Buch: Dewatripont's work shapes bank supervision
Claudia Buch, Chair of the Supervisory Board of the ECB, discussed the practical implications of prudential regulation for European banking supervision. Speaking at a Brussels conference, she highlighted the foundational work of Mathias Dewatripont and Jean Tirole.
The blueprint for bank oversight
The economic rationale for prudential bank supervision long lacked a systematic conceptual framework.
Mathias Dewatripont and Jean Tirole addressed this with their seminal 1994 work, 'The Prudential Regulation of Banks'.
They posited banks as 'managerial firms' where managers' actions are not fully observable, necessitating external monitoring.
Capital structure plays a disciplining role, with control ideally shifting from equity to debt holders as performance deteriorates.
However, banks' dispersed depositors often lack the information or incentive to monitor effectively, creating a structural governance gap.
Supervisors, therefore, act on behalf of depositors, ensuring risks are managed and intervening as required.
Capital and solvency requirements serve as triggers for these interventions, prompting a shift in control from shareholders to supervisors.
This foundational framework underpins the capital standards of the Basel Committee and the European supervisory approach, where the ECB ensures banks remain safe and sound.
Lessons from a vigilant mind
Buch highlighted Dewatripont's recent insights, emphasizing supervision's role in replicating depositor discipline.
He stressed the need for credible, timely control shifts from shareholders to supervisors when bank performance declines.
Dewatripont supported a risk-focused supervisory culture, cautioning against complexity, leading the SSM to streamline internal model assessments.
From the March 2023 turmoil, he urged vigilance, noting that despite euro area banking sector resilience, geopolitical risks and limited fiscal buffers demand sharp attention to intervention credibility, complex business models, and strong governance within banks.
Theory meets practice, vigilance remains
Buch expressed deep gratitude for Dewatripont's intellectual contributions, which continue to shape supervisory thinking.
She underscored the invaluable benefit of being challenged to remain focused on financial stability as a public good.
It remains essential to maintain a clear vision of how good regulation enhances welfare, avoiding short-term objectives that could weaken resilience.