Buch: Vigilance key for European bank supervision
Claudia Buch, Chair of the Supervisory Board of the European Central Bank, discussed the practical implications of prudential bank regulation for European supervision. She highlighted the enduring influence of Mathias Dewatripont's work and emphasized the need for continued vigilance against evolving risks.
Dewatripont's enduring framework for supervision
The economic rationale for prudential bank supervision lacked a systematic conceptual framework until the mid-1990s.
Mathias Dewatripont and Jean Tirole's seminal 1994 work, 'The Prudential Regulation of Banks,' provided this foundation.
They argued banks are 'managerial firms' where managers' unobservable actions necessitate external monitoring.
Capital structure plays a disciplining role, with control shifting from equity holders to debt holders as performance declines.
However, banks are largely funded by small, dispersed depositors who often lack the information or expertise for effective monitoring, exacerbated by free-riding problems or deposit insurance.
This creates a 'structural governance gap,' requiring supervisors to act on behalf of depositors.
Supervisors ensure risks are managed properly and intervene as needed, using capital and solvency requirements as triggers.
Applying theory to today's risks
The Basel Committee's capital standards directly reflect Dewatripont's theoretical insights, providing a basis for supervisory intervention, including licence withdrawal in Europe.
Buch highlighted Dewatripont's emphasis on regulation, supervision, and resolution as a coherent incentive framework, stressing the challenge of timely control shifts from shareholders to supervisors during performance deterioration.
Lessons from the March 2023 banking turmoil underscore Basel III's progress but also the need for vigilance.
Buch emphasized that resilience is forward-looking, urging banks to address evolving risks, complex business models, and governance structures, particularly amid elevated geopolitical risks and reduced fiscal policy capacity.