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Introduction
Dear Chair, Honourable Members, ladies and gentlemen, good morning;
I want to thank you for the opportunity to address your committee, albeit remotely. First of all, I hope that you and your loved ones are safe and well at this time.
The Context of COVID
These are unprecedented times, as governments and parliaments take decisive measures to slow the spread of COVID-19 and save lives. Those measures are of course having a knock-on effect on other areas, including the economy. At this stage, we do not know the full and final impact on the economy. We do not know how long the pandemic will last, nor how quickly the economy will recover. COVID-19 and its economic impact in the medium term is a very large ‘known-unknown’.
This is also true for the impact on the financial industry and, in particular, on banks. The good news is, we have much firmer foundations in place across Europe today than during the financial crisis a decade ago. We have built up a certain level of resilience and, like all financial regulatory authorities across the EU, we at the SRB are closely monitoring developments. The decisive actions taken by national governments, the European Commission, the ECB and the SRB in recent weeks should make us confident that the banking sector can stand the impact of COVID-19. That being said, this is an unprecedented and evolving situation, so together with the SSM we are carefully monitoring all of the banks under our remit.
While for the overall industry we cannot yet say precisely what the impact of COVID-19 will be, we can say that this situation is not going to make banks that were already weak pre-COVID-19 any stronger.
Let me start with a personal and an operational comment first: I am really glad that the new Vice-Chair and the two new Board Members joined on March 1 so that we can tackle any challenge with a fully staffed board. The present situation has shown that the SRB is able to continue its work, even in exceptional circumstances, with almost all our staff working remotely for the best part of two months at this stage. Banks, too, have shown resilience. They are continuing to function in this unprecedented crisis-type environment. Despite the restrictions, the financial system continues to operate as normal, providing confidence to consumers and ensuring that essential services can continue to be provided.
Just as the banks have continued to function, so, too, the SRB has been able to carry on with our normal activities, in order to strengthen the resolvability of the banking system.
I’d like to address a few of those activities before reflecting on COVID-19 related topics.
Main SRB activities in recent months
Expectations for Banks
In early April, we published our “Expectations for Banks” document. This document is not a new set of policies, it simply compiles the SRB’s work until today in a single document. It expresses clear and concrete expectations towards banks on how they should make themselves resolvable in various domains. As such it provides guidance, best practice and benchmarking - for the banks and for the SRB’s assessment of banks’ resolvability. Considering best practice in risk management and governance, it is fair to say that the requirements spelled out in the “Expectations for Banks” should not come as a surprise to any responsible bank management.
Nevertheless it is a ‘one-stop’ guide for industry to help build resolvability. And let me re-iterate an earlier statement: it is for the banks to make themselves resolvable. Here the SRB is fully aligned with its international counterparts. It would be a myth to believe that a resolution authority could set and implement the relevant processes for each individual bank. The resolution authority can and will assess the adequacy of measures taken by banks, not more, not less.
Priority letters
Like in previous years the banks under our remit have received so-called SRB’s priority letters, an annual tailor-made letter, which emphasises the priorities each bank should focus on individually in order to make themselves resolvable. These priority letters use the “Expectations for Banks” as a new reference point. The clear guidance expressed by the priority letters will be followed by our assessment of the progress made. Based on this assessment the SRB will - if need be - trigger substantive impediment procedures, in case banks do not make sufficient progress on becoming resolvable.
To pre-empt a question that might be raised by you, let me explain why the SRB has not yet started a formal process to remove substantive impediments for any of the banks under our remit. We have always stated that resolvability is a multi-year-journey. The SRB thus started by pointing out concerns and asking banks to address these topics in their work programs step by step. In some areas we also have to acknowledge that relevant guidance first needed to be developed. So far we see the industry making reasonable progress in general, but rest assured that the SRB stands ready to use its powers where needed.
SRF
We continue working to build up the Single Resolution Fund. On the 15 April, the SRB Board decided that the amount to be collected for the 2020 ex-ante contributions from 3 066 institutions would be €9.1 billion. This means that by the end of next month, we will be on track to have collected about two-thirds of the final target amount of monies for the SRF, in total €42 billion. As a reminder, the target is approximately €60 billion plus by 31 December 2023.
Resolution Planning Cycle & MREL
A word now on the 2020 resolution planning cycle and why it is important in these unprecedented times. The 2020 cycle started last month. This year’s cycle will align resolution planning for all banks under the remit of the SRB to the same 12-month cycle again. Not only does this change implement the new provisions of the Banking Package, but we also believe that it will facilitate the resolution planning process for banks and improve the quality of the resolution plans.
