Frank Elderson: Supervisory risk appetite, efficiency and effectiveness

Elderson's speech is a supervision document, not a monetary policy one: it sets out the SSM's shift to a higher supervisory risk tolerance, a process-simplification drive, and a harder line on timely remediation. There is no read on rates, QE, QT or the policy stance anywhere in it. The only tangential content is a defence of strong prudential standards and full Basel III implementation, plus a claim that euro area bank profitability is strong. For the front end and the curve this is a non-event.

What’s new: Nothing material on the rates axis. The supervisory risk tolerance framework, the Next Level Supervision efficiency push and the defence of Basel III are all standing SSM themes, not new information. The genuinely new content is operational and quantified: about 40 of more than 100 guidance publications discontinued, securitisation approvals cut from three months to around seven days, stress test data points down roughly 55%, and capital approvals shortened from several months to under six days. None of it speaks to monetary policy or the rate path.

KEY FINDINGS

• The SSM risk tolerance framework explicitly accepts more residual supervisory risk: lower-priority risk areas at individual banks will no longer get the same intensive scrutiny every year. Points to a less intrusive supervisory stance at the margin, which trims bank compliance burden but carries no rates signal.
• Elderson rejects cutting capital requirements as a route to competitiveness, saying it could just as easily produce more share buybacks, and calls timely and full implementation of Basel III critical. Rules out a regulatory-relief trade for euro area banks and keeps the capital framework intact, a stability-positive but non-rates signal.
• Quantified efficiency gains: standardised securitisation approvals cut from three months to about seven days, stress test data points cut around 55%, fit-and-proper and capital approvals digitalised to under six days. Lower operational friction for banks, marginally supportive for bank equities, with no macro or rate transmission.
• Euro area bank return on equity has stabilised above 10% and the average price-to-book is near 1.5, narrowing the gap with US banks. Signals healthy bank profitability, constructive for bank equities, but not an input to the front end.
• The non-bank financial sector has doubled since 2008 and now exceeds half of euro area financial sector assets, with calls for greater private-market transparency. A medium-term financial-stability concern with no near-term market catalyst.

FROM THE DOCUMENT

Simply reducing prudential standards and capital requirements is no guarantee of greater competitiveness or lending. It would reduce resilience and could just as easily result in more share buybacks and higher distribution to shareholders.

The timely and full implementation of Basel III therefore remains critical.

The RTF goes one step further: it clarifies how much residual supervisory risk can be accepted when certain areas are reviewed less intensively or deferred.

In practice, this means that lower-priority risk areas at individual banks are not subject to the same intensive supervisory scrutiny every year.