Goldman Sachs: 28th Financials Conference
June 4, 2024
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[Introduction]
Good morning – Buenos dias!
I am very pleased to be with you today in Madrid. This morning I would like to provide you some insights about the SRB priorities and its direction of travel. I would also like to share some thoughts on our lessons learned from last year’s turmoil and about the ongoing legislative development to improve the banking crisis framework.
A few key achievements
Let me start with a few achievements that are tangible results of nine years of work and that will enhance the SRB capabilities to handle a banking crisis.
1.1 SRF
First, the Single Resolution Fund, our emergency fund that can be called upon to finance the resolution of a bank, has reached its target value of 78 billion euro, or 1% of covered deposits – thanks to banks’ contributions. It is now fully funded and mutualised. As a result, we will not ask banks for any contributions to the Fund this year.
1.2 MREL requirement
I am also glad to report that all banks within our remit, large and small, except for a few special situations (meaning longer transition period for some banks), have reached their MREL targets, on time.
The 2024 MREL policy introduces a few targeted changes but it will not change the global picture. It will mainly impact the calculation of internal and external Market Confidence Charge calibration and the monitoring of MREL eligibility. It also reflects the legislative changes on the MREL framework related to entities in a “daisy chain” and to liquidation entities. With these changes, the MREL policy is expected to be stable in the coming years, all other things being equal.
1.3 Resolvability progress
Moreover, besides their MREL requirements, most of the banks have also built important capabilities to improve their resolvability for most of the SRB expectations. This means that they are now much more resolvable, and, as a result, safer, than 10 years ago. However, much remains to be done.
SRM Vision 2028
After 8 years, the SRB had come to the end of its build-up phase. 2023 was a good year to start asking ourselves, “what’s next?”. This is why we launched a strategic review to define the SRB’s long-term goals. The final result of this review is our new strategy, the SRM Vision 2028. This Vision is a joint effort with most of our stakeholders. It will be implemented over the next five years. It is based around different areas but today I would like to focus on a few key areas directly relevant for the industry:
crisis preparedness: more testing and OSIs
new risks of banking crisis
and transparency
2.1 Enhancing crisis preparedness through testing and OSIs
Even if one could think it strange to say that “All SRB banks must be ready for resolution”, it is the case, that in order to be operationally ready in all circumstances, we will work further on testing banks’ capabilities to handle a crisis through fire-drills, deep-dives and on-site inspections.
This year, all banks under our remit with a resolution strategy have been asked to test their liquidity and valuation capabilities.
In the next months and years, we will start asking banks to systematically test all resolvability dimensions, principles and capabilities.
The SRB will publish guidance for banks on its expectations on resolvability testing. This guidance will be subject to a public consultation in the coming months.
The SRB and NRAs will develop multi-annual testing programmes for banking groups. Well in advance, banks will know what tests will need to be carried out and when.
These bank-specific programmes will cover three years, and will be updated yearly, on a rolling basis. They will also take into account other engagements such as deep-dives, on-site inspections and workload coming from the supervision.
Banks will have to incorporate these multi-annual testing programmes in their overall governance structure for resolution-related topics.
We will also launch our first round of on-site inspections. We will start small - with a few banks. We will then expand over time our capabilities and, in turn, the number of inspections that we carry out per year. However, we will never be in competition with the SSM, in intensity and in the number of missions, and even more, we will coordinate our programmes with the ECB.
2.2 Addressing new risks of banking crisis
In the coming years, resolution authorities should be ready to handle new risks of banking crisis.
A clear example of new risk is the cyber risk. Cyberattacks have more than doubled since the pandemic. Banks, and their service providers, are certainly a prime target for both cyber criminals and malignant foreign actors. Think about this. In 2023 a ransomware attack on a cloud IT service provider caused simultaneous outages at 60 US credit unions. This is why, I think, banking agencies have an important role to play on this, alongside national security agencies of course. A successful cyberattack can truly shatter the confidence in a financial system.