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The SRB works closely together with all relevant authorities – the NRAs, the ECB and the Commission; but we are also working with our international counterparts in monitoring and addressing the COVID-19 pandemic.
We have adopted a pragmatic common-sense approach as required by current circumstances by postponing less urgent reporting and thus providing operational relief. As regards existing MREL binding targets, the SRB is taking a forward-looking approach to banks that may face difficulties meeting those targets before new decisions, as part of the 2020 resolution cycle, take effect. While being vigilant on the implementation of the current MREL decisions, our focus thus, aims at upcoming 2020 decisions with the updated targets. We asked banks to continue to make efforts to provide the necessary data on MREL for the upcoming cycle. I’m pleased to state that banks were able to comply. This approach regarding MREL binding targets is in line with decisions announced by other European authorities not to impede banks to continue supporting lending to households and firms and, therefore, the real economy in the middle of the pandemic.
So far, so good but, as I stated, the impact of COVID-19 on the financial industry is a large “known – unknown” today. However, the ‘imposition’ of tighter banking regulations since the last crisis a decade ago will stand us in good stead. In particular, the resolution plans, that are now inbuilt into banks’ business models, mean that overall the banking sector is more resilient. As stated in the past, resolution planning has a preventive component, too. With banks actively focussing on resolvability they will be far better equipped to weather a critical situation and thus avoid to fail.
PIA
In case a bank fails or is likely to fail the so called “Public Interest Assessment” is decisive for the SRB’s decision whether to resolve a bank. In the past the SRB decided in certain cases that banks that were failing should not be resolved and these banks were therefore subject to national insolvency procedures. These decisions were always based on case-specific reasoning, financial stability being a core consideration. It goes without saying that Covid-19 is an unprecedented situation and we will of course have to reflect it in our decisions, if need be.
A robust framework
The SRB tool box is sufficient to address failing banks and I firmly believe that the current resolution framework is fit for purpose – though of course nothing is so good that it cannot be improved. In any case, the SRB will always take a pragmatic approach to overcome new challenges. We are committed to ensuring that short-term constraints do not prevent banks from lending to households, business and the real economy while at the same time ensuring that banks make progress on the journey towards resolvability.
There is much discussion at the moment about further aid to be considered if and when banks get under financial stress due to the current unprecedented situation. This also includes a discussion of so called “precautionary recapitalisation of banks”. This tool has been used once in 2017 and triggered then some reflection to clarify and tighten it. Indeed, it is available within the legal framework, but only under strict conditions to avoid that it is given to banks without a sound business model to address legacy issues – it cannot and should not be turned into a bail-out in disguise. To be clear: the nature of the current crisis prompts extraordinary public support to the real economy. The need for such extraordinary public support being extended to the financial sector must be carefully assessed as a response to the adverse losses eventually caused directly by the sudden halt of the real economy without undermining the core objectives and features of our resolution framework.
There seems to be also some discussion about the need for a European Bad Bank. This is a concept that was floated in 2017 and we were more than sceptical at that time, and this has not changed. The reasons are manifold: starting from valuation and not ending with questions of management and disposal of such a mixed basket. In recent years some national bad bank concepts have emerged that look more promising to me; but even here numerous questions remain.
Outstanding issues
Dear honourable members, dear Chair, in this time of crisis, there are still a number of areas I would urge you to promote and encourage.
The occurrence of a sudden economic crisis on a large scale should be a vivid reminder that we must not lose sight of completing the Banking Union in so it can operate at its full potential. I’m sure that the completion of the Banking Union would in itself also account for an efficient response to the unfolding crisis by allowing bank lending to circulate on a truly cross-border basis. This would thus amplify the cushion for those businesses and households most impacted by COVID-19.
We still lack a European deposit insurance scheme and a credible solution for liquidity in resolution, while the operationalisation of the common backstop to the SRF is still pending. We also need to see the completion of the Capital Markets Union and a better alignment between the resolution framework and insolvency, including a common liquidation regime for banks under SRB remit and a harmonised procedure for withdrawing a banking licence. These are areas that need to be worked on and will help shore the European financial system in the medium to long term.
Conclusion
Dear honourable members, dear chair, we have seen the commitment and care shown by so many workers and volunteers right across Europe in these past few weeks as they work to save lives. Although our work is not comparable to that of those on the frontline, in our own way – we at the SRB, together with you – have a responsibility to the people of Europe to continue our work in a dedicated and diligent way. It is vital we continue with our work to promote financial stability and protect the taxpayer.
A firm foundation for financial stability is in place, but we have to continue our work to make sure that the foundation stays intact, in order to allow Europe’s peoples to come out of this crisis and return to normal life as soon as possible.
I wish you – and all of those listening or watching – good health.
Thank you.
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