Boštjan Jazbec at Deutsche Bundesbank Munich: Data information system requirements from a resolution perspective
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Ladies and Gentlemen, Good morning,
I have been allotted 40 minutes in the programme, but I will try to, in banking financing terms, give my speech a little bit of a haircut, since I know there has been a lot said over yesterday and today!
Before I get into the nitty gritty of data system requirements, I want to very briefly give you a little overview as to the work of the SRB, since not everyone is familiar with the SRB.
[Where the SRB sits in the Regulatory Framework]
The SRB and the EU resolution regime as a whole are now in place since more than four years, and we were created under the Banking Union – one of the cornerstones of the EU’s response to the financial crisis of 2008. And in line with the EU’s often glacial pace of introducing new policies, the Banking Union, true to form, is still not complete.
Yes, we have pillar one, the Single Supervisory Mechanism.
Yes, we have pillar two, the Single Resolution Mechanism, which of course the SRB belongs to.
But, we still lack a common European scheme to protect deposits, but we hope progress can be made soon on this.
[Purpose of the SRB]
So, what is the purpose of the SRB? Our mandate is to ensure the resolvability of banks in Europe, following the crash over a decade ago.
The very reason the European Union exists is for society’s stability. The very reason we exist is for financial stability… So our work is very much in line with the basic values and aims of the European Union – which is to promote peace and stability.
And if the SRB exists for financial stability, we exist also to protect the taxpayer. We exist so that ordinary people will not have to bail-out banks and pay for the mistakes of bank management. We exist so that pensioners can hope to have a pension and so that our young people can hope to have a job.
We saw what happened in 2008, with mass emigration, soaring unemployment, private debts becoming public debt - all because our banks were deemed too big to fail.
Now ladies and gentlemen, I don’t want to dwell on the past, but in order to know where we are going, we have to understand where have we come from.
Today, we have made very good progress on securing our financial system in order to protect the taxpayer from bail-out and to protect the wider economy from collapse, even though there is still more to do.
[Why resolvability is important]
Achieving resolvability of systemically important banks is very important for the wider European economy.
Resolvability means that banks are resolvable at all times – and not only at quarter/year-end. So we need to have reliable, up-to-date data that we can interpret, quite literally at the ‘flick of a switch’.
And that is the main message of my speech here today – we cannot have resolution, with up-to-date, reliable data available to us instantly.
So now, I want to take a look at data information requirements from a resolution perspective. There are three main chapters to follow.
[Data System Requirements]
- First, I’m going to take a look back at what we have required in terms of data reporting so far and what has been achieved;
- Then, in the second part of my speech, I will focus on our ongoing work at the SRB and the resulting data requirements;
- The third and final part of my speech will look at what’s ahead in the coming months.
[1. What data we have required to date]
So to the first point, what we have required so far.
The SRB can require banks under its remit, as well as their employees or third parties to which information has been outsourced, to provide the information for resolution.
The SRB has also the power to access information of entities under its remit that is available to the European Central Bank or national competent authorities. And exchanges of information with the SRB shall not be deemed to infringe any requirement of professional secrecy.
However, those that are the subject of an SRB’s decision are entitled to access the relevant SRB's file, according to the Single Resolution Mechanism Regulation. The exercise of this right by those who are subject to an SRB’s decision, however, is limited by the legitimate interest in the protection of business secrets. As a consequence, the right to access the file does not cover confidential information or internal preparatory documents of the SRB.
In general, Management Information Systems or MIS remains a key issue, as the ability to retrieve good quality data in a timely manner is crucial, amongst others, for valuation purposes and for bail-in implementation.
A bank’s MIS is essential before, during and after a resolution to provide the SRB with information. This data feeds into valuations that are pivotal elements of the resolution process, deciding whether or not a resolution is required and which resolution tool should be used, if a resolution is needed. Of course this requires bank management to invest in the necessary IT infrastructure, but expenditure can also help the banks day to day operations become more efficient.
[Differences in data requirements under the SSM and the SRM]
So, why don’t all the EU institutions ask for all their data together at once to cut down on data reporting requirements? The short answer is that we require different sets of data and at different times.
There are some important differences on data requirements between the SSM and the SRM.
- Bank supervisors look at banks from a going-concern perspective and traditionally focus on the asset side in order to identify potential solvability risks, whereas;
- Resolution authorities focus on the gone-concern perspective and in particular on the banks’ liabilities side. Before the SRM started its work, the available information on banks’ liabilities structure and, for instance, their ranking according to the national insolvency code was limited. As a first step, it was therefore necessary to define SRB’s reporting needs and to develop a set of standardised data reports to prepare the grounds for bank-specific resolution planning in Europe.
