Claudia Buch: Bridges to the future - managing bank risk amid uncertainty

Speech by Prof Claudia Buch, Chair of the Supervisory Board of the European Central Bank, at the Morgan Stanley annual conference, London, 12 March 2024.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you very much for inviting me to speak at Morgan Stanley's annual conference. It is almost one year to the day since bank distress in the United States and Switzerland tested the resilience of the banking system. Europe's banks have weathered those storms quite well – thanks both to their own resilience and to the swift policy response in the countries affected.

The reports prepared by the authorities following the banking turmoil last year provide important lessons – on the importance of good risk management and governance, the need for swift follow-up to supervisory findings, and the need to remain vigilant with regard to macroeconomic risks that can expose fault lines.

Today I would like to draw on these lessons and discuss how banks can prepare for the risks that may lie ahead. Geopolitical risks dominate the headlines. Climate and environmental risks are real. These risks and other global trends such as demographic change and digitalisation will require structural adjustment. When and how these risks and structural changes will materialise – and how they affect our economies – is highly uncertain.

As regards the short-term, forecasters remain relatively optimistic: they are expecting a soft landing this year in terms of global economic growth. Many longer term trends and uncertainties are not reflected in market-based risk measures, however.

Good risk management and sound supervision thus require us to look beyond the market's baseline scenario and into the future.

John Maynard Keynes once observed that "For the importance of money essentially flows from its being a link between the present and the future." Keynes was referring to the motives for holding liquidity in the form of money versus holding less liquid assets – a choice influenced by the level of interest rates and by expectations for the future. A choice that ultimately depends on people's confidence in the stability of banks and the value of their deposits.

In the same vein, banks' balance sheets are a crucial link – an economic bridge – between the past, the present and the future. Banks are the main providers of money and credit in our economies. And more than in any other sector, their past decisions shape the way our economies evolve in the future. Managing bank risks thus requires an understanding of how the past shapes banks' balance sheets today and how well banks are prepared for future contingencies.

Let me give an example.