 Good afternoon everyone. My name is Mario Pagliariel, I'm the Director of Supervisory Strategy and Risk at the ECB. It is a pleasure to open this conference and to welcome you at this first annual ECB Banking Supervision Research Conference. I'm happy to see many of you in person here in Frankfurt, so thank you so much for joining us. And there are also a lot of people joining online. Actually the response to our web invitation was really overwhelming. I think we got almost 500 people registering and almost from all continents. But I hope the conference will be interactive not only for the people in the room but also for those connected online. The conference brings together researchers, supervisors, regulators and the financial industry. And I think for us is a very good chance to look a bit beyond our daily supervisory tasks and get some insights from research. Sometimes there is a bit of diffidence between supervisors and researchers with the former to busy with what they say very serious supervisory tasks and the latter finding those tasks a bit boring topics for research. I think the aim of this conference is to show that this is not the case and there are benefits and merits in exchanging views and sharing analysis. Over the next one day and a half we will be discussing topics which are relevant for banking supervision but go well beyond banking. First is the climate change auto cop with these risks and also the second one will be how to manage digital transformation. We really look forward to get new ideas and better understand the complex interactions between supervisory actions, the impact on the banks and the overall economic implications. And from the discussion I'm sure we will draw lessons on how to overcome the challenges ahead of us and how to improve supervisory policies and practices. A bit of housekeeping for the press in the room kind of reminder on the media policy. All sessions are on the record. Therefore you will be free to report on each session and each paper which is presented but all the conversations with the conference participants taking place on the sidelines are strictly off the record unless otherwise agreed bilaterally. Before starting also I would like to thank a lot of people and actually this is not the full list of people I should thank. The program committee in the first place. I was chairing the program committee. The organizers Andreas Bayer, Klaus Duhlman, Monica Bambour and Brita Bertram and colleagues from digital communications, Stefan Sides and Nasser Anafi and their teams for setting up this venue. Thanks also to all the colleagues behind the scenes to ensure the smooth working of the event which is a bit sort of you shouldn't see at the beginning would be better to wait for them but let's see. Let's be optimistic on this one. I think now we can start the conference with our conversation on the progress made in the banking sector and the risks looming ahead between Luke Leven, the director general of research at the ECB and the chair of the ECB supervisory board, Andrea Ria. I wish you all a productive conference, fruitful discussions and I leave the floor to Luke and Andrea. Thank you. All right. Good afternoon. It's a real pleasure to be here. It's anything but all I can tell you. Yes, I'm one of those researchers that was just referred to. And I have this feeling we're in sort of a calm before storm. Yes, there have been some hiccups already along the way and I see some friends from the Federal Reserve. We can tease them in the breaks but it's an exciting time for the SSM as well. And so the theme of today's conference is very broad. It's about banking supervision and its interaction with the economy covering digitalization, climate change and also financial innovation. So Andrea, I would like to start with also a conference related question, which is the following. With the rise of financial technology and new players in the industry, many are wondering what is going to happen to these traditional banks. Have we seen the last of those type of creatures? Are they going to lose profits and market share? And more generally, how are they adopting to this new financial landscape? So my question is what are your thoughts on this digital transformation and its impact on the banking industry? Thank you. Thank you, Luc. And good afternoon to all of you. First of all, let me say that I'm very glad that we have this conference. You remember when I joined some years ago, we discussed how to develop a sort of research agenda on supervisory matters. So I'm very glad that before I leave, let's say we managed to have a first research conference. On digitalization, let's say the short answer to your question is that I think that banks can manage to still thrive in the new digital world, but probably not all of them will, so there will be winners and losers. I think that the first battlefield where we saw the dynamics developing as being payments in the area of payments is where fintech companies have been most aggressive and successful in challenging banks. I think that banks were, for a long time, leveraging on their monopoly on deposit taking to capture the payments market and the world actually not providing probably the most efficient and customer-friendly service there. Also, the legislators started opening the market for initiational payments to fintech companies and that is where, let's say, the dynamics became quite harsh for the banks. The attitude of the banks first was to be very