But clearly, banks are exposed to more than just credit and market risk. Operational risk also is a growing concern for the banking industry. The looming issue of Year 2000 remediation is just one example. With the continuing diversification of banking, the fast pace of financial innovation and the growing concentration of crucial payments, settlements and custody businesses, the importance of operational risk is rising, especially at many larger institutions. These institutions find that the probability of a financial loss resulting from a breakdown in internal controls or systems is greater than ever. As banks expand into new lines of business, such as electronic banking, this trend is likely to continue. For instance, consider the risk of a breach in electronic security controls that leads to unauthorized access to confidential customer information. Should this breach be severe and pervasive, it could lead to considerable legal and reputational problems for a bank. Further, the overall rapid pace of technological change in this area means there is a substantial risk of obsolescence. These are just some of the risks that banks must manage, and clearly the list I have set forth is not exhaustive. In particular, consider banks in emerging market countries that are subject to a unique set of risks as a result of the financing and investment cycles in their countries. Those banks that fund their domestic assets with foreign currencies may be particularly susceptible to liquidity risk when sharp fluctuations in exchange rates and market turbulence make it difficult to retain sources of financing.
The Single Resolution Mechanism Let me now turn to the establishment of a Single Resolution Mechanism (SRM), which constitutes the second pillar of the banking union and is a necessary complement to the SSM. It is crucial that the SRM is in place once the SSM is operational. There would otherwise be a danger of creating potential conflicts between supervisory and central bank perspectives. It would be a misunderstanding to believe that there will be no more troubles at banks as soon as responsibility for banking supervision is conferred to the ECB. On the contrary, non-viable banks will have to be closed down and resolved in order to prevent the “zombification” of the European banking sector. The viable parts of certain banks may nevertheless require transitional funding – which should not be mistaken for a bail-out. A single resolution mechanism is hence an essential condition. It will ensure timely and impartial decision-making focused on the European dimension and that resolution costs are borne by the private sector, thus putting an end to the expectation that taxpayers will foot the bill. The era in which the privatisation of profits and socialisation of losses was possible should belong to the past. The SRM should be equipped with a comprehensive set of enforceable tools and powers to resolve all banks participating in the SSM. This mechanism should under no circumstances be placed with the ECB, in order to nip any potential conflicts of objectives in the bud. However, the flow of information to the SSM must be safeguarded.