Claudia Buch: "The prudential regulation of banks" - practical implications for European supervision

Thank you for inviting me to speak at today's roundtable and for the opportunity to celebrate Mathias Dewatripont's academic achievements. Personally, I had the privilege of working with Mathias during his time as Executive Director of the National Bank of Belgium. To explain the influence his work has had on banking supervision in Europe, I would like to start by taking you back through history.

The economic rationale for the prudential supervision of banks

For a long while, no systematic conceptual framework existed to explain why we regulate and supervise banks. Yet banking activities date back to ancient times – temples in Babylonia acted as safe depositories and granted loans, the first professional bankers appeared in classical Greece and well-established banking practices developed in ancient Rome.

By comparison, prudential supervision, in an institutional sense, is a relatively modern development. In the United States, for example, it was first established at the national level with the introduction of federal bank supervision in the 1860s. The architecture we recognise today as modern prudential regulation did not take shape until the 1930s and became international in scope only from the mid-1970s.

A conceptual framework for modern supervision did not even emerge until the mid-1990s. Building on earlier research on corporate finance, contract theory and information economics, Mathias Dewatripont and Jean Tirole published their seminal work, The Prudential Regulation of Banks, in 1994, and I vividly remember reading their book at the time.