For instance, the SRB requires banks to report granular data as regards their liabilities side based on our Liability Data Report, or LDR for short. This template is very important for resolution planning and allows for detailed information on bail-inable eligible liabilities. The LDR also serves as a basis for the definition of MREL targets.
Another standardised template we have created is related to the identification of critical functions, where banks provide information on their economic functions. This self-assessment is required by EU law.
After the banks’ self assessment, the Internal Resolution Teams (IRTs) have to perform a critical review and, finally, decide whether a bank has critical functions for a specific country that have to be maintained in case of a bank failure. The information provided to us helps us determine whether a bank has critical functions, and of course we have to be able to assess that information to ensure consistency and coherence across approaches used by individual institutions in the Banking Union.
Another standard template for our resolution planning aims to provide a detailed overview of banks’ participation in financial market infrastructures (FMIs). It represents the minimum information needs concerning qualitative and quantitative information on banks’ use of FMIs and data necessary to facilitate bank resolution and FMI access. It is important for the SRB to obtain these data, for instance, in order to further understand the conditions for maintaining access to FMIs during bank resolution.
So far, we put a focus on the reporting of standard resolution templates on a year-end basis. in the futrue however, banks will be required to ensure their capability to provide these data upon request. Thus, banks have to further adjust their data information systems.
So, we have made good progress in just four short years, and we have received very good cooperation from the banking industry - but of course there is always room for improvement, in particular with the quality and timely delivery of such data. We hope therefore that in future years, these issues can be addressed. Now I want to move onto the second part of my speech, which is focused on ongoing work at the SRB and the resulting data reporting requirements.
[2. Current work at the SRB and the Data Reporting Requirements that flow from that]
Fours years into the SRB’s existence, we are now focussing on enhancing the content of every resolution plan. Alongside this, there are two major things happening that are changing the type and amount of data that is required.
The first major element is the recent revision of the legal framework of the EU resolution regime by law-makers. Our further work on achieving banks’ resolvability across all Member States will be framed by the so-called Banking Package. This package will trigger substantial changes of the SRB’s reporting needs and will therefore have an impact on data system requirements.
The BRRD2, part of the package, will introduce new reporting requirements, for which the European Banking Authority (EBA) is developing technical standards on uniform reporting templates. We expect that the EBA will finalise them by around mid-2020.
The SRB however needs to bridge the gap in the transitional period in order to facilitate a timely and effective transition towards the application of the new reporting framework. This means, we will frontload future EBA’s Implementing Technical Standards templates by launching a new data collection exercise in the transitional period. For instance, we will request additional data on loss absorbing capacity and on internal MREL, e.g. in order to set intermediate MREL targets. As such, 2020 will see a further development of regulatory standards, implementing acts and, notably, the preparation by the SRB, the NRAs and the banks under its remit for the application of the new rules.
The second major element that will impact our work is our decision to move from the 2 stage resolution planning process 2018/19 to a new steady-state process. What does this mean?
In 2020, the SRB will re-align all banks under its remit to a uniform 12-month resolution planning cycle.
This new cycle will start in April, with banks‘ regular data reporting based on 2019 year end data, and finish in March of the following year, with the approval of the resolution plan, including MREL decisions, followed by communication to the banks. This was necessary in order to take into account the new legal framework from 2020 with respect to our aim to ensure “fully-fledged resolution plans” and MREL decisions.
So the Banking Package and the new 12-month resolution planning cycle are two major changes that will impact on reporting requirements.
* * *
Now, back to our current priorities and the operationalisation of our bank-specific resolution strategies. Ensuring banks’ resolvability and the application of resolution tools at all times, necessitates additional requirements on data systems which cannot be captured by standardised data reports.
Resolution planning is an individual process that has to take into account banks’ characteristics and country-specific peculiarities to ensure that resolution strategies are feasible and credible and, furthermore, that the regulatory burden on banks is reduced, as far as possible.
Consequently, banks themselves are responsible and have to be proactive to adjust their data systems and bank-internal processes based on our guidance. Once established, banks have to provide evidence that their data systems are resolution-proof and that we receive all information we need in order to apply our resolution tools at all times.
