Speech by Elke König, Chair of the SRB at the ECON Committee Hearing, European Parliament
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Honourable Members of Parliament,
As usual it is a great pleasure to be here with you today. Just after the agreement on the risk reduction package in the ECON committee and before the European Parliament will go into its summer recess, it is that time of the year when I am invited to this committee to present to you the SRB’s Annual Activity Report for 2017. The Annual Report is the main document of accountability towards the public and the European Parliament. It is thus a good opportunity to look back at an overall successful year 2017, but also to look at the challenges ahead of us, in order to continue to safeguard financial stability and protect the taxpayers in the Banking Union.
In my introductory remarks today, I would like to touch upon our main achievements in 2017, before looking to times more present - what we have achieved and still strive to achieve - in the current year. Then, I would like to make some comments on the ongoing discussions on the risk reduction package, to which so many of you actively contributed, and finally conclude by highlighting some other policy topics.
But let me first highlight some of our achievements in 2017 as outlined in the Annual Report:
Our first resolution case, the resolution of Banco Popular in Spain on 6 June 2017, can be seen as a key event. It proved that the SRB is able to effectively apply the existing rules and carry out its mandate to ensure an orderly resolution with minimum impact on the real economy, the financial system and the public finances of the respective Member State and beyond.
At the same time, we made further progress in our resolution planning activities for the banking groups under our remit in close cooperation with the National Resolution Authorities, thus advancing in our mandate: ensuring that banks become truly resolvable. At the end of 2017 we published our MREL policy, which gave clear indications to the relevant stakeholders on what to expect over the coming years. Moreover, we developed additional policies and internal guidelines to ensure consistency in resolution planning.
For the first time we set binding MREL targets at consolidated level for the most important banking groups, while informative targets have been communicated to the remaining banks.
Besides, we continued to further build-up and operationalise the Single Resolution Fund. By 30 June NRAs had transferred ex-ante-contributions of EUR 7.5 bn to the SRF, which by now comprises around EUR 25 bn in total. It should be noted that this year the contributions increased, because the amount of covered deposits grew by 3%. If this trend continues, we can thus expect that by 2024 the target level of the SRF will lie well above the initially estimated EUR 55 bn.
Also regarding our staffing we have transitioned from a start-up to a well-established agency. Intensified recruiting efforts in 2017 ensured that by the end of this year our envisaged target level for staffing can be reached.
Deliverables in 2018:
Of course our work did not stop in 2017 - Where do we stand now? Let me first make a remark on the case of Banco Popular:
As we announced on 13 June 2018, the SRB has received the final ‘Valuation 3’ report, which determines whether shareholders and creditors would have received a better treatment if the institution had been wound up under normal insolvency proceedings. We have been since preparing for the next steps, notably to provide affected shareholders and creditors with the right to be heard, alongside the publication of the SRB’s draft decision and the non-confidential version of the ‘Valuation 3’ report.
I can tell you today that the SRB will launch a registration process for the ‘right to be heard’ in early August. This will allow former shareholders and creditors of BPE, whose instruments were affected by the resolution action, to express their interest in exercising their right to be heard and submit supporting documentation proving their eligibility. The registration period will run until mid-September. The preparatory act and non-confidential valuation 3 report will be ready then. In a second phase, persons whose eligibility has been verified by the SRB will be able to submit their comments. This second phase will open after the registration phase has been finalised.
Always bearing in mind that resolution planning is a multi-year process, for 2018 we have worked and will work towards the completion of resolution plans for all banks under our remit until 2020, as stated in our Multiannual Work Programme.
Moreover, we are constantly developing and updating our internal policies and guidelines, which in turn will feed into the next resolution planning cycle.
For example, in June the SRB published its approach to critical functions. This approach has been developed since early 2016 and benefitted from lessons learned from the first resolution planning cycles. It is an essential component for determining whether a failing bank has to be put into resolution as well as for the selection of the preferred resolution strategy. This approach provides transparency to the banks and also enhances the consistency in the identification of critical functions by the banks and has been published on our website.
Moreover, the SRB is making progress in developing policies on resolution planning: in recent months we have finalised internal guidance on the bridge bank tool, the bail-in tool and the asset separation tool and are currently finalising guidance on the sale-of-business tool. All this will feed into an updated public manual in autumn, too.
Similarly, we are making further progress on the “core pieces” of resolution planning: MREL and the resolvability assessment. Thus, we are currently updating and expanding last year’s MREL policy and phasing in our resolvability assessment policy. The finalisation of both of these policies is envisaged in autumn.
Besides, our current work on policy topics also covers numerous other domains, such as valuation, liquidity and funding, operational continuity and separability.
