ECB colloquium - Speech by Ignazio Angeloni
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Angeloni, Ignazio
ECB colloquium marking the end of the tenure of Ignazio Angeloni as a member of the Supervisory Board of the European Central Bank
 Well, thank you, Luis. Thank you, everybody, for being here. This morning I'm humbled and thrilled by having so many high-caliber people like you being here for an event which I took the initiative to organize. So the topic that I would like to propose to you this morning is supervisory independence. Now, this is a topic that has attracted some attention lately, a little bit like central bank independence, but in a slightly different way as I will try to explain. If I look back when I first joined a central bank that was the early 80s, earlier than I like to remember, early 80s, central bank independence was a new idea. The classic papers by Barogordon and Ken Rogoff, which I'm sure you know, were still circulating in working paper form at that time. My employer, the Bank of Italy, had just gained some independence from the treasury, the so-called divorce, whom you may be familiar with, and was beginning to exercise this independence with some hesitation as if it was a taboo. I remember one superior telling me that a central bank should never discuss its own independence because it was, and I quote, not polite, end of quote. By the way, this is why I talk about independence today, one day before leaving. I try to be as polite as I can. Since then, however, central bank independence has become a commonplace, and central bankers, which are very polite as you know, speak about it all the time. But recently, the consensus has been waning to some extent. Larry Summers recently wrote, who's that? Because as you know, a big supporter originally of central bank independence, recently wrote, and I quote, I suspect that we may have moved beyond the conditions arguing in favor of central, of peak central bank independence in the industrialized world, end of quote. The cycle of supervisory independence followed that of monetary policy with a lag of about 20 years. So the idea came dates back, as I shall describe in the 1990s, and became firmer after this latest financial crisis. The SSM, which is the youngest supervisor today in existence, has in its charter independence provisions, which are essentially copy pasted from the EU treaty independent provisions on monetary policy. So my point, short and simple, is that in the present state of affairs, supervisory independence is necessary, but also very difficult to put in practice. To make it real, some changes are needed. The process is in motion, but more work needs to be done. I will refer mainly to the European situation, although I think that some of the remarks may have more general validity. So let me start to explain why I think it's necessary. So I had an early mentor many years ago, he's no longer with us, and he's familiar with, to all of you, but I will not name him, who once told me that there are two mistakes an economy should never make when approaching a subject, reading the literature and looking at the data. I've learned a lot from him, but I never follow this advice. So let me start by mentioning some early contributions on the subject. Now the earliest reference that I can think of to regulatory independence, or rather to the problems arising from the lack of it, is by the Chicago economist George Stiegler. In 1971, using the rudimentary econometrics of his time, he was able to demonstrate the regulators always lean in favor of the industry that they regulate. They should therefore be put in a position to withstand pressure and captured by the industry. Now what I find remarkable in this contribution is not only its enduring relevance, but the fact that it completely ignores the other dimension of the problem, which is that of political capture. Stiegler makes no distinction between the regulator and the state and assumes that the latter always pursues the collective good. Now so much faith in the regulatory function of the state is surprising in a Chicago economist who even called himself an unregulated economist. The divergence between daily politics and collective welfare did, however, feature prominently in the subsequent discussion on central bank independence. In the next 20 years or so, as you know very well, the crucial distinction there is in the different time horizons of political decision making and collective welfare, the very well-known time inconsistency problem. The focus of this literature was initially only on monetary policy for a number of reasons, which I explain in some of the footnotes, but then extended to financial regulation in the 1990s with the growth of financial markets, the newly liberalized environment, and the occurrence of some banking crisis. Now one of the first, if not the first, who argued in favor of independence of banking supervision was not an economist, but an eminent lawyer who is present in the room today, Rosa Lastra. In a book which she published in 1996, she wrote and I quote, Though independence is often advocated for monetary policy, I claim that it is also necessary for banking supervision, end of quote. Indeed, the timing consistency argument applies to banking supervision as well. Supervisory policies are inherently forward-looking. They affect financial stability with long and uncertain legs. The role of expectation, including expectations on how the supervisor will act in the future, is not less important. There are, or they may be, short-term gains on supervisory accommodation, but there are costs of laxity over time. Financial stability is no less harmful than price instability. So