defensive, trying to call for level playing field, try to basically protect themselves, push back on the legislative changes, but eventually they understood that they needed to engage. I think they did so. I think they developed their own in-house fintech companies. They acquired some fintech companies, especially they developed partnerships with the fintech companies and they recovered a competitive edge. So I think this is a little bit a story that can happen throughout different areas. And I think that COVID crystallized this new awareness in the banking sector that they need to transform digitally their franchise. Still, let's say, we have done a survey at the SSM. We published the results in the supervising news letter and we saw that many banks, although, let's say, almost all significant institutions now say that they have a digital transformation strategy, many of them do not have investments, budget lines that match this strategy. Many of them do not have the skills that match this strategy, both in terms of staff and knowledge in the board. And many of them, which is our concern from the supervisory perspective, do not have the risk management probably capabilities to say they've not revised their risk management in such a way to match these new challenges. And recently we've also seen probably that there could be a dark side to digitalization in terms of speed with which customers can leave you. Depositors especially, but more generally customers can become much more choosy in the way in which they compare and contrast the conditions offered by different banks. So these all can lead to some banks losing competitive ground and maybe not having any more sustainability in their business model. So there will be casualties, I think. I don't really know, I don't think this is the end of the banking sector as we know it. So one of those recent casualties overseas was Silicon Valley Bank. I'm sure you also saw from Page News and more recently, basically yesterday, the First Republic Bank. So some of the rioting about this bank was, I mean, at least in my mind, sort of a traditional bank run. Is this how we should think about these casualties or is there a different dynamic to it? What's your view on that? You're right. I mean, there are some things. I was reading through the reports published by the Federal Reserve and the FBAC during the weekend and many things are, you know, traditional elements in almost any crisis. You know, poor management, poor governance, sometimes also the difficulty on the supervisory side. We escalate, you know, supervisory corrective action in these fields fast enough. So things that we know we are grappling with ourselves to some extent. There was this issue of unrealized losses, which I think is still to some extent open. I saw that in the US, some servers compared the SVB, Silicon Valley Bank, to Continental Illinois, which was a bank in the past where there was this violent run on deposits, the bank for which actually was coined the term too big to fail, if I remember well. I think that if there is a similarity of Silicon Valley Bank is more with Dexia. Dexia in 2011, I remember it was the first stress test I was doing at the EBA, you know, and came out rather positively with the stress test. If you look at the books as they were, but if you took a market-market view of the book, the bank was basically without capital. And the interesting point is that there are moments in which investors switch very fast from the balance sheet view to the market-market view of banks. And this can happen very fast. So I think we need to reflect a little bit what this tells for us. In the European Union, we're a bit better off than what was the case for Silicon Valley Bank in terms of regulatory treatment because we apply the liquidity coverage ratio. The compliance is checked on a market-market basis. And for the assets which are booked in the available for sale, we factor the losses into capital. So it's not by chance that if you look at the IMF, they publish a report, a chart recently in which they show that if you take all the unrealized losses to capital, the impact for US banks is much larger than for European banks. I think the median is 250 basis points for the European banks is less than 50 basis points. Still, let's say we too, let's say, basically consider the liquidity buffers in the liquidity buffers also assets which are held at a mortise cost. And I think that this is something that we should reflect on. Maybe if you have a liquidity buffer, you should be always able to sell these assets a short notice so having these in accounting books at market value would be better. And the other point is the speed of deposit outflows. Now that was really never experienced presently. And we need to reflect a bit whether this is idiosyncratic or whether there are some structural elements that play there. Of course, we know that the banks in the US did these ones that went underwater. They highly concentrated deposit bays, mostly uninsured. So there are specific features. There is also a peculiarity post-COVID. There was this huge increase in deposits during COVID. And there was a natural reduction that maybe took place at an accelerated pace in some cases. But we also reading the reports from the colleagues in the US. I mean, you also see that maybe social media digitalization could have played a role in these dynamics. So we need to think a bit about that going forward. Thomas Jefferson famously said that banks like