Main challenge to sustainable growth is regulatory convergence, says vice-president of the ECB

Faster and sustainable growth may be hindered if the ultimate goal of regulatory convergence is not met, according Lucas Papademos.

The need for supervisory frameworks to be able to withstand cross-border financial shocks is the central topic of policy-making circles around the world, and supervisory convergence provides the key, stated Lucas Papademos, the vice-president of the European Central Bank last week.

Speaking on EU integration’s role in promoting sustainable growth, Papademos praised the current efforts of the Committee of European Banking Supervisors (CEBS) to create regulatory convergence as part of its Basel II work and on the co-operation between home and host supervisors.

While CEBS is making every effort to assist cross-border co-operation with the creation of operational networks for specific cross-border groups, Papademos placed the onus for convergence on individual supervisors. “The main challenge is the consistent implementation of the agreed standards and guidelines by the national supervisors,” he said.

Papademos called for patience to allow sufficient time for the existing framework to be tested before other proposals to achieve greater convergence are considered, such as the establishment of a lead supervisor or to move to a federal system of supervision. “By the end of next year, we will have the findings of the review that is currently underway of the processes and procedures. It would seem reasonable to me to await this before embarking on another major assessment,” he said.

Citing the need for financial integration, Papademos admitted that there were two possible effects on financial stability. On one hand there could be an increased risk of contagion and a larger exposure to shocks, while on the other there are more opportunities for funding, risk-sharing and risk transfer.

“The net effect is difficult to gauge. In my view, it is likely to be positive for the stability of the financial system. What is certain, however, is that in the case of banking strains, the likelihood that they will remain confined within domestic borders is less in comparison with the past,” he said.

Click here to see Papademos’ speech in full.

BaselAlert.com