provides sufficient leeway and flexibility to react to a potential worsening of economic data. However, Mr Wuermeling is strictly opposed to measures which would distort the correct assessment of risks.

While the current situation is certainly challenging, this doesn't change his overall assessment that European supervisors are well equipped to dealing with it. However, coming back to his structural considerations, this situation should not be taken for granted. Indeed, looking at several structural developments, he believe that supervisory capabilities need to be protected.

Mr Wuermeling sees three developments that could restrict supervisory capabilities:

  • Brexit and the subsequent restructuring of financial relations;
  • Bigtech companies and their increasing role in the banking sector;
  • And a potentially lenient approach to implementing Basel III.

His message is that, in order to ensure strong and effective supervision going forward, regulators and legislators need to protect the achievements.

To protect the supervisory sphere, the following measures are called for:

  • The SSM should continue to resolutely implement its zero-tolerance policy on empty shell companies. The EU should strengthen Europe as a financial centre to reduce its dependence on London.
  • Both in the EU and internationally, requirements in the context of outsourcing and other types of cooperation between banks and non-banks should be harmonised further. We also need to assess to what extent rules should apply directly to third-party providers, and push for strong international cooperation to effectively supervise cross-border financial ecosystems.
  • The EU should fully implement Basel III and resist calls to introduce loopholes. It should keep regulation risk-oriented and principle-based.

Full speech on BIS

© BIS - Bank for International Settlements

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