Check against delivery
Good morning ladies and gentlemen.
Thank you very much to El Economista for organising this event. I am pleased to be able to address you, and update you on the SRB’s activities, in these most challenging of times.
First this morning, a question to you. Did you ever find yourself in a situation where you have to take a decision, and the voice of your mother appears suddenly inside your head? That voice might be issuing advice, or a warning, or a wise saying.
Well, I can tell you that my own mother’s voice comes into my head from time to time. She used to say that the easiest way to pass a test was good preparation.
And right now, in the financial world, we are facing a series of tests. Preparation is vital if we are to pass these tests. We cannot delay these tests due to lack of preparation. Now, we must build on our work, and make final preparations. Regulators and industry have a role to play in this.
[10 years of preparation]
Thankfully, Europe has been preparing for potential upcoming tests for some time. We might have failed the tests laid out for us during the financial crash of 2007/8, but we have since dusted ourselves down and picked ourselves up.
We have put in place structures such as the Single Supervisory Mechanism and Single Resolution Mechanism. Yes, it is true that there are missing elements such as:
- a common European scheme for deposit protection;
- the backstop to the Single Resolution Fund;
- harmonised insolvency regimes, or at least bank liquidation framework, and;
- a fit for purpose Capital Markets Union;
but we are in a far stronger position now than 10 or even 5 years ago.
Europe has learnt the lessons from the last crisis and put a framework in place that can deal with threats to financial stability. And this will help us to manage the inevitable economic fallout of the pandemic. Now we have to implement that framework, while of course being agile and flexible where required. Nothing is so good that improvement cannot be made, of course, but as regards our immediate focus, it must be on the upcoming tests.
[A quick, measured response to Covid / SRB’s response]
I want to step back a few months, and look at the response to Covid since March. I think that financial regulation at EU level provided a rapid and coordinated response. The ECB, the EBA and the SRB together with our international peers worked hard to adapt to the situation.
The SRB’s approach during Covid-19 has been to support the banks where necessary with operational relief measures, using the flexibility in the resolution framework and building on the work done so far and the close contact between our teams and the banks, including of course the major Spanish banks. We took pragmatic and flexible measures following input from industry and our financial stability peers.
Together with FROB and the Bank of Spain, and all the other the national resolution authorities, the SRB postponed less urgent information or data requests related to the upcoming 2020 resolution planning cycle. In light of the challenges posed by resource constraints and adverse market conditions, we remain ready to address any issues in relation to specific requirements with banks on an individual basis.
We also took note of the measures adopted by authorities to provide capital relief to banks in support of the economy and will reflect this in our 2020 MREL decisions. In addition, the SRB carefully monitors market conditions and of course the impact of Covid on banks’ balance sheets, and we will assess the need to adjust transition periods for the build-up of MREL. The good news is that at least so far the need for such adjustments is limited.
We have been doing all of this, without compromising our ongoing focus on resolution planning, with the aim of making banks resolvable. The direction of travel is clear, and the expectations of the SRB for banks are equally clear, as laid out in our aptly titled ‘Expectations for Banks’ document. We have been, and we will continue to be, flexible to a certain extent, but the work on making banks resolvable has to continue. Covid does not change this direction of travel. In fact, now more than ever, as we enter into uncertain times, we must ensure that every bank under the SRB’s remit is resolvable.
[Challenges / Priorities in Spain]
Looking a little closer at the impact of Covid-19 on the economy, it goes without saying that the severe measures that had to be taken in recent months, and that might unfortunately be with us for some time, will have an impact on the economy in the quarters ahead. Certain sectors are being severely hit and many businesses, in particular SMEs, are struggling. The impact on banks, that is to say, NPLs, will most likely take another few quarters to be felt, given the current high level of government support for business.
My message to banks is clear: please put in place the measures to identify and deal with NPLs sooner rather than later. Put another way, banks must sort the viable loans from the unviable loans, as quickly as possible, so they do not start making a viable bank unviable. And, adequate and early provisioning for credit risk never harms.
In a world of many known unknowns, there is one thing we do know: Banks with weak business models and / or weak performance before the arrival of the pandemic will most likely not have become stronger in the meantime. So, while certain measures and supports taken by European authorities might be necessary at the moment, any support for banks, or indeed any business, should only be for those with a sustainable business model. Easy to say, but tough to implement.
I note, with interest, the recent initiatives to consolidate the banking sector in Spain but also elsewhere. If done correctly, this can lead to economies of scale, and make investment in new digital technologies – just to mention two aspects - more efficient. Consolidation can be a good thing – if done well. I might even go a step further and strongly encourage those engaged in ,or contemplating such transactions, to consider explicitly the path towards achieving resolvability in their business integration plans, and discuss them with the resolution authorities on a proactive basis. A lean and transparent structure is a plus for running a successful business and it is a clear requirement for banks to be resolvable – thus focussing on these topics is a win-win.
The banking sector in Spain has made great efforts in recent years to become more resolvable. It is banks themselves that best know their own business, and so they are best placed to make themselves resolvable.
Much has been done to bolster resolvability in Spain, so credit where credit is due, if you’ll pardon the pun! However, there is still much more to do. The SRB expects banks’ management bodies and senior management to stay focussed on ensuring the resolvability of their banks.
Ladies and gentlemen,
I am coming to a close. While the resolution framework in the EU is by no means perfect, it is a framework that works: it has required banks to become better prepared to withstand shocks.
And we will continue to ensure we implement the provisions of that framework, to ensure it is robust going forward. We will continue to ensure that we have firm foundations for financial stability.
As mentioned, there are still parts of the framework outstanding, but today, we can say that banks are part of the solution for economic recovery in Spain and across Europe - how exactly they can best play that role is up for discussion, but I have no doubt the virtual room is filled with people who have very many good ideas!