Resilient banks are competitive banks. How crisis management contributes to a competitive Europe

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Ladies and gentlemen, first, let me thank Eelko and Wim for inviting me to speak with you today.

I read with interest the EBF’s recommendations for the next legislative term. It is encouraging to see that we have - in several instances - very similar views. Today, I would like to share some thoughts on what I think about the current legislative proposals and the financial services policy debate at large and then update you on our current work and future plans.

1. Competitiveness, single market and public goods 

The policy debate, these days, revolves around three broad concepts: 1. competitiveness, 2. the single market and 3. European public goods. 

Financial stability is quintessentially a public good - it is critical for our societies to thrive but markets cannot deliver it on their own.  Strong, competitive and resilient banks are a “must” to achieve financial stability, and one that is not subsidised by taxpayers. A fully-fledged Banking Union, with a complete crisis management toolkit, is critical to ensure banks’ resilience but also to provide a level playing field - a single market, really - where European banks can grow, consolidate and serve European citizens efficiently while competing internationally. 

As you can see, banks, banking authorities and their common framework sit at the crossroads of competitiveness, Single Market and European public goods. This is why we should all strive for a Banking Union that is, in essence, a single market for banking services. 

Let me just add one word of caution on competitiveness, simplification and overregulation – a relevant part of your memorandum. We are absolutely mindful of the fact that our framework should be as simple as possible and allow banks to compete at a global level. In that sense, we are always available to discuss unfair “goldplating”. However, as the US crises last year have shown, sometimes having a more complete regulation proves to be an advantage in the long run. As I am sure you know, American federal regulators are introducing a long-term debt requirement to a number of banks that are not subject to TLAC. An American MREL! 

As the EBF memorandum correctly points out, a number of reforms are still missing. However, I think we can all agree that our political masters have charted a route towards a fully-fledged Banking Union. It is a step-by-step approach. Unfortunately, baby steps at times! But, nowadays, where do we stand?

1. CMDI and ESM treaty revision

Let’s start from the ongoing negotiations:

CMDI makes the resolution toolkit stronger and more flexible to handle the failure of smaller and medium-sized banks. It does so by expanding the scope of resolution to a number of these banks. Critically, it also provides resolution authorities with the possibility to use DGS resources (after MREL) to fund the sale of middle-sized banks in crisis to a healthier peer. Let’s be clear. CMDI, not only protects financial stability and taxpayers’ money, but can also facilitate much needed consolidation of the banking sector in case of crises at a very limited cost for the industry – multiple birds with one stone.

Another ongoing negotiation, unfortunately, is the Common Backstop one. The ratification of the revision of the ESM treaty should be a “no-brainer” - as we keep reminding to all the relevant stakeholders. As I will discuss later, our Single Resolution Fund is a powerful liquidity tool. However, the March 23 turmoil has shown that the liquidity needs of a bank in crisis can be immense. This is why the Single Resolution Fund needs to be backed up by adequate liquidity facilities, which will give confidence should we face a crisis. Nobody gains from holding this useful reform up.

2. Liquidity in resolution and EDIS

This leads me to those discussions that could be unlocked once CMDI and the Common Backstop are settled:

EDIS, the missing third pillar, will ensure level playing field across the Banking Union. How can we honestly say to European citizens that we achieved a single market in banking if a depositor in Member State A is less protected (despite the alignment of legal coverage) than a depositor in Member State B, as there can be differences in the DGSs size and strength? We really cannot! The recent report on EDIS approved by the European Parliament’s ECON committee could be a clear signal to restart this debate. I appreciated that you have included EDIS in your memorandum’s recommendations.

Equally, the absence of a public backstop to our liquidity facility is clearly something that our framework lacks. [I am not too fond of the expression “lender of last resort”. This is because it gives the impression of good money being thrown after bad money. On the contrary,] as our Swiss colleagues have demonstrated last year, a public backstop just consists of short-term loans that protect financial stability at a minimal risk for the taxpayer. The Swiss government even turned a profit out of the guarantees it has provided to UBS last year. 

Let’s not forget that having the same crisis management tools as our international peers is a key prerequisite for our domestic industry to be competitive. 

Briefly, it is in everybody’s interest to have these proposals back on the table!

