ECON Public Hearing on 2016 SRB Annual Report - Elke König, SRB Chair
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Honourable Members of Parliament,
It is a pleasure for me to speak to you today and present the Annual Report of the Single Resolution Board (SRB) for 2016.
Enhancing the resolution readiness for approximately 140 banks under our remit was in 2016 and still is our key responsibility. It cannot be achieved in one year, but with the support of the National Resolution Authorities the SRB drafted and adopted 92 resolution plans in 2016, thereby covering the majority of banking groups in the Banking Union.
Effective resolution planning depends on up-to date data from banks, in particular regarding the bank’s liability structure. In 2016, the SRB collected relevant data from all major banking groups by using a specific Liability Data Template. The granular data collected is supporting our determination of the minimum requirements for own funds and eligible liabilities (“MREL”) and for making the bail-in resolution tool operational.
In 2016, the SRB adopted a preliminary approach on MREL, taking into account – among other factors – that the European regulation for MREL is still evolving. I am of course referring to the Commission’s legislative proposal to integrate the international Total Loss Absorbance Capacity Standard of the FSB into the BRRD and to create a Two Pillar MREL system distinguishing between G-SIBs and other banks, among a number of other proposed changes to the BRRD.
A word of caution in this regard. MREL needs to be built up and banks and markets require clarity on the legal framework, particularly when it comes to eligibility and hierarchy of instruments. There is no reason to “wait and see”, the earlier banks can start building up MREL the less likely tax-payer funded bail-outs become.
We therefore calculated informative and non-binding MREL target levels in 2016 for the major banking groups. We communicate intensely and constructively with banks on this and other resolvability topics and try wherever possible to adapt a gradual approach. This will enable banks to prepare and adjust.
Of course our work on resolution planning is not limited to MREL, work on the identification of critical functions, access to FMIs, IT systems etc. are all being worked on by our staff.
Our cooperation with the NRAs is crucial and the joint development of horizontal policies and best practices within the SRM is progressing well.
Let me now turn to our progress within the Single Resolution Fund, the “SRF”. Since last year, the SRB has been responsible for the calculation of ex-ante contributions and I am pleased to report that the funds held by the SRF currently amount to approx. to EUR 17.4 billion. In addition we have LFAs with all Member States in place and are supporting the efforts of Member States to put in place an effective common backstop.
Looking at 2017 and beyond, our work in all the areas I have just mentioned is evidently going on and deepening:
We are focusing on the operationalization of resolution plans. To ensure they will work in reality, we are conducting more analytical work on the preferred resolution strategy and tools, on critical functions and material impediments to resolvability.
Preparing for effective cross-border resolution is another ongoing priority. We will continue our exercises, be they dry runs in the Banking Union, table-top discussions with non-Banking Union Member State authorities or our international work in the context of trilateral exercises with the US and UK.
In 2017, our objective is to start developing binding MREL targets at consolidated level for all major banking groups and to address the quality of MREL within a group. We will base any policy decision on the legislation in force while we are closely following the negotiations in respect of the EC’s legislative package.
And of course, our work will take into account our most recent experiences with resolution cases. As you are aware, on June 7 the SRB adopted its first resolution decision, triggering the sale of Banco Popular to Banco Santander for the price of EUR 1. The Spanish Executive Resolution Authority FROB is responsible for the implementation of the resolution scheme.
This text-book like resolution case benefited greatly from the close cooperation of both European and national authorities, the commitment of the bank itself and the ongoing private sale process which the SRB could build on in our resolution role.
The situation of the two small Italian banks in the Veneto region which were declared failing or likely to fail (FOLTF) on the 23rd June by the ECB was different.
The deterioration of the banks over the last two years meant that they have shrunk significantly in terms of size and interconnectedness, and at the same time their only remaining critical function – taking deposits – was also available from almost 30 other banks in the region. The SRB therefore concluded that resolution action was not warranted in the public interest for these banks individually, but also taken together and that they could instead enter into the normal Italian insolvency proceedings without measurable risks to financial markets or the real economy. The Italian authorities then decided about the future course of action.
Last week (4 July), the European Commission authorised the precautionary recapitalisation of Monte dei Paschi di Siena – the first time after the BRRD entered into force. A rule explicitly foreseen in the BRRD; which the co-legislators may reconsider during the upcoming BRRD review of next year.
While the first resolution decision – Banco Popular – has proven the effectiveness of the EU resolution framework, we also identified some areas for improvement and gained valuable experience that will influence our work and that might also have policy implications. We are still analysing the cases in detail but some takeaways are already evident at this stage:
- There are strong advantages to a Moratorium Tool covering all liabilities to buy time if need be or to take us to the weekend in case a bank is declared FOLTF by the SSM mid-week again.
- Ad-hoc availability of liability data is crucial to obtain a full picture of the situation and to allow the resolution authority to take appropriate action. This will be a collective undertaking: While the SRB needs to determine data requirements, banks need to invest significantly and build the relevant IT infrastructure to provide this kind of data at the push of a button in times of crisis.
- As supported by the case of Banco Popular, the question of “funding or liquidity in resolution” remains. Here, we will need to explore possible solutions with, in particular, the ECB and national central banks. There might not always be a strong buyer and open bank bail-in is only viable with liquidity support.
- Cross-border co-operation with third countries is of vital importance; even in this mainly European case we worked with the US authorities effectively to ensure that the resolution was smooth. For firms with more cross-border links, this co-operation will be all the more important.
- Last but most certainly not least, we need to ensure that incentives are set correctly. The Commission’s 2013 banking communication should be reviewed and checked against the progress made in the implementation of the new resolution framework – it is July 2017!
Let me conclude by saying that while a lot of work still needs to be done to strengthen resolution readiness in the Banking Union, the SRB – in any event – is prepared to handle a resolution.
I now leave the floor to you and any questions you may have and thank you very much for your attention!