European Parliament ECON Committee Hearing - Speech by Elke König
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Honourable Members of Parliament,
It is a pleasure to be here with you today. Accountability is a key value for the SRB, particularly as our mission is to the benefit of European citizens, which this Parliament represents. I always appreciate your interest and candid debate.
In my introductory remarks today, I would like to touch upon, among other things, the European Court of Auditors report, the release of the non-confidential version of documents related to the resolution of Banco Popular, and the recent case of ABLV Bank. Finally, I will share some views on the amendments to BRRD-SRMR, CRR and CRD, which many of you are working on, I am sure.
ECA recommendations and SRB progress
Our programme for 2018 was published in November and we had already the chance to discuss it in December. Two weeks after, the Court of Auditors published a number of recommendations for the SRB as consequence of their audit of SRB activities up to the end of January 2017.
We had a very constructive cooperation with the ECA throughout the audit and we welcomed their set of the recommendations. More than this, we are capitalising on them. Concretely, we mapped the recommendations vis a vis our 2017 resolution planning cycle (which was not covered by the audit) and with our multiannual programme 2018-2020: we were glad to note many matchings.
For instance, as regards the recommendation on staffing, in 2017 an enhanced HR department allowed us to accelerate recruitment bringing us on track with the agreed staffing plan. Another ECA recommendation already partially fulfilled is the development of a policy on MREL: our 2017 MREL approach is public and has been applied in the 2017 resolution planning cycle. But clearly more has to come and 2018 will see a clear focus on determining MREL for all banking groups and significant entities within banking groups.
Several other recommendations are actually deliverables planned for 2018-2020 in our multiannual programme. This includes the work on substantive impediments to resolvability, the ongoing revision of our cooperation agreement with NRAs and of the Memorandum of Understanding with the ECB, an update to our resolution planning manual and, notably, the completion of fully compliant resolution plans for all SRB banks by 2020 by the latest. I know that for some of you this train is moving too slowly. But let me reiterate that resolution planning is a multi-year project. At the same time, no responsible bank management needs to wait for the SRB decisions: building MREL and addressing data, legal and organisational obstacles should happen now. The sun is shining; no reason to wait. This is a message my colleagues and I are constantly conveying to banks.
Turning to recent SRB decisions, let me first briefly comment on the recent extended publication related to our first resolution case.
At the beginning of February, we published extensive additional information on the Banco Popular case. This includes non-confidential parts of: the Resolution Decision, the so-called Valuation 2 and the 2016 Resolution Plan. In doing so, we actually went beyond the decision by the SRB Appeal Panel of November 2017. And we did so because we are determined to be as transparent as we can.
We shall be equally clear in stating that some parts of these documents need to remain confidential. This is the case for information that comes from the ECB and where the ECB refuses publication, and this is the case when the disclosure would: (a) undermine the protection of public interests [as regards the financial, monetary or economic policy]; or (b) undermine commercial interests of BPE and/or its purchaser; or (c) affect the still on-going valuation 3. This is the valuation to determine whether former shareholders or creditors of Banco Popular would have received a better treatment under normal insolvency proceedings. The SRB is obliged to respect the independence of the valuer, Deloitte, and give the necessary time to complete the valuation. Therefore, we are waiting like other interested parties in this regard.
Moving on to the most recent case, as you know, the SRB decided on February 24th that resolution action was not necessary for the Latvian bank ABLV and its subsidiary in Luxembourg and therefore, the banks should be wound up under Latvian and Luxembourgish laws.
This case is still fresh and rather peculiar, thus we shall be careful in drawing lessons at this stage, and even more in generalising them. However, we already made some observations, which I would like you to take away.
First, this case is a vivid reminder of the fact that insolvency remains the primary route for many banks, even if they are under SSM and SRB remit. The route to take of course depends on the assessment of public interest first and foremost. For ABLV, the SRB’s resolution plan 2017 already indicated the lack of critical functions for the Member States or the Union as well as the absence of public interest and, therefore, insolvency as the preferred strategy.