the ones he just referred to are more dangerous than standing armies. Indeed, I think the press is not only full with individual cases but in general there is sort of a growing agony around banks. Again, the usual discussion of bad banks, especially big banks. At least in the US, JP Morgan and Gengrew incised yesterday tremendously. So I wanted to ask you what these recent bank failures in your mind mean for sort of the post-regulatory, that's a financial crisis, regulatory reforms we've seen. You mentioned already liquidity requirements. I mean, have they broadly been successful? Is more needed on the right path? As I was saying, I think it would be a mistake to jump the gun and move to wholesale regulatory reforms. All in all, the regulatory reforms we put in place served us well. I think that the banking sector was more resilient. We had to remind ourselves that some of the banks that went underwater were not actually requested to comply with the full monty of the Basel standards. Liquidity buffers, indeed there might be some assumptions on the outflows of liquidity that might need to be fine-tuned. But again, I think we should also find the balance between regulation and supervision. So we couldn't calibrate the international standards to cover every business model in the world, even very extreme ones. So there are cases which you need to leeway for the supervisors to apply add-ons of liquidity, for instance, for banks which have a business model relying extensively on an insured deposit. So I think we should be careful to adjust too much the regulation so far. But there are suggestions in the reports issued by our U.S. colleagues that of course we should discuss at the international tables. So another debate that's ongoing, especially in the U.S., is about deposit insurance. You referred to that already. So let's say Warren Buffer earlier this week, he wrote that right now it's better to invest in a financial cripple as long as Uncle Sam is behind it. And I don't look at ratings and capital anymore. But yeah, I guess the general push is for even further, larger-scale insurance of deposits, maybe full amount of deposits, and essentially the U.S. government is sort of bulked in that direction by using the systemic risk exception, right? So do you think that way is the solution with deposit insurance? Are you worried about more hazards? Let me say, first of all, that the systemic risk exception should not be seen as something that bad. I mean, we argued as ECB in the past, in our own opinion, that having a systemic risk exception could be a good idea. The AMF, actually, in the article four in the Euro area, argued that we should introduce it. Many jurisdictions have it. And I think that we do have this problem in the European Union that because of lack of trust between member states, between authorities, we tend to write everything in the marble of rules. No, we never leave enough leeway to authorities sometimes to have the flexibility to adjust the case that you have at hand. So I don't think that the systemic risk exception is a bad thing in itself. Having said that, let's say I read, I've not yet digested the FDIC report on deposit insurance, so I just came through it. I must say I'm a bit skeptical about the need to increase depositors coverage. My impression is that either you go the full amount of full coverage for all deposits, which would be an issue in terms of moral hazard, in terms also cost for the whole industry. But if you come short of that, we've seen it in the case of Northern Rock, when you add in the UK coinsurance, or 90% only coverage. If you only have to lose 10% or even less, you will push the deposits out in any case. So I don't think that this is going to, increasing the bar, increasing the coverage is going to stop panic runs. So all in all, I think we have to leave with an only partial deposits. The one we have is, working decently, I would not support at the moment. I need to, of course, there needs to be a debate, but I've not seen a compelling evidence for raising the bar yet. Thank you. So I would like to take you a bit closer to home and maybe also slightly away from the focus, primarily on banks, but also their interaction with the real economy. And maybe actually a little bit closer to my day job on monetary policy. Because now for pretty much a decade, we've experienced very low interest rates and banks were complaining about low rates and now they're complaining about high rates so I'm trying to get my head around it and make sense of it. And I think it's fair to say that one of the side effects of this rapidly rising rates to fight inflation has been some financial turbulence we have seen in financial markets. So is that of concern to you from an Euro area bank's stability perspective? Is there more to come? You see that. We've looked into the impact on increasing interest rates in the bank's balance sheets and P&L for some time now. We started already at the end of 2021. Our conclusion has always been so far that higher interest rates are good news for European banks. I mean, we have seen in 2022 the net interest income increased by 15%. And if you look also at the projections for 2023, even 2024, let's say both the bank's models and our models tell us that the positive effect on interest margins is more than compensating the expected negative effect on asset quality on customers not being able to pay back their loans as due. Now, should we trust our models and the bank's models? To some