In a recent discussion, Anneli Tuominen, member of the Supervisory Board of the European Central Bank discussed capital market requirements, equity financing and non-bank financial intermediary (NBFI) risks, among other topics.
On NBFI risk, she said the central bank’s review identified areas where only a few banks have adopted sound practices and where further efforts are needed to address several material shortcomings. These include: customer due-diligence procedures for NBFIs; early warning indicators specific to derivatives and securities financing transactions; and risk appetite statements for banks with material or complex counterparty credit risk exposures.
“To help guide banks in this area, last year we published a report on sound practices in counterparty credit risk governance and management, describing sound practices in areas such as counterparty credit risk governance, risk control, management and measurement, stress testing, and the watchlist and default management process,” she said.
On capital requirements, she said: “I would caution against heeding the calls made by some in the banking industry, who argue that capital requirements should be relaxed so that banks can be more competitive in the business of financing the economy. There have been around 150 banking crises since the 1970s. These have come at a high economic and social cost to the people affected, so we should not risk repeating the mistakes of the past. However, there is a case to be made for streamlining the overall banking regulatory framework, which is currently complex. The ECB is participating in discussions on this, together with other stakeholders such as the European Banking Authority.”
On equity financing, she said: “…everyone can agree on the fact that a more developed securitization market could play a role in transferring risks away from banks and enabling them to provide more financing to the real economy, while also creating opportunities for investors. This would also be one way, although by no means the only way, to contribute to the capital markets union – promoting equity financing would be at least as, if not more, important.”