FRANKFURT (Reuters) -Financial markets are underpricing geopolitical risks and nearly all euro zone banks are exposed to some extent, so weakening regulation now could jeopardize the sector’s viability in the longer run, ECB supervisory chief Claudia Buch said on Thursday.
U.S. officials are working on a raft of initiatives to ease the regulatory burden on U.S. banks, including softening capital rules, a pullback on supervisory bank exams and a friendlier stance on bank mergers.
Buch, however, pushed back on these ideas, arguing that capital requirements do not come at the expense of profitability and banks must be prepared for difficult-to-predict scenarios, especially as governments’ ability to respond via spending is limited.
“Broad-based resilience does not come at the expense of long-term profitability,” Buch said in a speech.
The key issue is that current market valuations may not be accurately reflecting risk, so there is potential for a sudden repricing, and higher capital levels will then better protect banks.
“Traditional correlations linking macroeconomic shocks and credit risk may no longer hold,” Buch said. “All of this indicates that markets are underpricing geopolitical risks.”
In case of systemic shocks, like the pandemic or surging energy costs after Russia’s invasion of Ukraine, governments often act in concert with central banks to mitigate risks.
However, debt levels are already high so it is not obvious authorities would be able to provide similar support in future crises, Buch added.
There are also no signs of widespread losses or credit supply constraints from banks being capital-constrained, so maintaining sufficient capital buffer requirements remains important.
The ECB will play its part by streamlining key supervisory activities and by assessing the effectiveness of its work.
But none of these changes should lead to laxer regulation, Buch argued.
“We do not need new regulatory frameworks, but we do need a commitment from legislators not to weaken the frameworks we have,” Buch added.
(Reporting by Balazs Koranyi; Editing buy Toby Chopra)
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