The new Finma Director, Stefan Walter, has once again called for stronger supervision. «Strong regulation and preventive supervision of the banking sector are critical for financial market stability and sustainable growth,» he said on Wednesday, according to the speech text at a symposium of the German Bundesbank in Frankfurt.

«Financial crises have always had greater impacts when banks were involved in their role as financiers.» Regulation and supervision must be strengthened in the context of innovation and financial market cycles. It must be ensured that regulation also covers bank-like credit intermediation outside the banking sector, namely the so-called Non-Bank Financial Institutions (NBFI).

Qualitative supervision and early intervention must be advanced. «This is especially true where problems usually begin with banks and other financial institutions, namely in weaknesses in risk culture, governance, and business models,» Walter continued.

Targeted Early Intervention

Typical signs, the «red flags,» allow supervision to detect problems early. «Then it should act quickly and, if necessary, escalate with appropriate instruments to resolve the problem. Early intervention can be achieved with targeted measures without the supervision taking over responsibility for these areas instead of the institution.»

It is central that Basel III is implemented. Walter can also envision adjustments to address the lessons from the 2023 crisis with the end of Credit Suisse. He mentions, for example, the assumptions about liquidity outflow in the LCR. Additionally, the interconnection between banks and NBFIs needs to be better understood.

«Today we see growing interconnections of banks with private equity firms and credit funds. In the future, we will likely need to have the interconnections between banks and crypto companies more on our radar.»

Full Range of Competencies

The crisis of March 2023 showed that banks can get into trouble very quickly despite meeting capital and liquidity requirements. Often, qualitative, complex, and difficult-to-measure factors are also the downfall of an institution. «Supervision therefore needs the full range of competencies during the going concern, that is, still in the phase of calm, to be able to intervene early.»

«Based on the lessons from financial crises of recent decades, where bank-like credit intermediation almost always plays a role, we must further develop regulation and supervision towards best-in-class – for the benefit of us all. For a sustainable financial sector is the foundation of a healthy economy.»