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Three Pillars of an Effective Cross-Border Stability Framework in Financial Supervision

In his presentation, Dr. Stanisław Kluza emphasizes the importance of a robust global stability framework anchored in national authorities. He outlines three critical pillars: competent local supervision, regulatory regimes to discourage consolidation among large banks, and clearly defined accountability for bank executives. Local supervision is crucial since financial turbulence often originates locally, and regulators must manage the size and strategy of financial institutions. These principles aim to increase the resilience of the banking system while ensuring fair responsibility for depositors and taxpayers.

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Three Pillars of an Effective Cross-Border Stability Framework in Financial Supervision

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  1. Three pillars of effective cross-border stability framework Stanisław Kluza, Ph.D.ChairmanKomisja Nadzoru Finansowego – Polish Financial Supervision Authoritywww.knf.gov.pl/enPlac Powstańców Warszawy 1, 00-950 Warsawknf@knf.gov.pl

  2. Main points: • Global stability framework must be based on national authorities. • Regulators should influence the size of financial institutions. • Those who influenced a bank’s strategy should be held accountable if it fails.

  3. Pillar one: competent supervision at the country level Global stability framework must be based on national authorities • Financial turbulences, notwithstanding their cross-border nature, originate locally. Strong local supervision must therefore be at foundations of any international regime. • Some prudential ratios should be established globally, but their application must be left to national authorities who know local markets best. • As responsibility for deposits held in banks remains at the country level, capital and liquidity requirements should be at discretion of local supervisors. • International supervision over cross-border groups should also be enhanced. To this end, EBA could replace home supervisors in the role of coordinators in colleges of supervisors. Public aid for financial institutions as a percent of GDP (2008-2009, excl. guarantees on interbank loans) BUT Source: EC

  4. Pillar two:regulatory regime that discourages consolidation Some banks not only are too big to fail, but may also be too expensive to survive • The risk generated by SIFIs surpasses the abilities of guarantee systems and state budgets to absorb it. Is it fair for depositors of those institutions? Is it fair for taxpayers? • The more an institution grows, the more risks it creates – and the more stringent capital requirements it should face. • The role of regulators, also, is to remove incentives to continuing consolidation implicit in prudential requirements. • Proposals to apply liquidity requirements at the group level, not to individual institutions, could result in increased risk in the banking system. • We may think about ways to foster diversification of the banking sector rather than mergers. Deposits held in the largest banks and total state budget expenditures (bln euro, 2009) Source: Bloomberg

  5. Those who influenced a bank’s strategy should be held accountable if it fails Pillar three:properly addressed responsibility • Supervisory competences should always be accompanied by responsibility for deposits. • Should the parent institution’s financial responsibility for its subsidiary be limited only to the capital invested? • There is a need for establishment of some formal ties between deposit guarantee schemes, especially between those of parent companies and those of their subsidiaries in other countries. • As for banks operating internationally via branches, a kind of additional insurance is needed in case their home DGSs are to become insolvent. Share of banking sector assets held by banks under foreign control (December 2008)

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