ECB Urged to Follow US Fed in “Material Risk” Focus

During a panel discussion at a conference hosted by the Association for Financial Markets in Europe earlier this month, Jessica Kaffren, a member of the Management Board at JPMorgan’s Frankfurt subsidiary, urged the European Central Bank (ECB) to follow the US Federal Reserve’s lead and focus supervision on “material risks,” as reported by Risk.net.

Kaffren argued that supervisory activity should be tailored to individual banks’ operating models and business strategies rather than applied uniformly. “Prioritizing supervisory activity based on material risk on a firm level would be very key for us,” she said. Her comments echo a shift already underway at the Fed, where supervisors have been directed to focus on material financial risks rather than procedural missteps, and to conduct horizontal reviews only where the benefits to safety and soundness outweigh the costs.

Kaffren called on the ECB to adopt similar principles, including mandatory cost-benefit analysis before on-site inspections or horizontal reviews. “[I]n an ideal case, we’ll have an independent decision-making committee that can opine whether the benefits really justify the cost before such initiatives are launched,” she said.

On the panel with Kaffren, Michael Theurer, a member of the Executive Board of the Deutsche Bundesbank, argued that horizontal reviews serve an important purpose in reducing fragmentation across the European banking union. “I believe that there is always room to simplify and optimise processes,” he said, “but there is a limit.”

Speaking at the same conference, ECB Supervisory Board Chair Claudia Buch said the central bank has made meaningful progress in simplifying its supervisory regime in response to calls for reform. “With regard to supervision, I think we’re doing a lot already to streamline the process,” she said. Buch pointed to the ECB’s adoption of fast-track approval procedures and its use of digital tools to reduce compliance burdens as examples of its efforts in this direction. “You should have been seeing the direct benefit of these reforms already,” she added.