In a speech delivered late last month, Margarita Delgado, Acting Governor of the Bank of Spain, reflected upon how supervision has developed in the ten years since the European Central Bank's Single Supervisory Mechanism (SSM) was created, and discussed the challenges facing supervision in the near future.
Delgado highlighted several key aspects of supervisory development over the past ten years: balance sheet restructuring, strengthening of European banking solvency, and improved liquidity management. However, she argued that perhaps the most important development has been a focus on risk management and governance.
"This has been, and continues to be, a supervisory priority, because we are convinced that the first line of defence for a strong, profitable and efficient banking system is a well-defined, robust and professional governance structure and a solid and prudent risk management framework," she said. "This is a message often repeated by supervisors, but reality shows that banks with weak risk management systems or governance frameworks can find themselves in situations that jeopardise their own existence or financial system stability."
Much supervisory activity over the past decade has sought to drive improved governance and risk management practices, with an increasing focus on organizational structure and management. "As a result of all this, banks are much better managed today than a decade ago," Delgado said. "However, as I have mentioned, this is an area that is and will continue to be a supervisory priority in the future owing to its extraordinary importance."
Looking forward, Delgado called for supervisors to ensure they are flexible and agile to react swiftly to new scenarios — a necessity in "such turbulent and evolving times." Supervisory technology (suptech) tools may be essential in allowing supervisors to act more quickly upon weaknesses.
Supervisors must also work to ensure that corrective measures are taken when deficiencies are identified. And, Delgado notes, these corrective measures may not always be quantitative in nature. "Matters related to governance or business models, for example, can only be mitigated through qualitative measures," she argued. "Perhaps we have put too much focus on capital requirements over the years, at the expense of these other measures. This is why we need to strengthen this other aspect because, as I have pointed out, governance is key to strengthening the banking system."
Join The Discussion