Montagner on balancing EU banking harmonisation and diversity

The European Union's motto, 'united in diversity,' applies to banking regulation and supervision, aiming to harmonise the framework while respecting institutional diversity.

The co-legislators established a Single Rulebook to ensure consistent supervisory standards, preventing depositors from worrying about weaker oversight.

This harmonised approach offers tangible benefits, notably in preventing panic and limiting contagion during financial shocks.

The 2023 regional banking crisis in the United States served as a stark reminder of how a differentiated, size-based supervisory framework can prove more fragile when institutions fail.

Montagner notes that rigid size-based thresholds can inadvertently hinder the growth of financial institutions, as crossing a regulatory threshold can abruptly alter applicable rules, potentially discouraging expansion.

The Single Rulebook also supports the Single Market, facilitating the freedom of establishment and the provision of services across borders, especially with the rise of online banking and digital financial services.

Regulation and supervision must be proportionate, as established by the Capital Requirements Directive.

The ECB's Governing Council has proposed improvements for small and non-complex institutions, recognising that size alone does not determine risk.

In the euro area, the ECB directly supervises 112 significant institutions (SIs), which consolidate 823 credit institutions, while national authorities oversee less significant institutions (LSIs).

Even within SIs, considerable diversity exists in size, business model, and ownership.

ECB Banking Supervision addresses these differences by organising institutions into analytical peer groups or 'clusters,' facilitating meaningful comparisons.

Regardless of these distinctions, the ECB expects all banks to continuously assess their risks, maintain robust internal controls, and ensure strong governance systems.