The Importance of Supervision and Regulation in European Banking

Introduction

The European banking system has been subject to intense scrutiny in recent years, particularly following the global financial crisis. While there are concerns about the overall stability of the banking sector, it is important to recognize the role that supervision and regulation play in ensuring the safety and soundness of financial institutions.?In this?article?I?will explore the importance of supervision and regulation in the European banking system, and the differences between the European and US approaches.

Supervision in Europe

The?European Central Bank (ECB) has done an excellent job in terms of supervision, particularly in terms of reinforcing solidity and liquidity. The ECB uses a safe and sound approach to supervision, which ensures that banks are well-capitalized and have adequate liquidity. This is particularly important in the context of the Eurozone, which has a different banking system than the US.

Differences Between Europe and the US

The situation in Europe is completely different from that in the US. While there have been specific cases of problematic banks, such as?Credit Suisse, these are not indicative of the overall system. The business model of the European banking sector, particularly in?The Netherlands, is based on the wealth management of households. This means that banks can be much stronger in terms of liquidity because they rely on households and retail funding.

In terms of regulation, there are around 5,100 banks in Europe.?The regulation in Europe is generally considered to be strong, particularly in the context of the systemically important banks (SIBs). However, outside of the SIBs, there are concerns about the robustness of supervision across the broader banking sector. The situation in the US is particularly problematic, with banks that would be considered systemic in?The Netherlands?not being under the control of a supervisor. This means that there is a risk of problematic liquidity and collapse.

Importance of Supervision and Regulation

The level of supervision and regulation is critical in ensuring the safety and soundness of the banking system. The fragmentation of supervision in the US, particularly for smaller banks, is a concern. In Europe, however, there is a strong level of supervision that extends even to small banks. This provides a factor of solidity and stability, ensuring that banks are well-capitalized and have adequate liquidity.

Conclusion

In conclusion, supervision and regulation are critical factors in ensuring the stability and safety of the European banking system. While there are concerns about the broader banking sector, particularly outside of the SIBs, the strong level of supervision in Europe provides a level of stability and solidity that is not present in the US. This is particularly important in the context of liquidity, which is a key factor in the collapse of banks. Overall, it is essential that regulators continue to prioritize supervision and regulation to ensure the long-term safety and stability of the banking system.

Take a Deep Dive at Our Events

Regulation and Stability are topics that feature heavily on our events, such as The Amsterdam Banking Forum from The Banking 50 , and BANKLEX 2023 by Wisselbanck ?? . If you would like to attend the discussion, or take part in it, please get in touch.

Morten Kriek is the founder of?Wisselbanck ??, co-founder of?The Banking 50, and has more than 25 years of experience in the banking and financial technology sector. He holds a Masters Degree in Positive Leadership and Strategy from?IE Business School?in Madrid. He also completed on-campus executive programs at some of the world's leading business schools including?Columbia Business School,?Yale School of Management,?The Tuck School of Business at Dartmouth?and?Cornell Johnson Graduate School of Management. Morten is also a certified Positive Psychology Coach from the?Wholebeing Institute.