Despite the resolution plans still evolving, no bank with a responsible management has to wait for us to send them concrete instructions. We have communicated very clearly our expectations and our work programme for 2018 to the banks’ managements and we will continue to do so and of course follow-up. In this way the banks are aware of the direction we are heading to and they should start their work on MREL and ensuring their resolvability as soon as possible, now that the economic situation is good.
Regarding the risk reduction package, and in particular the review of the BRRD and SRMR, we have entered a decisive phase, now that both the EP and the Council have adopted their respective positions. At this point, I would like to thank those MEPs who worked hard on this important file and contributed to the consensus-building. I am hopeful that a good agreement in trilogue can be found before the end of the current legislative term. The earlier we reach an agreement here, the sooner there will be clarity for our resolution planning activities and for all market participants alike.
Let me at this point also comment on certain provisions of the Parliament’s position:
We appreciate the Parliament’s efforts towards simplicity on the provisions around the calibration of MREL. Avoiding complexity is key to give the necessary transparency and predictability for credit institutions and investors.
Secondly, we believe that the amount of MREL ought to be tailored to the resolution strategy of each credit institution. Equally, the extent to which MREL should be subordinated must
- be set to improve resolvability and limit the risk of breaching the No Creditor Worse Off safeguard,
- increase the degree of certainty for taking resolution actions, and
- ensure a clear priority and transparency to investors.
In this regard, the Council text is in our view to be preferred, as it allows for a solid layer of subordinated MREL.
Resolution Authorities need discretion on the quantity (=amount) and quality (=subordination) of MREL of each institution. This discretion is what we understand by proportionality – a principle that is widely supported in the European Parliament.
Similarly, Resolution Authorities should be able to assess the need, the amount, as well as the possible type of internal MREL instruments, entity by entity within each banking group. The need for internal MREL within banking groups is undisputed but it should also be closely monitored that the resolution strategy is not contradicted by potential national measures creating additional barriers.
Finally, we welcome the new moratorium tool which can be applied after an institution is deemed failing or likely to fail. However, we do not support the possibility to use the current stay power only 10 business days after using the new moratorium tool, as the Parliament’s text suggests. This seems unnecessary, if not counter-productive: If market participants have the expectation that an additional stay (under current powers) could be applied 10 days after the application of the moratorium tool, this might undermine market confidence in the resolved entity.
Other policy topics:
There are also other ongoing policy files, where in our view progress is urgently required: Let me start by briefly mentioning EDIS. Unfortunately, there has been hardly any progress in the last year. However, we strongly believe that EDIS as the third pillar of the Banking Union must become a reality as soon as possible, and we count on you and the Austrian Council Presidency to advance also on this file.
The recent European Council has revealed once again that there seems to be a political consensus on the need for a Common Backstop to the SRF. The Member States should thus make quick progress to agree on the practical and organisational provisions in more detail. It is important that in case of need the additional support offered by the backstop can be provided without delay. The fact that the Backstop is fiscally neutral and only used as a last resort ensures that the taxpayers will remain protected, even if the loans provided by the backstop are being used.
We must however remain mindful that the provision of funding in resolution remains an unsolved issue. It is likely that the SRF, even if secured by a backstop, might not be sizable enough to provide funding when a major and complex institution is resolved. We must therefore continue to explore alternative options, particularly in cooperation with the national central banks and the ECB.
Our experience in recent cases highlighted the prevailing need for an eventual harmonisation of national insolvency laws. The failing or likely to fail (FOLTF) assessment does not automatically link to the criteria for insolvency/liquidation. Similarly, the assessment regarding the “no-creditor-worse-off” principle uses insolvency as the counterfactual scenario. Only by establishing harmonised standards in this regard we can ensure identical outcomes in all Member States of the Banking Union for these evaluations.
Within the SRM, we continue to work on National Handbooks. This exercise aims to define how resolution schemes are implemented in each country, but also to understand what are the procedural steps in each Member State in case there is a decision not to send a bank into resolution. National handbooks are certainly a step in the right direction, but they cannot remove the need for harmonised insolvency laws. In this regard, we can only re-iterate our concerns and encourage the legislators to undertake next steps.
While Europe is facing a number of challenges simultaneously, there are currently many plans and initiatives looking to strengthen the Euro area, while taking advantage of the overall good economic development. The European Parliament, the Commission and the Council are playing a key role; the SRB stands ready to carry out the tasks and mandate that legislators entrust it with. We are both united by the same objective: To maintain financial stability and protect taxpayers in case of a bank failure. I am looking forward to continuing our work together with you.
I will end my opening remarks at this point and I am looking forward to answer your questions, not only on our Annual Report but also on many other aspects of our work in the Q&A session.
Thank you very much for your attention!