Supervision in Uncertain Times

In a speech delivered late last month, Patrick Montagner, a Member of the Supervisory Board of the European Central Bank (ECB), addressed whether supervision is “too strict” in this period of apparent calm, arguing that vigilance is essential and that supervisory methods must continue to improve.

Montagner acknowledged the progress banks have made over the past 15 years in strengthening solvency, liquidity, and governance. Profitability has risen, supported by higher interest rates and fiscal measures during the pandemic and energy shocks. However, he warned that “no tree ever grows to the sky” and stressed that economic uncertainty has increased.

Montagner highlighted several risks to financial stability: excessive asset valuations, rising leverage across households, firms, and governments, and unrealistic liquidity assumptions. He criticized the idea that risks lie mainly with “non-banks,” arguing that these entities remain deeply interconnected with banks. He also noted lessons from 2023, stating that no ratio can compensate for a flawed business model or weak risk culture, as seen in the Credit Suisse failure.

Montagner also stressed the importance of governance. Montagner argued that legislators must provide sound rules and tools, supervisors must enforce them, and banks must take “entire responsibility” for risk management.

Montagner reminded the audience that the global financial crisis showed that any bank can fail. What distinguished sound institutions from weak ones was their governance and culture, he contended. “A solid financial position is typically a reflection of, not a substitute for, a sound governance and risk culture,” he said.

“The banking landscape will continue to change through technological innovation, shifting business models, new competitive pressures and structural economic changes,” Montagner concluded. “Our supervision will evolve accordingly. But it will evolve to become more effective and efficient, not less intensive or demanding.”