Also, as I have said in the past in other keynotes, let’s not forget that risks to financial stability may come from less regulated sectors of financial markets, the so-called NBFIs. These actors are key players on the financial market. They are strongly interconnected with banks and the failure of some of them could have systemic impact on the financial market while there is currently a limited crisis management framework to handle the situation.
2.3 More transparency towards external stakeholders
One of the key objectives of the SRB strategy is to be more transparent towards external stakeholders.
We want to give you better clarity on our requests to industry and our policies. This is why, we have started publishing a one-stop-shop list of policy consultations and requests to the industry on our website.
One example of this new open and transparent approach is the MREL policy consultation. I take this opportunity to thank those of you who contributed to the consultation on the future of MREL policy, also published last month.
How to improve the current framework?
3.1 Lessons learned with a focus on liquidity
Looking to the events of last year in the US and Switzerland, the Basel Committee and Financial Stability Board have published reports that extract lessons learned from this turmoil. The review of the FSB concluded that, yes, the system worked but it also identified several implementation issues. On the positive side, the Swiss authorities preserved the financial stability. Credit Suisse was treated as one single entity and ringfencing along national borders was never on the table. Finally, cooperation and crisis communication within the Crisis Management Groups (CMG) worked well, but only within.
This leads me to the implementation issues, for brevity, I underline only four of them:
The first one, indeed, is that we need to ensure broad information sharing between authorities. The failure of a systemic bank could cause instability even in places where the bank does not operate directly.
The second one is that we need optionality for resolution strategies and tools - depending on the various scenarios, for example liquidity crises.
The third one refers to the need to work further on the operationalisation of the bail-in tool in a cross-border context, where loss-absorbing instruments are held by non-domestic investors. We need to ensure that, at bail-in time, we are fully prepared to comply with the relevant securities laws, such as the US one. And here, it is also important to give confidence to the stakeholders that we will respect the rules of this crisis management game – we will absorb first all the share before anything else, as stated in our joint press release in March 2023.
The fourth one is, the importance of liquidity in a crisis. Unsurprisingly, liquidity proved once more to be vital to restore stability.
3.2 Liquidity
As the Credit Suisse crisis reminded us last year, the availability of large amounts of liquidity is critical for a successful crisis management.
The Single Resolution Fund has EUR 78 billion available. However, the additional EUR 70 billion of the ESM backstop – should it be ratified- would put us a lot closer to being able to deploy amounts similar to the ones provided by the Swiss authorities last year. We hope that all members states will support the ESM treaty in the near future to enhance our capabilities to handle successful a crisis.
Through resolution planning, we are also working with our banks to increase their capacity to generate liquidity in resolution, in particular through a better mobilization of collateral and through the estimation of the funding needs under resolution scenario.
In the coming years, we would like to explore the idea of an increased prepositioning of assets to reduce liquidity stress. We want to work with other authorities, in a coordinated way, to test banks’ readiness and capacity to pledge assets in a crisis. By creating a regulatory expectation and making it more of a routine exercise, we would hopefully help remove the stigma from this kind of operations.
3.3 CMDI
Besides liquidity, the Crisis Management and Deposit Insurance reform can improve our current toolbox. As you will recall, the CMDI proposals come as a wish to improve the crisis management and deposit insurance framework in Europe.
Recently, the European Parliament reached an agreement on this critical package.
CMDI brings many useful, and mostly uncontroversial, improvements to our framework.
CMDI makes the resolution toolkit stronger and more flexible to handle the failure of smaller and medium-sized banks. CMDI expands the scope of resolution to a number of these banks. Critically, it also provides resolution authorities with the possibility to use DGS resources to fund the sale of middle-sized banks in crisis to a healthier peer.
Hopefully this reform could be completed in the coming months to upgrade the banking crisis framework and the tools at our disposal.
By the way, CMDI is just a good step forward. I hope one day or the other, the EU co-legislators will achieve the Banking Union!
[Conclusion]
Ladies and gentlemen,
Thank you for listening to me and hopefully I have given you some food for thought with regard to the direction of travel.
I might stop there to allow us a few minutes to have a chat and discuss some of these issues in more detail.
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