COVID-19 and the banking landscape - a perspective from the Banking Union
Speech by Elke König at the EBI Global Annual Conference 2021
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Good afternoon ladies and gentlemen,
Thank you very much to the EBI for the invitation to join you this afternoon. The agenda for these two days is certainly an interesting one, and I will be particularly interested to hear the discussions on NPLs and responsible banking. I am sure that over the course of today and tomorrow, an even wider range of topics and ideas will be discussed as we try to chart the way forward and emerge from the pandemic, while ensuring global financial stability.
[A brief look back]
In order to move forward, we have to take stock of where we are right now, and also the road travelled so far. It is almost 12 months since Europe began its first wave of lockdowns, which were necessary to protect human life. These lockdowns were accompanied by massive government supports. There is no doubt that, were it not for the fiscal policies implemented by governments and the EU, our economies would be in a far worse state than they are today, with a corresponding knock-on effect on our banking sector.
State borrowing limits have been temporarily put aside. Businesses of all kinds of shape and size have received payments – and rightly so - from the public purse, be they direct grants or payments to employees or in some other form. Mortgage breaks were granted to many commercial and residential account holders. These types of support are, in many cases, the lifeline allowing businesses to continue to function. However, while these supports have done their job pretty well up until now, at a certain point, that support will be stopped and businesses will have to turn a profit with reduced, or even no state support. I will come back to this point later on as we look at the future.
[The crisis as it unfolded in the Banking Union]
Although at the start of the crisis almost 12 months ago, there were calls for a suspension of certain regulatory measures, I think we should start by the simple fact that all the measures put in place since the financial crisis of 2007/08 were well warranted. They ensured that the banks, this time, are part of the solution and so far weathered the storm well. In addition, the regulatory measures that were put in place in the Banking Union since the last crash have proven to work well and to be flexible enough to adapt to different economic situations. We did not have to build a new boat to deal with rising floodwaters. We have a strong, well-crafted financial stability framework, capable of dealing with choppy waters, even if there is always room for improvement.
The current framework provides flexibility, within reason. We did offer some flexibility to our banks. The SRB postponed data requests or the submission by banks of less urgent information related to the 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.
But to be clear: the resolution framework in Europe, while providing some flexibility, is not so flexible as to allow a holiday for banks contributions to the Single Resolution Fund, to give just one example. In other words, the law is set out for us, and our task as regulators, is to implement that law. Yes, even if it were legally possible to stop collecting contributions to the fund – and I remind you again, it wasn’t! – this would only have delayed the contributions, and banks would still have to make up the shortfall in their contributions in 2021, a year that looks even less stable than the one just gone.
In addition to being flexible, the framework is also a prudent one. At times when stormy seas may be on the horizon, then it is all the more important to batten down the hatches, and make sure that everything is in order so that we can ride out the potential storm. Now - as we begin to see the effects of the pandemic from an economic standpoint – is not the time for light touch regulation.
Our mission at the SRB is to promote financial stability and protect the taxpayer. 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; and the good news here is that banks are making progress and that even in 2020 the markets were [wide] open for banks building up the needed capital, i.e. MREL buffers.
So, ‘slow and steady’ wins the race. In 2020, we decided, working closely with our partners in the SSM and our national resolution authorities to be pragmatic, but not to enter into the folly of kneejerk reactions. To date this has stood to us, but of course, we continue to monitor the situation and keep our boat afloat.
[Completing the financial stability architecture]
Just as now is the time to ensure all banks are resolvable, it is also an ideal time to finish what we started on a number of fronts in terms of financial stability in the EU. Within the EU, we must work to complete the Banking Union. The final major priority in order to complete the Banking Union will be the development of a common deposit protection scheme at EU level. In order to break the bank-sovereign doom loop, it was always envisaged that the Banking Union would rest on three pillars, but progress on this last pillar has been slow. Now, I did say a moment ago that ‘slow and steady wins the race’, but here on this third pillar of the Banking Union, I think it is a case of just slow! So, it would be good if this could be speeded up.
The other area the SRB would like to see progress on is the development of a meaningful Capital Markets Union to allow capital to flow easily right across the Banking Union. At present, different legal systems and other regulatory barriers make investing in another member state in the EU less attractive than investing in the domestic market. Clearly, this is anything but ideal for the EU’s internal market.
