In an era of greater transparency and scrutiny by market players, communication is key for us all, banks and supervisory authorities.
The success of Banking Union, a project supported by the European Banking Federation from inception, is now a reality. What has been achieved on the side of the authorities and the banks is unparallel: constructing from scratch a new supervisory framework, even a new supervisory paradigm, in just a few years is something we can be proud of. But the room for complacency is very limited in a challenging environment. And I am not just thinking about the financial environment but also, even especially, about geo political risks.
The first challenge we face is that the creation of a common supervisory framework is more difficult than initially foreseen. In other words, the degree of heterogeneity of national supervisory frameworks is greater than what we thought. This of course points to the importance of the creation of the SSM, even if it adds complexity to the task ahead: the voluntary cooperation schemes put in place, first, in CEBS and, then at the EBA were producing convergence at a very slow pace.
The new reality of Basel III is also being tested. For instance, we discussed in the past whether Cocos would be a useful instrument for managing a crisis situation in a bank, but we never expected back then the contamination towards bank shares we saw at the beginning of the year. In these circumstances, a clear communication strategy is key to avoid, or limit, market turbulence. I will come back to this later on.
But the new reality in financial markets is not solely, or even mainly, driven by regulation. The low interest rate environment is being more powerful and pervasive that we all thought. For an industry whose core business is maturity transformation, the flattening of the yield curve and the negative interest rates are not good news from the profitability perspective. The sooner we see a normalisation of interest rates, the better.
Turning to the new supervisory environment, we can see a tension between the need of a greater homogeneity of approaches and the need to discriminate between good and not so good supervised entities. In the end, it is the old debate between rules and discretion. Now the direction seems to be, in my view, towards rules as a way to ensure a level playing among SSM banks. In the starting years of Banking Union this may well be a reasonable approach given the heterogeneity of the starting point in supervisory practices, but later on we may want to revisit the balance between rules and discretion. And we will have to extend the Level Playing Field effort beyond the 120 directly supervised banks: I am, of course, referring to indirect supervision, to DG III issues.
Finally, a word on communication challenges. In an era of greater transparency and scrutiny by market players, communication is key for us all, banks and supervisory authorities. Let me mention a couple of examples. First, the issue of MDA, where the combination of new Basel III rules, an EBA paper and a very sensitive market environment created an unexpected shock. Second, the messages around the finalisation of Basel III in the Basel Committee (the so-called Basel IV), where the high level message of not substantially increasing capital requirements does not fit well with the detailed consultative papers being released.
I am sure some of the issues pointed above will become clearer during the next twelve months. And I am sure other topics, such as the coordination between the SRB and the SSM, consistency between MREL and TLAC, and progress towards a Single Deposit Insurance Scheme will all be high on the agenda for next year.
But let me now go to the important issues, by giving the floor to Madame Nouy, Chairperson of the SSM.