EU Supervision, Integration, and Competitiveness

In a keynote speech delivered last week, Patrick Montagner, a member of the Supervisory Board of the European Central Bank (ECB), framed Europe’s banking competitiveness challenge as fundamentally a story of fragmentation, not excessive regulation.

Montagner drew heavily on the lessons of past crises. “Since the failure of Bankhaus Herstatt in 1974, which led authorities to create the Basel Committee on Banking Supervision, one lesson has remained broadly constant: banks depend critically on the confidence of their depositors, creditors and counterparties,” he recounted. When that confidence is lost, weaknesses can emerge very quickly, he noted.

Weak governance, risk management frameworks insufficiently linked to actual risk-taking, concentrations tolerated too long because they are profitable, and complacency about liquidity in benign conditions can all abruptly erode confidence with systemic consequences, Montagner explained. “The global financial crisis of 2007-09 displayed all of these patterns across multiple jurisdictions and business models,” he reminded.

“[L]ight supervision does not work, and it has repeatedly and expensively failed in the past,” he said. Fragmented rules compound the problem, he noted. When supervision is fragmented, different jurisdictions apply different standards, supervisory cultures diverge, and the rules governing a banking group depend on where its subsidiaries are incorporated. “The result is weaker oversight of the risks that matter most,” he argued.

On capital requirements, ECB analysis finds no evidence that European banks face systematically stricter requirements than their US peers, Montagner said. “Europe’s competitiveness challenge in banking cannot be diagnosed primarily as a capital stringency problem,” he added. The real solution lies in completing the banking union, Montagner contended. Capital and liquidity should flow freely within cross-border groups, the patchwork of 27 national legal environments must give way to genuine harmonization, and a European deposit insurance scheme must be built, he argued.

On supervision, Montagner distinguished meaningful simplification from a narrower version that would confine supervisors to a defined set of quantifiable financial metrics. He also cautioned against treating governance, risk management culture, operational resilience, business model sustainability, and early remediation as matters for management rather than supervisors. Such a model, he warned, would identify governance failures “when it is too late,” after they have already materialized as financial losses.