How are banking supervision measures influencing banks’ overall risk management?

Abstract

This paper sets out how banking supervisory measures are influencing banks’ overall risk management and some unintended consequences, based on the experiences of a national German bank. From the perspective of the regulator, large and complex, system-relevant institutions are prone to crises. There is a risk of market failure, which must, of course, be compensated for by rules. This in turn increases control and monitoring obligations so that financial stability can be ensured while at the same time protecting the often-quoted ‘man on the street’ who is generally seen as a taxpayer. From the perspective of banks, however, this argument can be turned around by claiming that we have too much regulation. The resultant costs of regulation certainly pose a threat. For smaller and medium-sized banks, this may even lead to overburdening and a loss of individualism. Even though each and every regulation measure may be justified, together they lead to a level of complexity and an impact that banks or supervisory authorities are unable to precisely and fully identify. This paper describes the challenges facing banks and how these challenges can be counteracted. It is mainly based on the experience of Investitionsbank Berlin (IBB), the business development bank of the Federal State of Berlin.