Daniel Davies is Managing Director at Frontline Analysts, the author of lie for moneyand co-author of The Brompton.
If you ever want to start a fight with a bank supervisor (and who doesn’t), the epitome of choice is to call them a “box-ticker”.
In context, this refers to their slightly lower status within central banks, an alleged lack of imagination, less frequency of advanced degrees in economics, and the repetitive and uncreative nature of their work. Like all truly deadly insults, there is a grain of – but no more than – truth.
The “b-word” appears only twice in the report of the group of experts appointed by the ECB to examine its banking supervision practices. (They would never have used it as an epithet, of course—there’s a reference to “checking all the boxes” on page 29 and another to “risking fostering a tickbox culture” on page 55. ).
But if you know how to read between the lines, it seems clear that international pundits have found an absolute nest of box-tickers. It turns out there is an IT system at the ECB called IMAS that documents all of their processes and provides boxes, forms and fields for everything. According to experts:
System design dictates how [banking supervision] is executed in the field and any flexibility introduced into the process can only become operational if corresponding changes are made to IMAS. Since supervisors spend a lot of their time working with IMAS, its design directly affects the structure of . . . process and can ultimately affect [the ECB’s] supervisory culture.
It sounds awful. Reviewers also point out that IMAS itself is not capable of generating the analyzes that supervisors need, and that they often have to manually extract data from the system, work with it, and then turn it into documents that need to be glued back together. manually. in IMAS.
Rather than working with banks to understand their business models and focusing on key emerging risks over a period of years, European banking supervisors spend much of their time filling out standard, one-size-fits-all templates. And because IMAS is rigid, it has to include all the metrics that could possibly be relevant for any major eurozone bank, which means that much of the model is not relevant for any particular bank. .
This may be one of the reasons why, according to the report, the “annual” supervisory review process can take as long as fourteen months from beginning to end:
The coordination of a large number of stakeholders and the establishment of synchronized decision-making procedures for all important institutions results in an extended SREP timeline of up to 14 months. The long and precise sequencing of the calendar steps ensured the consistency and completeness of the process. However, it does not promote an agile oversight process. Specifically, it does not facilitate timely review of new developments during the process or timely monitoring measures. During the stakeholder interviews organized by the expert group, members of industry and NCAs advocated for a shortening of the time frame and a reduction of the time between the reference date of the evaluation, i.e. the end of the previous calendar year and the finalization of the SREP decision.
It was therefore recommended that the ECB update and improve the IMAS, and generally revamp the supervisory culture, to make it more forward-looking, analytical, risk-sensitive and responsive. Which sounds good. . .?
Except, of course, as the report admits, although the ECB’s supervisory culture is a bit hidden and b*xt****ng, the purpose of banking supervision is to ensure financial stability, not an intellectually rewarding job. Judged on that basis, it’s not really too badly done; even Wirecard can only credibly be blamed by BaFin. Do we really want a culture closer to that of the San Francisco Fed?
There is actually a very good reason why the ECB today has an extremely prescriptive supervisory system; this function is basically only 10 years old and had to be set up from a wide variety of national authorities.
Not only did that mean they had to follow some kind of common denominator in terms of practices that everyone could agree on, but in the beginning there wasn’t necessarily a lot of trust. Even today, there is a strict internal rule that a bank’s supervisory team cannot be headed by a person of the same nationality as the bank’s head office.
And that little element of distrust is exactly what you don’t want to lose. It is the spark of the realization that the greatest risk to a supervisory culture is the constant tendency towards regulatory capture. When people learn to understand business models, they often pick up bad habits in the process. Focusing on emerging and new risks sometimes means you lose sight of things that are really obvious in front of your nose. But whether a box was checked or not is an objective fact.
A persuasive CEO or CRO can often argue that a particular ratio or monitoring report isn’t really relevant or shouldn’t be a priority, or is hindering growth. It’s much harder to argue with a square box that should have a checkmark but doesn’t.
The history of banking regulation suggests that the natural state of affairs is to see the rules constantly eroded by decisions that appear individually defensible but set precedents that are then expanded.
Whatever the ECB decides to do, it should think carefully about preserving a bit of a checkbox.
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