I don't think I need to continue because the argument is quite compelling. Two well-known economists, Alberto Alessina and Guido Tabellini, who is here today, have added further arguments. They show that policy areas that are more technical and areas where vested interests play a major role should, other things being equal, be delegated to independent agencies. Banking supervision possesses both characteristics. Conversely, the presence of distributional implications from the policy, which is an argument that is often advocated for politicizing supervision, does not affect the advantage or the drawbacks of delegation in any particular way. Now, to make it short, today, supervisory independence is broadly accept as a concept. The Basel Committee has put it in its list of core principles of effective supervision. These principles are endorsed by the IMF, the World Bank, etc., so they tend to be spread all over the world. And the European legislator recently has granted the SSM a high degree of protection using, in Article 19 of the SSM regulation, a formulation which is virtually identical to that of Article 7 of the treaty dealing with monetary policy. And then there are also provisions, accompanying provisions for accountability to several political authorities. However, and that's my point, establishing a principle does not mean being able to easily put it in practice. And I will mention three obstacles that pertain to the legal, the analytical, and the political dimensions. Let me start with the legal dimension, which is the one I list competent on. Now, as everybody knows, banking supervision is highly legalistic. Supervisory decisions are legal acts affecting private agents, which are in turn protected by law. Those decisions are often challenged in court, and they become invalid, they may become invalid, and even they may turn into a liability for the supervisor. What is not clear to most, and I myself came to appreciate only over time, is that the assignment of certain duties to the supervisor does not in itself mean that they can actually be discharged. For example, the SSM regulation lists the ECB's power as a supervisor, but this doesn't mean that the ECB can actually do these things. It only means that it can use the law to do them. This distinction is important because two pieces of legislation may differ, especially in their interpretation. Here is a concrete example. Article 16 of the SSM regulation states without the shade of ambiguity that the ECB can require banks to apply specific provisioning policies. Recently, however, the ECB's power to set provisioning calendars on NPLs was challenged by the European Parliament on grounds that calendars, like rules, invade the prerogatives of the legislator. Prudential provision can only be applied case by case and not across the board. European law stipulates that pillar two requirements of which prudential provisions are apart can only be derived from an assessment of which bank's specific risk profile. One can see here a case where a combination of law and interpretation severely limits the supervisor's scope to independently set prudential provisions. I took this as an example because the controversy between the ECB and the European Parliament on provisioning was extensively covered by the media, but the problem is more general. And there is a catch-22 situation. The ECB is under pressure from the industry and others to be as transparent and even handed as possible in its pillar two demands. Yet the more it is so, the more these demands look like additional layer of rules on top of pillar one. A systematic and transparent pillar two policy is easily mistaken for another rule. And as soon as this happens, the supervisor meets the boundary of what it is allowed to do. I see no other way out of this conundrum but to assign to the supervisor a limited but meaningful degree of regulatory powers. A difficulty of course is where to draw the line. I suspect that part of the reluctance in allowing the supervisor more leeway in this area stems from the fact that the goal of supervision is not well defined. When the goal is vague, independence can lead to arbitrariness. And this leads me to my next point which is analytical and pertains to the goals. So article one of the SSM regulation stipulates that the ECB is assigned supervisory tasks and I quote, with the view to contributing to the safety and the soundness of credit institution and the stability of the financial system. This definition is rather common. Other authorities have it with some variations and the Basel Committee also refers to safety and soundness in the first of the court principles. I think supervision may benefit from a bit more clarity on what safe and sound exactly means. It cannot mean that the bank should be riskless. The bank is inherently and always risky and you wouldn't perform its function if it wasn't. However, one may appeal to the basic notion of finance that says that the risk of a portfolio in equilibrium and the risk aversion is directly related to its return. This must be true for bank balance sheets as well. One could think therefore of safety and soundness as a situation in which the bank moves along an efficiency frontier between profitability and risk. The supervisor would be tasked to ensuring that for any given profitability level, the overall risk of the bank is minimized. But who can choose or who should choose the desired point in this efficiency tradeoff? In other words, who is entitled to decide the level of risk that society as a whole considers acceptable for its banking sector? Being linked to collective preferences, it seems logical to entrust this choice to the political