extent, we didn't do a proper job in the past. In the past, we were overshooting in terms of conservatism, in terms of thinking that we would have had a tsunami of NPLs, of deterioration of asset quality as a result of COVID. So we might get it wrong this time as well. So I think we need to be extra cautious in any case. And that's why we have been, since a while now, pushing banks to put their focus not only on the earnings perspective where the impact is likely to be positive, but also on the economic value of equity, for instance. So on the impact that this could have on the net worth of the banks, so considering market to market, to hold their assets and liabilities, and their funding costs especially, putting more attention on asset quality, and especially on those sectors that are particularly sensitive to increase in interest rates, commercial, residential, real estate, consumer finance, leverage finance, and also from the bank side take proactive action when they see any signal of deteriorating asset quality. And finally, I think also there is also the issue that is always there, but of known bank financial institutions. I mean, these are entities that we know very little about, but they have taken a major role in financing the higher level of leverage that we have in our economy so far. So it might be that that is an area also which we need to keep under watch of. For us as bank supervisors, the entry point is mainly counterparty criteria. So I think that these are the areas that we should keep a close eye on. So you referred already to big to fail. One more recent example that comes to mind that we haven't touched on is in Switzerland, Credit Swiss and the merger with UBS. And you also mentioned Continental Illinois in the 80s, I think it was 88, which coined the too big to fail, as you said. And in comparison, that was a tiny bank. Credit Swiss, even at the time of its failure, having shrunk to have its size was still, let's say, half of Swiss GDP more or less, depending on how you count mark to market or not. But anyway, my question is whether sort of too big to fail resolution is done the right way, especially sort of merging already too large entities. In the case of Switzerland, I would like to add sort of the more recent case that I already mentioned on J.P. Morgan earlier this week being offered to take over First Republic Bank in the US. So this type of mergers that creates banks that have a very large share of particular deposit markets. Is that something that you think is desirable or sometimes that's the only solution? Well, first of all, let me say that as supervisor we should be thankful to the Swiss authorities for having solved the issue of Credit Swiss during the weekend. When you have a globally systemic important institution going underwater, the first priority is to have the issue dealt with during the weekend and then the critical functions maintained and up and running on the Monday. If these had not happened, there would have been probably a number of negative consequences through derivative exposures, securities, financing transactions, maybe market infrastructure. So the impact would be really, really large. So good that the solution was found. I think we should start from that point. We had a little bit of a contagion effect through the treatment of additional tier one instrument in Switzerland. We tried to go out fast to explain that that particular treatment could convey for a moment the impression to general market that additional tier one could have become junior to equity in resolution. We tried to explain that this could not be the case in the contrast of our banks and in our resolution framework, legal framework and also in our practices. I think I hope that this clarified the issue. I think the key point for too big to fail is resolvability. So for me, I understand the point on having large shares. There are a number of competition issues which maybe are not for me as a supervisor to some extent. For me, what matters the most is the issue of resolvability. Of course, if Swiss was not resolvable as the Swiss authorities seem to have conveyed quite starkly after the weekend in which the bank was sold to UBS, I don't think UBS plus Swiss could be resolvable. So we need to understand what are the drivers of this lack of resolvability. Because to some extent what they did was a sale of business which could have been crafted also under resolution. So we need to understand what are the issues there and in my view we need to try and fix that because I would not give up on the resolution strategy. I think that we still have to make an effort to make this work in practice because if the banks are really too big to fail and need to be bailed out or supported in this way in any case I think that that will carry important consequences on the function of our markets. So I think we need to push this agenda further. The FSB is working on this. I understand that together with the Swiss authorities they will come out with a report so hopefully we can identify the ways to make further step forward on resolution. Okay, so before I turn to the audience if you have the opportunity to ask Mr. Emre a question I wanted to touch on the other topic of the conference we haven't spoken about climate change which under your leadership the SSM has embraced very much so and you have done the stress test. So I understand that last year you concluded that while banks have made quite a bit of progress from their risk management