Miroslav Singer: European Supervisor Education Initiative “Financial supervision in Europe – on the right track?” Dinner speech by Mr Miroslav Singer, Governor of the Czech National Bank, at the ESE Conference 2015 “Financial supervision in Europe – on the right track?”, Prague, 1 October 2015. *  *  *  Good evening ladies and gentlemen, I am honoured and delighted to be here with you today to share my views on whether prudential regulation and financial supervision in Europe are on the right track. My opinions are based on the Czech National Bank’s long and direct experience of supervising the Czech banking sector. I’d like to emphasise that our banking sector was hardly affected at all by the financial crisis. Our banks have consistently been posting high profits in recent years, so recapitalisation has not been on the agenda. This allows me to maintain the necessary detachment when observing current developments in financial supervision. I believe that three major trade-offs are encountered when developing regulations. 1. A trade-off between the costs and benefits of implementation. 2. A trade-off between complexity and clarity. 3. A trade-off between growth and safety. Often only the first one, between costs and benefits, is discussed. Mostly lip service is paid to the second one, the trade-off between complexity and clarity. And the third one, between safety and growth, is ignored in many cases. I will deal with all of them in what follows.
At the same time, it extended across national borders. Just before its collapse, the three major cross-border banks that constituted the bulk of the banking system had over 40% of their total assets in foreign subsidiaries, 60% of total lending was to non-residents, 60% of income was from foreign sources, and over two-thirds of total lending and deposits were denominated in foreign currencies. How did this happen, and why was it allowed? I do not think we yet have the research and the consensus to provide a reasonably undisputed list of the main causal factors in this process; however, I think four factors will rank highly on that list. These are Iceland’s membership in the European Economic Area (EEA) in 1994, privatisation of the Icelandic banking system in the early 2000s in a manner that placed the major banks in the hands of risk-loving investment bankers, the global conditions of ample and cheap credit that prevailed in the years prior to the international financial crisis, and the tendency in Iceland both to adopt international and EU regulations without critical analysis of Iceland-specific risks and to base supervision to a significant degree on mechanical checks of adherence to those regulations. Let me expand a bit on the EEA part, as it is highly relevant to my topic. The EEA Agreement provides a legal and regulatory framework based on European Union Directives, including a framework for free movement of capital and provision of financial services.