Stability before competitiveness, say supervisors

Supervisory authorities must prioritise financial stability before considering measures to boost competitiveness and growth, top officials at the European Central Bank and the Bank for International Settlements have said.

In a panel discussion during the Institute of International Finance’s (IIF) annual meeting on October 15, Sharon Donnery, a member of the ECB’s supervisory board, argued that her team’s contribution to competitiveness came from ensuring the financial system remained safe and sound.

“If you have strong banks – and given the fundamentally important role that banks play in the economy – then they can operate through the ups and downs of the economic cycle,” she told the audience.

When asked about a potential regulatory divergence between the European Union and the US, Donnery said the EU should aim to preserve the high level of banking resilience built since the global financial crisis. However, she acknowledged that there was scope for the EU to make supervision more efficient.

“It’s about trade-offs, and it’s about trying to get that balance really right,” she added.

Donnery’s remarks echoed those of colleagues at the ECB supervisory board, including chair Claudia Buch, who in March warned that debates on competitiveness should not be used as a pretext for watering down regulation.

In a separate session of the IIF event, Neil Esho, secretary-general of the Basel Committee on Banking Supervision, gave a similar warning that financial stability was a prerequisite for growth.

Fernando Restoy, chair of the BIS’s Financial Stability Institute, who appeared alongside Donnery, argued that a competitiveness mandate would not work in the EU due to its unique institutional setup, in which prudential regulations are primarily set by the legislative branch.

“The [EU] supervisory authorities, including the ECB, have no formal rule-making powers,” he said. “This is clearly at odds with what happens with most supervisors around the globe.”

Restoy believed a competitiveness mandate would fare better in countries where the delegation of power to supervisory authorities was stronger. The US Federal Reserve and the Bank of England, for example, could decide whether to implement global standards, whereas the ECB could not, he noted.

“I think the case for introducing secondary mandates for European supervisory authorities is certainly much weaker,” he said.

EU authorities are considering ways to boost the bloc’s competitiveness as they see a widening gap with the US.

According to a Reuters report on Wednesday, Germany’s chancellor, Friedrich Merz, was expected push for deregulation in the EU banking sector, fearing that European banks had become too heavily regulated and had been losing ground to their US counterparts.