3. Capital Markets Union

I am also glad to see that the European Capital Markets Union project is gaining traction again. Very simply, among other positive elements, deep capital markets are critical to reduce our banks’ dependence on foreign markets to issue MREL securities. In addition, a vibrant European securitisation market could make banks’ balance sheets nimbler.

But, let’s not forget, that a true Capital Markets Union can only go hand-in-hand with a consolidated and integrated banking sector. There is no NYSE, without JP Morgan Chase. 

4. Increasing and new risks 

I also agree very much with your recommendation that policy makers should look into risks stemming from outside the banking system. In that sense, the work of the Commission on NBFIs is very welcome. We are also looking at this area from our perspective. Our objective is to better understand if more work is needed in the area of crisis management for these players. 

Also, I agree with the conclusions of your memorandum on the importance of cyber risks. Banks, and their service providers, are certainly a prime target for both cyber criminals and malignant foreign actors. A successful cyberattack can truly shatter the confidence in a financial system. This is why I think that resolution authorities should take a serious look at their capacity to act. Our new strategy, that I will discuss in a minute, aims exactly at enabling us to deal with emerging risks such as this one.  

2. Resolution planning work progress and next steps

I will now move to the SRM’s recent achievements and our plans for the future.

1. Recent accomplishments

To be strong, banks need to be resolvable. Since the inception of the SRM, we have made big steps forward, working together with you and the industry as a whole. 

In fact, all banks within our remit, except the few cases with an extended transition period, have reached their MREL targets on time.

Moreover, besides their MREL buffers, under the SRB’s guidance, banks have also built important capabilities in all resolvability dimensions. This means that they are now much more resolvable, and, as a result, safer, than 10 years ago. 

The Single Resolution Fund has also reached its target value of 78 billion euro, or 1% of covered deposits – thanks to your members’ contributions. It is now fully funded and mutualised. As a result, as I am sure you know, unless something unexpected happens, we will not ask banks for any contributions to the Fund this year.

2. SRM Vision 2028 

Reaching these targets shows clearly that the SRB, and SRM, have become mature. This is why 2023 was a good year to start asking ourselves, “what’s next?”.

To answer this question, we launched a strategic review defining the SRB’s long-term goals. The final result of this review is our new strategy, the SRM Vision 2028. This Vision, a joint effort with our many stakeholders, will be implemented over the next five years. It is based around three areas: 

The first is our core business. We need to improve our crisis preparedness by refocusing on being operationally ready in all circumstances. One key element is testing banks capabilities to handle a crisis, through fire-drills, deep-dives and on-site inspections - for instance. Having learned some relevant lessons from the recent American and Swiss banking crises, we will also work on diversifying our resolution strategies, for instance by combining the tools at our disposal. 

We also strive for a more transparent SRM – another pillar of our strategy. This is why I am keen to attend events like this one.

Our openness does not stop there. We want to give you full clarity on our requests. To this end, we have started publishing a one-stop-shop list of consultations and requests to the industry on our website. 

Another example of this new open and transparent approach is our more open consultation policy. By the way, as you probably know, we published our new MREL policy earlier this month.  

Through our new strategy, I also want to reinforce integration with national resolution authorities and build a common culture within the SRM. 

At the same time, we are also increasing our cooperation with SSM, for example on data reporting.  

Talking about reporting, let me also take this opportunity to agree with your memorandum once again on how important is to be efficient on data reporting. We are very cognisant of this and we recently set up a data management unit to make sure that we get this right.

3. Conclusions

Let me conclude. 

Even if great progress has been achieved, it is not time for complacency or back-pedalling. Much remains to be done. In fact, resolvability is neither a static condition nor a binary question. Becoming and remaining resolvable is an iterative process requiring continuous adaptation to rapidly changing market conditions and emerging risks.

Our strategy - over time - will increase trust in the crisis management framework, making the Banking Union even safer, more resilient and integrated. Trust, in my view, is what will break some of the issues that have been challenging the Banking Union since its inception – such as the “home / host” debate.

I think we should all work together to increase trust in the system. For the same reason, we should all push for our framework to be as comprehensive and up-to-date as possible.

Thank you very much