perspective to look at climate and environmental-related risk there's still quite some work to be done and so my question is how do you at the SSM plan to push the banks further to close the gap that you identified so that ultimately they will embrace more and take fully into account climate and environmental risks? I think we have been very structured in the approach to climate change. We set out our supervisor expectation already back in 2020 and we took a purely risk management angle so what we expected in terms of governance risk measurement, risk controls, stress testing pilotary disclosures and the banks self-assessed themselves against these yardsticks they themselves were very candid in saying that there was a significant gap between where they were and where we wanted them to be and they developed plans and we started with a stress test with this rep not to test the progress and again they know where we want them to be and they have a timeline which is by the end of 2024 so we will follow closely these progress and take action if they don't respect their commitments let me say that we have been quite I would say thoughtful in the way in which we structure because again the banks were always complaining you are pushing us to measure the risk but we don't have enough data the data is not of good quality our customers don't give us the data and I think that what we did was to and this is something we can do as SSM this is one of the assets of having the SSM that we can see practices across many banks so there are some banks that have developed good practices in terms of building proxies in terms of estimating the risk better so we acted as a sort of hub for disseminating good practices also to the industry if some banks manage to do it other banks can as well and this I think triggered a good dynamics in the sector so we hope that we can keep pushing and get the results we expect to have by the end of 2024 if not we will have an escalation process that will lead banks to come into line sooner rather than later Thank you Andrea Thank you so much for this very also candid reply to my questions which at the time of still some financial turbulence is rare in the supervisory world at least based on my little experience so this is your chance to ask a question to Mr. Andrea and also look at Andreas if you see questions from the online audience but otherwise I have already one hand up here first come first serve so Thorsten you are the first and you will get the mic Thorsten back Thank you very much and also thank you Andrea for these insightful comments two questions that follow up on two of your remarks first on the changes what you said the digitalization not every bank will achieve the transition and there will be some variation which I guess implies that some players might have to leave the market which brings us to I would say kind of a weak point in the banking union which is the resolution part let's say the failure management part and I mean we know that the SRB has so far only I think resolved two or three banks most of them are so being resolved or being recapitalized on the national level I mean where do you see this going forward I mean so if we want to if you either expect or even if you want to have structural change in the banking system to which extent do we have to rely on a more effective resolution regime on the banking union level that's my first question my second question you mentioned the systemic risk exemption so there's an old standing debate about whether this kind of should be announced in advance or should there be constructive ambiguity that people don't know ahead of time whether or not they will fall under such an exemption where are your thoughts on this it's better to have clarity from the very beginning kind of like yes you will be made whole no you will not be made whole or is it better in terms of discipline to kind of keep it ambiguous thanks well the first question first of all I would like to challenge the idea that we have a dysfunctional crisis management framework right now so let's say we know that it's complex we have always argued it's complex but let's say we have a very extremely good cooperation arrangements collaboration with the SRB I mean whenever we have had crisis eventually we have managed to find pragmatic solutions sometimes you know juggling different legal frameworks of different member states so that's still a challenge but I think that we argue that we can do it of course we can do better if the legislative framework is adjusted in such a way to increase the flexibility and the tools that we have and I think that the the CMDI package the recent legislative proposals by the commission do exactly that so they are not pushing for a major overhaul of the system but still they try to increase the room for resolution also to smaller midsize banks harmonize the way in which they can dealt with and especially focus on the financing of crisis management which is the sore point I mean we do have the same amount of funds if you take the single resolution fund and the national deposit guarantee schemes we have the same amount of funds as the FDIC probably more now actually because they have used some and but we it's very difficult for us to touch this pot of money you know and to actively use it to favor a smooth exit of banks from the market because the rules of engagement are very very tough so I think that the CMDI package would would help in that respect on the systemic risk