Speech to European Parliament's Kangaroo Working Group on Financial Services by SRB Chair Elke König
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Thank you Markus, and good afternoon honourable members of the European Parliament, fellow speakers, ladies and gentlemen,
It is my pleasure to address this Working Group on Financial Services. Although it would have been great to have been able to interact with you in person, during the present circumstances, this virtual event is the next best thing.
Although today, I have been asked to deliver a keynote speech, I must say at the outset, that at the SRB we do not have a monopoly on wisdom. Therefore, while I very much appreciate the opportunity to put forward the SRB’s views, I equally appreciate to hear the perspective of the other European institutions as well as the opinion of industry. So, my thanks to the Kangaroo group and the European Parliament for facilitating today’s discussions.
[How we are weathering the Covid storm?]
This day 12 months ago, Covid-19 was starting to spread like wildfire on the European continent, yet the general public was still oblivious to it. Who would have thought on the 25th of February 2020, that restaurants would be closed for months in the end that schools would close, or that all non-essential retail would be shut down?
To quote William B. Yeats, ‘all changed, changed utterly’.
In hindsight, the pandemic was perhaps not unexpected, not the “black swan”; but the economic disruption it has caused was not predicted per se. And yet, after a short period of high volatility we have seen relative stability, especially when we look at financial markets. Why have we seen such stability? Well, I think there are two main reasons.
The first reason is state support for the economy.
State borrowing limits have been temporarily put aside. However, while these supports have done their job pretty well up until now, at a certain point, that support will be, or rather I am inclined to say, must be stopped or phased out, and businesses will have to turn a profit with reduced, or even no state support. I will come back to this point later.
The second reason for stability is also clear: since the last crisis, the European Union has worked hard to put in place financial stability measures, such as the Banking Union. Institutions such as the SSM and the SRB have worked hard on implementing financial stability measures.
The roof of the house that is financial stability is certainly being tested at present. Perhaps the roof of that house needs to be made stronger – but at least during this economic storm, we have a house, which is far more than could be said at the time of the great financial crash in 2008.
Although at the start of the crisis almost 12 months ago, there were calls for a suspension of certain regulatory measures, it is clear, that all the measures put in place since the financial crisis of 2007/08 were well warranted. They ensured that the banks, this time round, are part of the solution and so far weathered the storm well.
The regulatory measures that were put in place in the Banking Union since the last crash have proven to work well. They have been flexible enough to adapt to different economic situations. We have a strong, well-crafted financial stability framework, capable of dealing with strong winds, even if there is always room for improvement.
The current framework provides flexibility, within reason. However, we must continue on the path to resolvability – which is all the more important in these uncertain times. Of course, we remain ready to address any issues in relation to specific requirements with banks on an individual basis, should it be required.
But to be clear: the resolution framework in Europe, while providing some flexibility, is not as flexible as industry might wish for. This leads me onto an important point, namely, contributions to the Single Resolution Fund.
The framework is not so flexible as to allow a holiday for banks contributions to the Single Resolution Fund, as certain bankers have been calling for. Bankers are very familiar with the law, but perhaps a reminder would be no harm, lest the memory be fading somewhat in certain quarters.
This house, together with the Commission and the Council decided to create the Single Resolution Fund. It is part of the resolution toolbox and it can – under strict conditions - provide funding should a bank get into difficulty. One of the reasons it exists it to promote financial stability, but it is also an important line of defence against having to use taxpayer’s money to deal with a bank or banks in trouble.
We have a framework in place and we will continue to do our work at the SRB to implement it. And rest assured that we will pay particular attention not to overshoot. It is a fact that we saw a substantial increase in covered deposits all over the Banking Union in 2020 and also the projections for 2021 assume a substantial increase. This will impact the contributions to the fund, of course.
[Banks: part of the solution as we emerge from public supports]
Now I want to take a look a the role of banks as we emerge from the crisis. To date, banks overall have been progressing to make themselves resolvable. I am convinced that working on becoming resolvable is something that suits banks in going concern, too – it’s not just work on a living will. Addressing structural issues or data management, just to mention two aspects, will strengthen the banks and they are less likely to get into a situation where they actually have to be resolved! It sounds like a paradox, but it is absolutely true.
Again, comparing this crisis to the last, I think banks today should stay part of the solution, as we emerge from Covid-19. However, I do think that the year ahead is going to pose challenges.
With vaccines being rolled out across the continent, pressure will build to return to some kind of ‘normality’. There are two major challenges ahead as we move into the next phase of the Covid-19 pandemic.
The first major challenge will be 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 aware that we need to avoid potential cliff effects.
The second major challenge 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. The message is clear: use this time to deal with the oncoming potential 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 or AMCs do not make losses caused by NPLs go away, even if they can be a helpful management tool.
However, there are opportunities as well as challenges.
The current crisis has also taught us valuable lessons. We all had to learn how to conduct our daily activities in a remote settings. This has also accelerated digitalisation not just in financial markets and at the same time we see reorganisation happening to become more efficient and customer-focused and we see even the needed consolidation moving forward. I think that banks overall have adapted well, so credit where credit is due.
[Completing the financial stability architecture]
Now is also an opportunity for the EU – an opportune 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. That is my clear message to legislators.
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, to say the least.
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.
This work is also key to address remaining issues for small and medium sized banks. For mid-sized banks heavily reliant on deposit funding, it may be challenging to access markets and issue MREL. At the same time, we cannot have a layer of banks that is considered too big for unwinding under normal national proceedings but making it resolvable is considered unfeasible or too burdensome. Our ongoing work on transfer tools, such as the ‘Sale of Business’ and Asset Separation tools might enhance the options we have for these banks. However, these tools come at a cost, as they need to be prepared and made implementable. To fully address this issue, the completion of the Banking Union through implementation of EDIS with sufficient powers, in particular to support transfer tools, is key.
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 in this house, as well as for those up by the Schuman Roundabout.
[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.
As I mentioned, 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 a nutshell, banks are expected to have built up their capabilities on all aspects by the end of 2023. This is also the date when the new MREL targets need to be adhered with. 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. I am happy to discuss all of this further during the questions and answers session if desired.
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 continue to work together – all of us, legislators, regulators and industry. Let us use this time wisely, and rather than only seeing the challenges it has created, we must use it as a trigger for further progress to equitable financial stability.