level. I'm not aware, however, of any country where the supervisor delegation arrangement is designed in this way. At present, aggregate bank risk level in our democratic societies are chosen by an opaque mix of legislature for the pillar one, global fora, treasuries and central banks who together compose the so-called delegated authorities that set the macro-prudential buffers and supervisors. Now, one obstacle, of course, is difficult to measure bank risk. Now, insufficient research has been devoted to this problem. The central bankers have devoted much more time analyzing price stability than supervisors have spent researching bank risk. And the same is true for the academics which are engaged in the respective fields. Supervisors themselves are less inclined than central bankers to analyze in depth what they do and why. They say they have no time for that. But there is a cost to this unwillingness. So supervisory independence may not become firmly established and respected until the objective of banking supervision is defined more precisely. And here are some thoughts about how this could be done. So you have market-based measures, of course, which are plentiful, historical volatilities, ill-spreads, derivative-based, implied volatilities, default swaps, etc. These measures, however, must be handled with care because they do not measure actual risk but perceived risk. Markets can be wrong and targeting market prices injects volatility in the policy process. So my view, market-based indicators can at best provide elements in a combination of other indicators. On the other hand, quantity-based indicators such as capital, liquidity, maturity mismatches, NPLs, etc. are more objective. However, they are more instruments than objectives. They are also inherently multi-dimensional. It is difficult, for example, to weight the capital against the liquidity in defining the extent to which a bank is safe and sound. Another point, in my view, is that the quantification of goals of supervision should not ignore the ultimate purpose of the bank, which is to transform liquid savings into sound credit to the economy. I have noted that this element is never considered explicitly in supervisory decision however, in deciding how much risk a bank is allowed to take, it should not be irrelevant whether that bank is granting good credit to good borrowers or not. Candidate measures here are the volume of intermediation, the quality and its price, for example, perhaps measured by intermediation spreads, corrected for cyclical effects. Naturally, this dimension brings the macro-hudential elements already also into the picture. Let me move to my last challenge, which is the political one. I do that with some hesitation being in the central bank, but my overview would not be complete if I didn't mention the challenge from politics, and I'm referring particularly to the strengthening of the strengthening in Europe and elsewhere of political forces that appeal directly to the will of the people and that call for restoring national sovereignty at the expense of international cooperation. Definitions and labels vary ranging from populism, sovereignism, nationalism, ism, etc. Populists typically regard the will of the people as opposed to the interest of banks. In addition, national sovereignty seemingly contradicts the logic of the banking union, which implies transferring certain policy functions to the supranational level. Equally important, supervisory independence deviates from the direct democracy, which populist favour. But what the populist vision fails to recognise, in my view, is that there is more coincidence between the interest of the people and the purpose of a well-intentioned supervisor than meets the eye. The question is, who are the people? I cannot think of a better equivalent than the combined population of bank depositors and taxpayers. Most citizens have bank deposits, and all citizens are taxpayers, at least insofar as they contribute to indirect taxes. Banking supervision is fundamentally about ensuring that depositor funds are safe and that taxpayers are not asked to foot the bill of bank failures that they are not responsible for. One can go even further and say that most, if not all, supervisory actions aim to protect citizens at large from a variety of special interests. And my experience in the past five years tells me that a European institution is better placed to provide this type of protection than national authorities, which are institutionally and also physically, closer to the origins of those special interests. A more insidious line of attack maintains that entrusting public policies to independent agencies represents a breach of democratic norms. According to some, the technocratic slide, so-called, has gone too far in our liberal democratic societies to the point of becoming a risk. Central banks are sometimes cited as an example of unelected power with dubious legitimacy, and supervision falls in that category as well. This critique is important and deserves a short digression in my view. So I'm personally not convinced that this risk outweighs the opposite one, which is the one of exposing certain policy functions, not only banking supervision, but central banking, competition, financial market, the judiciary, and so on. To a daily political influence, even before Tocqueville wrote his well-known book on the tyranny of the majority, the founding fathers of the American constitution warned about the risks of excessive recourse to majority rule. Political equality is much more than counting votes or tweets. We should also never forget that the policy decisions affect many more people than those who decide under majority