exception I think it is by construction should not be something giving a sort of badge to one or the other bank that they would be bailed out I mean that would be very destructive I think I think it should be just giving flexibility to authorities to understand why in some cases to assess that banks which are not considered particularly large, systemic in normal times in a particular the conditions could trigger a major problem, major systemic problems if they have a non-managed exit from the market so here we need to rely on judgment of the authorities I think I also have two questions first one is ready to Luke's point of monetary policy whether the IMF in the global financial stability review they said in the first chapter that there might be trade-offs between financial stability and monetary policy that are very long and then very high increasing interest rates do you believe whether there are those trade-offs and whether maybe there are the trade-offs but with good or very good regulation and supervision trade-offs these trade-offs wouldn't be there and the second question you said that over the weekend you read the report from the Fed on the Silicon Valley bank they were saying basically apart from bad management they were basically saying that there was an issue of regulation in 2018 and 2018 so there would be regulation and they were also saying about supervision and the lack of culture of excellent supervision do you think in the sense of a reduction in the culture of supervision associated to the previous head of the supervision do you think both are necessary do you agree on this issue about both regulation and supervision are crucial for this risk on the first question you will not get me commenting on trade-offs, monetary policy financial stability that's not for a humble supervisor to say what I think is that the normalization of monetary policy was not something that was not expected actually I would say also advocated and eagerly expected by banks so it has always been clear to us that when these started we should have we and the banks should have prepared not to take all the risks of the new environment until 2021 we were testing the banks for a low for long environment so we had to switch quite fast to test them on a higher faster type of environment so we need to keep doing that and keep the banks on their toes and proactively the risks again of a more stressful adjustment in the interest rate environment I mean we did last year this targeted review on interest rate increased price risk and it was clear that many banks still had very optimistic assumptions on the behavior of depositors in an environment of increasing interest rates or also the stress condition the past through assumptions they had they were still complaining quite a lot about the past through assumptions in the stress test that we are running right now together with the EBA so I think that it's important that we keep the banks focused on those topics sorry in the meanwhile yeah on the regulation supervision aspects let's say supervision it is clear that's typical of there are always moments in which there is a push for supervisors to be sort of enforcer of rules so become very cautious in the way in which they intervene have always a strong legal basis for any action they take I think that the point that the report is making very strongly is that as supervisors need to be able to push the banks and to make sure that they take care of the risk they are confronted with in a very strong fashion and supervisors need to be empowered need to feel empowered to challenge the banks in a strong manner so that's an important element depends on the culture of the supervisory authority I think we spent a lot of effort and time here to build a strong supervisory culture I'm confident that we will do our best to maintain it and to strengthen even further on the rules let me make just a comment that one of the points made in the report was of course there were some decisions taken in the US not to subject some banks of a certain size not to the stress test and international standards now we have always been quite proud and fasting saying well this is not the case in the European Union we apply the Basel standards for the banks which is true and I think it has been a good choice not something that should be given for granted because you remember there was a lot of lobbying not to use a two tier system like in the US also here in the European Union so that was a good choice still we are deciding to deviate from a number of international standards to water down a number of international standards also in the debates and the legislative packages which are being finalized right now so I hope that this tourmoil could have the positive effect of making our co-regislators think twice because there will be future crisis also in Europe and you can be sure that we will be blamed for having deviated here or there from the international standards so thank you for your questions and Mr. Henrietta thank you so much I really enjoyed our conversation and I wanted to also thank you for your support throughout for research on banks supervision issues with a very good collaboration between the two sides of the ECB and this conference was a long time in the making and it's a pleasure to see now coming to live in this very new hybrid setup so I'm very much looking forward to the rest of the day and please join me in a round of applause for Mr. Henrietta thank you very much thank you