We would also like to see progress on a harmonised EU liquidation regime and harmonised insolvency procedures for banks at national level, even if I am a realist and understand that this is some time off. However, it is something worth pursuing. Currently, with twenty-one plus different insolvency frameworks in the Banking Union, the analysis of the insolvency counterfactual for a cross-border bank in resolution is a challenge, and results in diverging outcomes depending on the home country of the institution. For me, harmonising at least the bank insolvency procedures is linked to the common deposit protection scheme, or EDIS, and to the resolution framework and we need to stay ambitious here.
I could add more topics, including the interesting idea of a European Bank Charter as an alternative to nationally chartered banks. In any case, let us stay focussed on finalising the Banking Union and avoid any temptation to re-nationalise.
These are items on the list for our political masters, however, and I now want to turn my attention to the months ahead.
[Ending public support / outlook for 2021]
So, coming back to the short and medium term, let us take a look at the outlook for 2021. Of course, I do not have a crystal ball, so I cannot be 100 per cent certain, but I do think that the year ahead is going to be a bumpy one at least for some banks. I am pleased that during this conference, many of the challenges to be overcome will be discussed and debated in the various panel sessions, that will no doubt provide us all with food for thought.
With vaccines being rolled out across the continent, pressure will build to return to some kind of ‘normality’. This will bring about a whole series of questions around the exit strategy, not just the exit from lockdowns, but also the exit from governmental support for the economy. We all know that this support must end, but at the same time we all are concerned about potential cliff effects.
For banks, no doubt one of the main concerns in 2021 will be the rise in NPLs. Banks must put in place the measures to identify and deal with NPLs, sooner rather than later, and cautious provisioning has never been harmful. However, and perhaps even as a lesson from the last crisis, if banks act properly and proactively, they should stay part of the solution not the problem. However, the message is clear: use this time to deal with the oncoming onslaught of NPLs. Use this time wisely. Doing this now will be less expensive, and depending on the severity of NPLs at a particular bank, the work being done in this period might be the difference between survival or collapse. Dealing with NPLs is first and foremost a task for banks or even broader, the private sector. AMCs/ Bad Banks can and should be part of the toolbox and the EC action plan is a welcome reminder. But let us also be clear here, Bad Banks do not make losses caused by NPLs go away, even if they can be a welcome management tool.
The current crisis should also be seen as an opportunity for banks to look at digitalisation and reorganisation to become more efficient and customer-focused.
[SRB outlook for 2021]
For the SRB, in the coming years, our focus will continue to be on building resolvability. We published our multi-annual programme for the years ‘21 to ‘23 at the end of last year. Unsurprisingly, the SRB will continue to focus on making all banks under our remit resolvable. This relates to operational resolvability, as well as the necessary build-up of MREL, a key tool in resolution. We must keep up the momentum on increasing MREL, especially in light of the new rules and deadlines in the BRRD2 – 2020 was a transition year in terms of BRRD2 application.
Another area of focus for the next few 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. Our ‘Expectations for Banks’ document clearly shows the direction of travel for banks, and on top of that, all banks under our remit have received work programmes for 2021. The ‘Expectations for Banks’ document sets out the capabilities the SRB requires banks to demonstrate in order to show that they are resolvable. It describes best practice and sets benchmarks for assessing resolvability. It also provides clarity to the market on the actions that the SRB expects banks to take in order to demonstrate resolvability.
In principle, banks are expected to have built up their capabilities on all aspects by the end of 2023. Where needed and on a bilateral basis, the SRB and banks may agree alternative phase-in dates. The Expectations are tailored to each individual bank and its resolution strategy, allowing for flexibility and proportionality.
In 2021, we will also continue to build up the Single Resolution Fund as we will do every year up until 2023, when it will be fully funded. We are on target at present. Just to remind you, the SRF is a fund that can be called upon in the case of resolution. I am pleased that the backstop to the Single Resolution Fund will be in place from next year. The decision to implement the backstop effectively doubles the firepower of the fund, and this will provide confidence to the markets when it is needed most.
Ladies and gentlemen, I am coming to a close. I suppose it is difficult to predict with certainty what 2021 will hold for the banking sector. What is clear is that the current resolution framework, one of the key pillars of the Banking Union, is working. It is contributing to financial stability and it has demonstrated that it is helping to protect the taxpayer from bail-outs, by ensuring responsible management of risk in individual banks from the outset and by placing the risk of a business with its owners and creditors.
However, there is always room for improvement. Just because we are weathering the storm so far, does not mean to say that we cannot do more to prepare.
We must use this time and rather than only seeing the challenges it has created, we must use it as a trigger for further progress to equitable financial stability.