rule. The voting minorities, the non-voters, the very young, the unborn, all have a natural right to be represented. So we may ask ourselves whether the delegation to independent institutions within proper boundaries set by statutes and accountability provisions are the best way to provide such a representation. The debate, of course, is open, but as an expert of democracy might have said, this could still be the worst system after all the others. And let me conclude remembering that when I started the ECB, as Vice President recalled, it was 1998, the last thing I expected to do was to end my journey here talking about banking supervision. But here I am, even as an economist or even worse a macro economist, I became involved and very interested in banking supervision. In my view, a macro economist should never be too specialized and one can retain a broader vision even engaging in special responsibilities. So in concluding, my reflection on supervisory independence leads me to think that supervision is at the crossroads. It can grow and consolidate itself or it can disappear, at least in the form that we now know. The essence of banking supervision, in my view, lies in the scope it has to independently exercise its pillar two powers. If this scope narrows, so does the role and the relevance of banking supervision. Now, we can, of course, think of supervision without pillar two, all requirements would be set by law and would apply to all without any distinction. The supervisor would be like a street cop checking compliance and imposing the fines. I hope supervision doesn't become like that. Not only it would be uninteresting, it would be inadequate to address today's and tomorrow banking reality where rapid change and increasing integration with the rest of finance and with modern technologies require a good deal of flexibility and judgment. Alternatively, pillar two powers can be better established and strengthened. To do so, supervisory independence needs to be preserved and enhanced. Supervisor should be allowed to enter the regulatory field in a controlled way and this requires the boundaries and the goal supervision to be better defined. The supervisors themselves should take an active role in participate in this reflection, shaping up their analytics and overcoming a little bit of their natural shyness. Now, I remember that many years ago, my early years at the Bank of Italy, which was an institution at the time responsible for both monetary policy and supervision with all the internal rivalries that you would expect in this case, one colleague went around and said only half jokingly, micro supervision is for micro brains. I disagree with that statement. Perhaps he may be amended as follows. Banking supervision is for big brains, which however need to exploit their full potential. Thank you very much.
 Well, thank you, Luis. Thank you, everybody, for being here. This morning I'm humbled and  thrilled by having so many high-caliber people like you being here for an event which I took  the initiative to organize. So the topic that I would like to propose to you this morning  is supervisory independence. Now, this is a topic that has attracted some attention lately,  a little bit like central bank independence, but in a slightly different way as I will try to explain.  If I look back when I first joined a central bank that was the early 80s, earlier than I like to  remember, early 80s, central bank independence was a new idea. The classic papers by Barogordon and  Ken Rogoff, which I'm sure you know, were still circulating in working paper form at that time.  My employer, the Bank of Italy, had just gained some independence from the treasury, the so-called  divorce, whom you may be familiar with, and was beginning to exercise this independence with  some hesitation as if it was a taboo. I remember one superior telling me that a central bank should  never discuss its own independence because it was, and I quote, not polite, end of quote.  By the way, this is why I talk about independence today, one day before leaving. I try to be as  polite as I can. Since then, however, central bank independence has become a commonplace,  and central bankers, which are very polite as you know, speak about it all the time.  But recently, the consensus has been waning to some extent. Larry Summers recently wrote,  who's that? Because as you know, a big supporter originally of central bank independence,  recently wrote, and I quote, I suspect that we may have moved beyond the conditions arguing in  favor of central, of peak central bank independence in the industrialized world, end of quote.  The cycle of supervisory independence followed that of monetary policy with a  lag of about 20 years. So the idea came dates back, as I shall describe in the 1990s, and became  firmer after this latest financial crisis. The SSM, which is the youngest supervisor today in  existence, has in its charter independence provisions, which are essentially copy pasted from the EU  treaty independent provisions on monetary policy. So my point, short and simple, is that in the  present state of affairs, supervisory independence is necessary, but also very difficult to put in  practice. To make it real, some changes are needed. The process is in motion, but more work needs to  be done. I will refer mainly to the European situation, although I think that some of the remarks  may have more general validity. So let me start to explain why I think it's necessary.  So I had an early mentor many years ago, he's no longer with us, and he's familiar with,  to all of you, but I will not name him, who once told me that there are two mistakes an economy  should never make when approaching a subject, reading the literature and looking at the data.  