Speech by Elke König to European Parliament ECON Committee
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Dear Chair, honourable members of the European Parliament,
Thank you once again for allowing me to address you at the ECON committee today.
I have about 10 minutes to cover a lot of ground, before taking questions from you, so let me get straight down to business.
One of the reasons I am here addressing you today, is to formally present the SRB’s Annual Report for 2019. It was published in June of this year and is available on the SRB’s website. This is not a normal year and I suppose I will leave the Annual Report to your reading pleasure. Given how much time has passed, it won’t be my main focus today.
I propose to look at a number of other areas instead:
- First: our Multi-annual Programme, a three year work programme due to be published in the next fortnight;
- Second: Covid, its impact on the banks and potential challenges for banks and for us at the SRB;
- Third: Some broader issues in resolution of which we should not lose sight.
Let me therefore turn to the first point, our multi-annual work programme, which we will publish very shortly. Our work at the SRB will continue to focus on resolvability. This relates to operational resolvability, as well as the necessary build-up of MREL, a key tool in resolution.
In the second quarter of this year, we observed MREL issuances amounting to 88 billion euro, meaning a total MREL stock of 2.3 trillion euro. New issuances declined by 4% compared to the first quarter of this year due to Covid-19. But the good news is that after the volatility of funding costs - of subordinated and senior bonds - and yield-to-maturity of subordinated debt peaked in March, the cost of funding materially decreased over the summer period until mid-September 2020. Clearly, banks must keep up the momentum on increasing MREL, especially in light of the new rules and deadlines in the BRRD2. [And banks are capable to tab the market for MREL even in these challenging times.]
2020 is a transition year in terms of the BRRD2. We are implementing BRRD2/ SRMR2 through the 2020 resolution plans. This is not a small task, and unfortunately numerous EBA Q&As as well as Technical Standards are still pending.
Another area of focus for the coming years will see the SRB fully operationalise the use of resolution tools, and their combined use. In this regard, more work is needed on transfer tools in particular.
We must implement the existing resolution framework as effectively as possible working with our partners at national and international level, and working with banks themselves. Our Expectations for Banks document clearly spells out the direction of travel for banks and in translated in detailed annual work programs.
Finally, on the multi-annual programme, we will continue to build up the Single Resolution Fund until 2023, when it will be fully funded and mutualised.
In this context, the SRB takes note of the recent judgements by the EU’s General Court. These are decisions on the 2017 ex-ante contributions of three banks to the Fund. In one of these cases, the ruling says that Delegated Regulation 2015/63 is unlawful in part. It is for the SRB to implement the regulations that are set out for us. Together with the European Commission, we are currently examining the judgement carefully and will decide upon the next steps.
Moving to the second item of focus now – Covid-19. The EU authorities, including the SRB, reacted rapidly and in a coordinated way to the crisis. It is clear that the measures this house helped put in place after the last financial crisis, have helped cushion the banking sector against the current shock.
The SRB’s approach during Covid-19 has been to support the banks where necessary with operational and financial relief measures, using the flexibility in the resolution framework.
The SRB postponed less urgent information or data requests related to the upcoming 2020 resolution planning cycle, but as it turns out, there were only minor delays and banks provided all the required information. In light of the challenges posed by resource constraints and adverse market conditions, we remain ready to address any issues in relation to specific requirements with banks on an individual basis.
We also took note of the measures adopted by authorities to provide capital relief to banks in support of the economy and will reflect this in our 2020 MREL decisions. In addition, the SRB carefully monitors market conditions, and will assess the potential impact on transition periods needed for the build-up of MREL, i.e. on the 2022 binding intermediate MREL target. Based on the June 30th figures, the impact of Covid on banks balance sheets and funding plans is still reasonably limited.
We have been doing all of this, without compromising our ongoing focus on making banks resolvable. Covid does not change this direction of travel. In fact, now more than ever, we must ensure that every bank under the SRB’s remit is resolvable.
Certain sectors of the real economy are being severely hit and many businesses, in particular SMEs, are struggling. The impact on banks, that is to say, NPLs, will most likely take another few quarters to be felt, given the current high level of government support for the real economy. My message to banks is clear: banks must put in place the measures to identify and deal with NPLs, sooner rather than later, and cautious provisioning has never been harmful. Asset Management Companies can be part of the toolbox, but they are not the magic wand to make losses go away.
In a world of many known unknowns, there is one thing we do know: Banks that had weak business models before the arrival of the pandemic will not have become stronger in the meantime. So, while certain support measures by European authorities might be necessary right now, support for banks, or indeed for any business, should only be for those with a sustainable business model. The exit strategy on current support measures will be a real challenge.
If we look to history, the times of greatest advancement across many areas of society have been linked to times of crisis. So let us try to seek out some positives in a sea of serious challenges.
Covid can and should be seen as an opportunity for banks to accelerate digitalisation and reorganisation to become more efficient.
Some ongoing consolidation initiatives show that banking groups are seriously addressing these topics, not least the over capacity and low profitability. Although EU law does not require the approval from resolution authorities for consolidation, the SRB supports any market initiative that enhances viability, and is in dialogue with banks on this. Rightly done, this will be a win-win in going concern and in enhancing, not hampering resolvability.
3.Macro / Wider issues.
The third area I will look at before concluding is some of the macro issues on the radar for the SRB.
On Brexit, the message is simple; we are prepared. We continue to work with the national authorities right across the Banking Union and indeed our counterparts across the Channel and across the Atlantic, and to handle whatever situation we face at the end of the year.
[Completing the framework]
We must also work to:
- complete the Banking Union;
- develop a meaningful Capital Markets Union and
- finalise once and for all the backstop to the SRF and find an answer to liquidity needs in resolution.
All these topics are well known and have rather gained importance in recent months. Here of course, the input, wisdom and support of this committee, will be vital. Happy to discuss them in the Q&A.
I am heartened that the new Commissioner for Financial Services, Mairead McGuinness placed these items as key priorities for the next four years. We are looking forward to ongoing good cooperation.
[Bulgaria and Croatia]
And while on the theme of things new, I might take this opportunity at ECON to officially welcome our Bulgarian and Croatian colleagues to the Banking Union.
Dear chair, honourable members,
These are strange times and these are challenging times. However, this is also a time for holding our nerve and building on all the work that you, and many others, have been doing over the past decade in order to promote financial stability and protect our taxpayers from having to bail-out banks. You have put in place a good framework and it is fit for purpose. This framework ensured that banks are part of the solution, not the problem this time. Now, we must, and we will, double down on our efforts and ensure that we deal effectively with whatever lies ahead for the financial sector.