A new year, a new impetus for the goal of financial stability
New Year isn’t the only time that we, at the SRB, think about resolutions. Our focus is always on making banks resolvable so that we can promote financial stability and protect the taxpayer. However, as we head into a new year that I hope will be brighter than the last, it is a good time to take a closer look at our priorities for the next 12 months.
It goes without saying that 2020 was a challenging year for every organisation, business and citizen across Europe and beyond. The EU authorities, including the SRB, stepped up to the plate to deal with the challenges posed by Covid. The SRB’s approach has been to support the banks where necessary with operational and financial relief measures, using the flexibility in the EU’s resolution framework and, at the same time, to focus on banks becoming resolvable. As it turned out, banks provided all the required information, with only minor delays, and stayed on track to deliver in line with our ‘Expectations for Banks’. This is reassuring news.
In spite of all the adversity, there were also positive developments in 2020. We all learned that technology has moved on to an extent thought impossible even a few years ago, enabling the industry and regulators to continue to work seamlessly even in a remote working environment. The economic fallout from the crisis is still uncertain, but banks have been and should stay part of the solution. We have seen that banks would like to issue dividends to shareholders, a sign of relative optimism and a good sign also for the continuation of MREL build-up and SRF contributions.
At the same time, the Covid pandemic has not changed our direction of travel. Resolution planning leads to more stable banks that are better prepared to deal with crises, including the current one. If a bank does fail, it means that this can be managed in an orderly way, without disrupting the economy or putting viable banks in danger.
So, our focus is firmly on building resolvability in all banks under our remit, as set out in our multi-annual programme for 2021-23. With this in mind, I would like to highlight four key priorities – or resolutions – for the year ahead.
- Putting in the work on resolvability: We start 2021 having published our key policies, including the ‘Expectations for Banks’, as well as adapting them to the changes brought about by the new Banking Package. These policies provide banks with a clear guidance and a phased timeline for becoming fully resolvable. Banks are expected to have built up their capabilities on all aspects by the end of 2023, except where indicated otherwise. Where needed and on a bilateral basis, the SRB may agree alternative phase-in dates with individual banks. The Expectations are tailored to each individual bank and its resolution strategy, allowing for flexibility and proportionality. We call on banks to do the work needed to achieve resolvability.
- Ensuring ready-to-use resolution tools: Resolution plans are in place for all SRB banks. Now, the focus is on updating these plans and making sure they are ready to go at short notice, what we call ‘operationalising’ them. Most SRB banks have resolution strategies that use bail-in alone (“open bank bail in”) or in combination with other tools. We will work on deepening banks’ bail-in playbooks, following our publication of detailed operational guidance on this topic. We will also work to detail the plans for banks that use other resolution tools, such as transfer strategies.
- Building up MREL: We need to keep up the momentum on building up minimum requirement for own funds and eligible liabilities (MREL) – and we have seen substantial progress here (see the Q2 2020 MREL dashboard). After the volatility of funding cost (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. Banks know their MREL targets and we urge them to establish realistic funding plans that do not put off until tomorrow what should be done today.
- Growing the Single Resolution Fund: We will also continue to build up the Single Resolution Fund until 2023, when it will be fully funded. We are on target at present and it is reassuring that, late last year, the Eurogroup agreed to implement the backstop to the Single Resolution Fund stepwise in 2022, two years earlier than originally planned. This decision acknowledges that we have achieved risk-reduction in the Banking Union and it effectively doubles the amount of firepower of the fund. Let’s hope that we will never need it, but it will provide confidence to the markets when it is needed most.
On top of these priorities, we will also continue to work with our European partners on completing the Banking Union, including finding an institutional solution for liquidity in resolution, making progress towards a common deposit guarantee system and work on a European framework for bank insolvency. International cooperation is another cornerstone of our work and we are pleased to have recently published our latest cooperation arrangement, which confirms our commitment to continuing our cooperation with the Bank of England.
2020 was a difficult year, but also a year of incredible scientific advancement, with several vaccines on the brink of becoming widely available. Having said that, the future is still uncertain. With our priorities for 2021, however, we aim to play our role in ensuring a more resilient banking sector that can help build the recovery and financial stability in Europe and beyond.
About the article author
Dr Elke König is Chair of the SRB, responsible for the management ofthe organisation, the work of the Board, the budget, all staff and the Executive and Plenary sessions of the Board. She is a former President of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) from 2012 until 2015. After qualifying in business administration and obtaining a doctorate, Dr König spent many years working for companies in the financial and insurance sector. Dr König was also a representative of the Supervisory Board of the Single Supervisory Mechanism.