I've learned a lot from him, but I never follow this advice. So let me start by mentioning  some early contributions on the subject. Now the earliest reference that I can think of to  regulatory independence, or rather to the problems arising from the lack of it, is by the Chicago  economist George Stiegler. In 1971, using the rudimentary econometrics of his time, he was able  to demonstrate the regulators always lean in favor of the industry that they regulate.  They should therefore be put in a position to withstand pressure and captured by the industry.  Now what I find remarkable in this contribution is not only its enduring relevance, but the fact  that it completely ignores the other dimension of the problem, which is that of political capture.  Stiegler makes no distinction between the regulator and the state and assumes that the latter always  pursues the collective good. Now so much faith in the regulatory function of the state is surprising  in a Chicago economist who even called himself an unregulated economist.  The divergence between daily politics and collective welfare did, however, feature  prominently in the subsequent discussion on central bank independence. In the next 20 years or so,  as you know very well, the crucial distinction there is in the different time horizons of political  decision making and collective welfare, the very well-known time inconsistency problem.  The focus of this literature was initially only on monetary policy for a number of reasons, which I  explain in some of the footnotes, but then extended to financial regulation in the 1990s  with the growth of financial markets, the newly liberalized environment, and the occurrence of  some banking crisis. Now one of the first, if not the first, who argued in favor of independence  of banking supervision was not an economist, but an eminent lawyer who is present in the room today,  Rosa Lastra. In a book which she published in 1996, she wrote and I quote,  Though independence is often advocated for monetary policy, I claim that it is also necessary  for banking supervision, end of quote. Indeed, the timing consistency argument applies to banking  supervision as well. Supervisory policies are inherently forward-looking. They affect financial  stability with long and uncertain legs. The role of expectation, including expectations on how the  supervisor will act in the future, is not less important. There are, or they may be, short-term  gains on supervisory accommodation, but there are costs of laxity over time. Financial stability is  no less harmful than price instability. So I don't think I need to continue because the argument is  quite compelling. Two well-known economists, Alberto Alessina and Guido Tabellini, who is here today,  have added further arguments. They show that policy areas that are more technical and areas  where vested interests play a major role should, other things being equal, be delegated to independent  agencies. Banking supervision possesses both characteristics. Conversely, the presence of  distributional implications from the policy, which is an argument that is often advocated for  politicizing supervision, does not affect the advantage or the drawbacks of delegation in any  particular way. Now, to make it short, today, supervisory independence is broadly accept as a  concept. The Basel Committee has put it in its list of core principles of effective supervision.  These principles are endorsed by the IMF, the World Bank, etc., so they tend to be spread all over  the world. And the European legislator recently has granted the SSM a high degree of protection  using, in Article 19 of the SSM regulation, a formulation which is virtually identical to that  of Article 7 of the treaty dealing with monetary policy. And then there are also provisions,  accompanying provisions for accountability to several political authorities. However, and that's  my point, establishing a principle does not mean being able to easily put it in practice. And I  will mention three obstacles that pertain to the legal, the analytical, and the political dimensions.  Let me start with the legal dimension, which is the one I list competent on. Now, as everybody  knows, banking supervision is highly legalistic. Supervisory decisions are legal acts affecting  private agents, which are in turn protected by law. Those decisions are often challenged in court,  and they become invalid, they may become invalid, and even they may turn into a liability for the  supervisor. What is not clear to most, and I myself came to appreciate only over time, is that the  assignment of certain duties to the supervisor does not in itself mean that they can actually be  discharged. For example, the SSM regulation lists the ECB's power as a supervisor, but this doesn't  mean that the ECB can actually do these things. It only means that it can use the law to do them.  This distinction is important because two pieces of legislation may differ, especially in their  interpretation. Here is a concrete example. Article 16 of the SSM regulation states without the  shade of ambiguity that the ECB can require banks to apply specific provisioning policies.  Recently, however, the ECB's power to set provisioning calendars on NPLs was challenged by the European  Parliament on grounds that calendars, like rules, invade the prerogatives of the legislator. Prudential  provision can only be applied case by case and not across the board. European law stipulates that  pillar two requirements of which prudential provisions are apart can only be derived from  an assessment of which bank's specific risk profile. One can see here a case where a combination of  law and interpretation severely limits the supervisor's scope to independently set prudential  provisions. I took this as an example because the controversy between the ECB and the European  Parliament on provisioning was extensively covered by the media, but the problem is more general.  