More notably, this case highlighted the importance of harmonising banks’ insolvency laws. The common SRM framework for resolution is faced with 19 or more different insolvency procedures. The failing or likely to fail (FOLTF) assessment does not automatically link to the criteria for insolvency/liquidation. Only by raising national bank insolvency procedures to a common standard we can clarify the line between resolution and insolvency and eliminate wrong incentives. In addition, the “no-creditor-worse-off” evaluation, where -as I mentioned earlier- it is verified if shareholders or creditors would have received a better treatment under insolvency proceedings than in resolution, should provide the same outcome in all Banking Union Member States.
Within the Single Resolution Mechanism, we are working on National Handbooks, first to define how to implement resolution schemes in each country, but also looking at the national implementation steps for a decision not to adopt resolution, as in the Latvian case. This is a very complex work, which requires the utmost cooperation by National Resolution Authorities. And it will anyway not be comparable to a harmonisation of national insolvency practices, something that only legislators can deliver.
Finally, I wish to comment on the ongoing amendments to the resolution framework based on the SRB experience. We follow attentively the debates by this Committee on the banking package. And we noticed at least one common theme, albeit conjugated in different ways, and this is proportionality.
We undersign this principle, and follow it in our application of the resolution framework. Undeniably, it is indeed through legislation that the work of Resolution Authorities can and shall be steered and framed. However, we shall be clear that, if you want us to be proportionate, we need to have the necessary discretion. This applies in a number of areas: the quantity and quality of MREL, the deadline to comply with it, even the way to remedy the breaches of MREL.
The starting point for Resolution Authorities when assessing these elements is the resolution strategy and, even more, the resolvability of each individual bank in our remit. This is our key aim, what we measure, and what we get measured against.
While it is natural to expect us to be proportionate and explain our choices (which are developed with NRAs and explained to banks in bank-specific workshops), it would be dangerous to constrain the ability to tailor to the specific situation of each bank how much subordinated and/or non-subordinated MREL the bank needs, and by when. It would run contrary to the objective of proportionality and achieving resolvability.
As long as the necessary flexibility (e.g. to address risks to resolvability) is retained in the calibration of MREL requirement, without caps or constraints, and Resolution Authorities are empowered to tailor the remedies to breaches of MREL case-by-case, without automaticity, then we could agree on removing MREL guidance; this would also avoid further complicating the framework.
When it comes to streamlining the framework for setting MREL, we recommend to move from the current two-tier process, whereby the SRB determines MREL targets but then NRAs need to implement the SRB decision, to a one-tier approach, to enable the SRB to address decisions directly to banks. The two-tier approach does not add any room for discretion for NRAs, while it de facto leads to delays in the implementation of the decisions, different rights and obligations in different Member States, and the possibility to challenge the SRB’s decisions. Moving to a one-tier approach would increase operational efficiency of the SRBV and protect it from additional challenges. This, by the way, holds true for any decision on impediments to resolvability too.
Another key topic is the new moratorium tool for Resolution Authorities proposed by the European Commission. This is also included among the recommendations by the Court of Auditors. We recognise the need to minimise possible negative implications, but we think this is possible and the benefit of a new tool is clear. We see it as a “bridge" between determination of failing or likely to fail (FOLTF) and resolution, to be used only
as an exception. It would help to reduce the first mover advantage sparking bank runs and to provide time to prepare a resolution scheme, where necessary (for instance to get to the weekend). Also, it would help to harmonise existing tools across the EU and avoid future divergent national moratoria. But let’s be clear, this tool would help addressing challenges only if it has a broad scope by including covered deposits.
Coming to a conclusion, the recent audit and cases show that we stand on much more solid grounds today, but challenges remain for the resolution framework and its application. In terms of policy, time did not allow me to touch on other key issues, such as the need for EDIS and common backstop, the very important topic of liquidity in resolution, etcetera. But I am sure there will be the chance to come back on these issues in the Q&A session now and in the weeks ahead, when you can expect the SRB to be ready to support the work of this Committee.
Thank you very much for your attention!