It is difficult for this to happen overnight. The full operationalisation of our resolution strategies requires continuous improvements of banks’ data systems. In order to frame this process, the SRB has defined a general approach that will guide banks in the right direction.
As we increase our focus on the operationalisation of resolution strategies, we are currently also refining our quality assurance processes to ensure the consistent implementation and application of our policies, right across the Banking Union.
[3. Looking to the future]
Before I come to a close, I want to take a look at the future. What will be the SRB’s priorities moving forward?
[Expectations for Banks Document]
Well, the SRB will shortly publish a new document called ‘Expectations for Banks’. The name says it all – it is a document that outline what we at the SRB expect banks to do.
It sets out the actions banks under our remit are expected to undertake, in order to ensure an appropriate level of resolvability. This document will be published shortly and will then go for public consultation. We would very much appreciate your input once, the public consultation is launched in the coming weeks.
We want to provide banks with sufficient flexibility to improve their internal processes and data systems in a cost-efficient manner, so our ‘expectations’ will be phased-in over time through the definition of operational priorities.
For the 2020 resolution planning cycle, the phasing-in foresees three operational priorities for all SRB banks. These are:
- operationalisation of the bail-in tool,
- ensuring operational continuity in resolution, and
- maintaining access to financial market infrastructures and their intermediaries ahead of, and during resolution.
In the coming weeks, the SRB will communicate further information on these three priorities. Based on that and the general expectations, banks will have to start their work and adjust their IT systems.
For the operationalisation of bank-individual resolution strategies we will not rely on standardised templates. We will only communicate the general expectations and operational objectives which the data information systems have to fulfil.
To be even more precise on what this means for data information system requirements, I would like to provide an example:
The bail-in is a key resolution tool for us which is also a priority in 2019. The bail-in allows to write down debt – and thereby to absorb losses – and to convert debt into equity in order to recapitalize a bank which performs critical functions or which has to be maintained due to its relevance for financial stability.
In principle, we need two things:
On the one hand, we need sufficient bail-in eligible liabilities which can be “easily” bailed-in. This we ensure through setting appropriate MREL targets. On the other hand, we also have to make sure that banks can implement the bail-in tool and report complete, accurate and up-to-date bail-in data at very short notice. That means, if a bank fails on Friday close of business, the banks must submit all required bail-in data during the weekend. This is crucial, amongst others, to thoroughly prepare the SRB resolution scheme and the national implementing act.
Closely related to that is our requirement that banks have to draft bail-in playbooks which are internal documents that describe the operational steps to be performed by the bank in order to practically implement a bail-in decision, irrespective of whether the bail-in tool is used in combination with other tools such as the sale of business tool, the bridge institution tool or the asset separation tool.
It describes how a specific bank established its internal systems and infrastructure and how it defines the roles and responsibilities of the bank as well as the interaction with the resolution authorities and external stakeholders, such as the external bail-in implementation via FMIs.
Now, one could ask why the SRB does not define a standard template for all SRB banks? The bail-in implementation is a good example where we cannot formulate standardised data requests based on templates.
At the end of this year, we expect the first draft bail-in playbooks from all SRB banks. And we will continue this work in 2020.
At a later stage, we will request banks to perform dry runs on bail-in implementation in order to test, in particular, the readiness of banks’ data information systems.
The example “Bail-in Playbook“ should provide you with some background as to why we have chosen the approach I described beforehand.
In the end, only banks can ensure resolvability. And therefore they have to do their homework. We, as resolution authorities, can only set the framework and evaluate whether there are substantive impediments to resolution that have to be removed.
Ladies and gentlemen, I am coming to a close. Lunchtime is slowly coming into view, don’t worry!
We recognise that any regulation, and with it, the requirement to report data is a cost to industry. We recognise that, and we understand that banks have to establish additional internal processes and to adjust their IT infrastructure. We will be as flexible as possible, both in terms of timing and in specification, so banks should be wise and use that time to find a solution that best suits them.
Resolution planning is a bank-specific task and that we cannot achieve banks’ resolvability based on a one-size-fits-all solution.
Ladies and gentlemen, for good quality resolution decisions, we need up-to-date, reliable data available to us instantly.
Our end goal is simple. Quality, reliable data, that is delivered in a timely manner, or in the case of a resolution, that can be delivered at the flick of a switch. And speaking of which, I think it is time to flick the switch on this microphone and give way for the closing remarks. Just a word of thanks also to the SRB staff who helped prepare my intervention this morning - Silvia Branca, Matthias Späth and Seán De Búrca.