And there is a catch-22 situation. The ECB is under pressure from the industry and others to be  as transparent and even handed as possible in its pillar two demands. Yet the more it is so,  the more these demands look like additional layer of rules on top of pillar one.  A systematic and transparent pillar two policy is easily mistaken for another rule.  And as soon as this happens, the supervisor meets the boundary of what it is allowed to do.  I see no other way out of this conundrum but to assign to the supervisor a limited but meaningful  degree of regulatory powers. A difficulty of course is where to draw the line. I suspect that part  of the reluctance in allowing the supervisor more leeway in this area stems from the fact  that the goal of supervision is not well defined. When the goal is vague,  independence can lead to arbitrariness. And this leads me to my next point which is analytical  and pertains to the goals. So article one of the SSM regulation stipulates that the ECB is assigned  supervisory tasks and I quote, with the view to contributing to the safety and the soundness  of credit institution and the stability of the financial system. This definition is rather common.  Other authorities have it with some variations and the Basel Committee also refers to safety and  soundness in the first of the court principles. I think supervision may benefit from a bit more  clarity on what safe and sound exactly means. It cannot mean that the bank should be riskless.  The bank is inherently and always risky and you wouldn't perform its function if it wasn't.  However, one may appeal to the basic notion of finance that says that the risk of a portfolio  in equilibrium and the risk aversion is directly related to its return. This must be true for  bank balance sheets as well. One could think therefore of safety and soundness as a situation  in which the bank moves along an efficiency frontier between profitability and risk.  The supervisor would be tasked to ensuring that for any given profitability level, the overall risk  of the bank is minimized. But who can choose or who should choose the desired point in this  efficiency tradeoff? In other words, who is entitled to decide the level of risk that society as a  whole considers acceptable for its banking sector? Being linked to collective preferences,  it seems logical to entrust this choice to the political level. I'm not aware, however, of any  country where the supervisor delegation arrangement is designed in this way. At present, aggregate  bank risk level in our democratic societies are chosen by an opaque mix of legislature for the  pillar one, global fora, treasuries and central banks who together compose the so-called delegated  authorities that set the macro-prudential buffers and supervisors. Now, one obstacle, of course,  is difficult to measure bank risk. Now, insufficient research has been devoted to this problem.  The central bankers have devoted much more time analyzing price stability than supervisors  have spent researching bank risk. And the same is true for the academics which are engaged in the  respective fields. Supervisors themselves are less inclined than central bankers to analyze in depth  what they do and why. They say they have no time for that. But there is a cost to this unwillingness.  So supervisory independence may not become firmly established and respected until the  objective of banking supervision is defined more precisely. And here are some thoughts about how  this could be done. So you have market-based measures, of course, which are plentiful, historical  volatilities, ill-spreads, derivative-based, implied volatilities, default swaps, etc. These  measures, however, must be handled with care because they do not measure actual risk but perceived  risk. Markets can be wrong and targeting market prices injects volatility in the policy process.  So my view, market-based indicators can at best provide elements in a combination of other indicators.  On the other hand, quantity-based indicators such as capital, liquidity, maturity mismatches,  NPLs, etc. are more objective. However, they are more instruments than objectives.  They are also inherently multi-dimensional. It is difficult, for example, to weight the capital  against the liquidity in defining the extent to which a bank is safe and sound. Another point,  in my view, is that the quantification of goals of supervision should not ignore the ultimate  purpose of the bank, which is to transform liquid savings into sound credit to the economy.  I have noted that this element is never considered explicitly in supervisory decision  however, in deciding how much risk a bank is allowed to take, it should not be irrelevant  whether that bank is granting good credit to good borrowers or not.  Candidate measures here are the volume of intermediation, the quality and its price,  for example, perhaps measured by intermediation spreads, corrected for cyclical effects.  Naturally, this dimension brings the macro-hudential elements already also into the picture.  Let me move to my last challenge, which is the political one. I do that with some hesitation  being in the central bank, but my overview would not be complete if I didn't mention the  challenge from politics, and I'm referring particularly to the strengthening of the  strengthening in Europe and elsewhere of political forces that appeal directly to the will of the  people and that call for restoring national sovereignty at the expense of international  cooperation. Definitions and labels vary ranging from populism, sovereignism, nationalism,  ism, etc. Populists typically regard the will of the people as opposed to the interest of banks.  In addition, national sovereignty seemingly contradicts the logic of the banking union,  which implies transferring certain policy functions to the supranational level.  Equally important, supervisory independence deviates from the direct democracy,  which populist favour. But what the populist vision fails to recognise, in my view, is that there is  more coincidence between the interest of the people and the purpose of a well-intentioned  supervisor than meets the eye. The question is, who are the people? I cannot think of a better  equivalent than the combined population of bank depositors and taxpayers. Most citizens have bank  deposits, and all citizens are taxpayers, at least insofar as they contribute to indirect taxes.  Banking supervision is fundamentally about ensuring that depositor funds are safe and  that taxpayers are not asked to foot the bill of bank failures that they are not responsible for.  One can go even further and say that most, if not all, supervisory actions aim to protect  citizens at large from a variety of special interests. And my experience in the past five years  tells me that a European institution is better placed to provide this type of protection than  national authorities, which are institutionally and also physically, closer to the origins of  those special interests. A more insidious line of attack maintains that entrusting public policies  to independent agencies represents a breach of democratic norms. According to some, the technocratic  slide, so-called, has gone too far in our liberal democratic societies to the point of becoming  a risk. Central banks are sometimes cited as an example of unelected power with dubious legitimacy,  and supervision falls in that category as well. This critique is important and deserves a short  digression in my view. So I'm personally not convinced that this risk outweighs the opposite  one, which is the one of exposing certain policy functions, not only banking supervision, but  central banking, competition, financial market, the judiciary, and so on.  To a daily political influence, even before Tocqueville wrote his well-known book on the tyranny  of the majority, the founding fathers of the American constitution warned about the risks  of excessive recourse to majority rule. Political equality is much more than counting votes or  tweets. We should also never forget that the policy decisions affect many more people than  those who decide under majority rule. The voting minorities, the non-voters, the very young,  the unborn, all have a natural right to be represented. So we may ask ourselves whether  the delegation to independent institutions within proper boundaries set by statutes and  accountability provisions are the best way to provide such a representation. The debate, of  course, is open, but as an expert of democracy might have said, this could still be the worst system  after all the others. And let me conclude remembering that when I started the ECB,  as Vice President recalled, it was 1998, the last thing I expected to do was to end my journey here  talking about banking supervision. But here I am, even as an economist or even worse a macro  economist, I became involved and very interested in banking supervision. In my view, a macro  economist should never be too specialized and one can retain a broader vision even engaging in  special responsibilities. So in concluding, my reflection on supervisory independence leads  me to think that supervision is at the crossroads. It can grow and consolidate itself or it can  disappear, at least in the form that we now know. The essence of banking supervision, in my view,  lies in the scope it has to independently exercise its pillar two powers. If this scope narrows,  so does the role and the relevance of banking supervision. Now, we can, of course, think of  supervision without pillar two, all requirements would be set by law and would apply to all without  any distinction. The supervisor would be like a street cop checking compliance and imposing the  fines. I hope supervision doesn't become like that. Not only it would be uninteresting, it would be  inadequate to address today's and tomorrow banking reality where rapid change and increasing  integration with the rest of finance and with modern technologies require a good deal of flexibility  and judgment. Alternatively, pillar two powers can be better established and strengthened. To do so,  supervisory independence needs to be preserved and enhanced. Supervisor should be allowed to enter  the regulatory field in a controlled way and this requires the boundaries and the goal supervision  to be better defined. The supervisors themselves should take an active role in participate in  this reflection, shaping up their analytics and overcoming a little bit of their natural shyness.  Now, I remember that many years ago, my early years at the Bank of Italy, which was an institution  at the time responsible for both monetary policy and supervision with all the internal  rivalries that you would expect in this case, one colleague went around and said only half  jokingly, micro supervision is for micro brains. I disagree with that statement. Perhaps he may  be amended as follows. Banking supervision is for big brains, which however need to exploit  their full potential. Thank you very much.
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