Dominique Laboureix's speech at IESE "The Challenges of the European supervisory and resolution framework"

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[Introduction]

Thank you Mario, and thank you to Anneli for her insight into the challenges facing the supervisory side of things in the Banking Union.

When accepting to speak at this prestigious event, I was confronted with two challenges:

1. Yo no sé hablar español;
2. Not to repeat what Anneli just said!

So, good afternoon ladies and gentlemen, ¡Buenas tardes!

It is a pleasure to be here with you in Madrid, in this wonderful city. Indeed, the Spanish government here in Madrid will, for the 5^th time, hold the rotating presidency of the EU in just over six weeks time, which makes it all the more special to be here.

I am very pleased to be taking part in this event together with Anneli. Both the Single Supervisory Mechanism, or SSM, and the Single Resolution Mechanism, or SRM, work hand in glove when it comes to ensuring financial stability.

In particular at the SRB, we work on ensuring every bank has a proper end of life plan in place, so that if the worst should happen, and your bank should fail, then we can manage that failure and safeguard financial stability, at no cost to the taxpayer. 

We have just heard Anneli give a very good insight into the supervisory side of the things in the Banking Union – certainly some food for thought and discussion in a few minutes time.

Now, I want to focus on the resolution side of the Banking Union;

1. First of all, I want to look at all that has been achieved to date;
2. Secondly, I want to focus on some of the challenges as I see it, for resolution in the Banking Union, including some of the reforms recently proposed by the European Commission;
3. Finally, I want to look at the SRB’s work and priorities for the coming years;

Then we will have the possibility to open up the floor for further discussions as Mario mentioned. 

[1. Achievements to date]

In less than a decade, we have made significant steps with the first pillar of the Banking Union. The SSM established high supervisory standards right across the Banking Union, and enhanced banks’ resilience.

We also have the second pillar, the SRM, which is composed of my own organisation - the SRB - and all of the resolution authorities at national level in the twenty one countries of the Banking Union. In Spain, the FROB and Banco de España are part of the SRM and I am pleased to see some of the Banco de España and FROB colleagues here this afternoon. The Single Resolution Mechanism has led to banks becoming not only more resolvable, but also more resilient. I think we have seen that in action over the past few months of market turmoil, at least so far.

The Single Resolution Mechanism was designed to deal with bank failures as efficiently as possible. The Sberbank and Banco Popular cases showed that, the SRB - in cooperation with other authorities - could devise a solution that successfully achieved all resolution objectives, including the protection of the taxpayer. That is exactly what happened here in Spain six years ago, when this country’s sixth largest bank was successfully resolved. There, three important things happened:

• depositors were protected,
• financial stability in Spain was protected;
• the Spanish taxpayer was protected. 

However, despite successes to date, there is still more to do – we must remain on our guard. That brings me to my second area of focus this afternoon.

[2. Challenges for resolution and a word on CMDI]

So what is needed in order to improve the European resolution framework that covers the twenty seven EU countries? What is missing to really make that framework work better?

Let me start firstly by eliminating two elements. I think we do not need to introduce a system for full coverage of deposits nor do we need a systemic risk exception. These are big topics of conversation over the Atlantic, but I am confident that we have the right balance on depositor protection, combined with all the other factors, to maintain stability.

In addition, the third thing we do not need, is any further calls for clarification of the stacking order in terms of what is bail-in-able. The stacking order is very clear as it is today in the EU, as recalled by our common press release issued by the SRB together with the ECB and the EBA, just after the Credit Suisse collapse. And we need to keep the AT1 instruments in this stacking order, as they provide for a useful funding for banks.

Instead of spending too much time on these, let’s look at the other important things that are actually required for the resolution framework to function better.

One of the things that will help our banking resolution in Europe is the European Commission’s Crisis Management and Deposit Insurance review.

1. The CMDI review will modify the EU framework, not only the Banking Union one. These are imperfect, but good proposals. If adopted, they will enable EU authorities to manage bank crises in a more efficient and harmonised way.

If we are to broaden the application of resolution, sufficient access to funding is needed. Deposit Guarantee Schemes could play a key role here, and for the Banking Union, and it could ease the access to the Single Resolution Fund.  One thing I am sure of: the enlargement of the scope of resolution cannot happen without its funding.

1. Liquidity in resolution is the elephant in the room. Nothing new, but still an unsolved issue. Recent events in the US and Switzerland have shown that liquidity crises can happen fast – and be driven by social media and digital banking. The resolution framework provides the powers and tools to restore the solvability of failing institutions. However, it is not enough to successfully handle a resolution action. Even if a bank is well recapitalised after the resolution weekend, it will probably suffer liquidity stress for a number of reasons. The first is that of liquidity outflows: depositors may withdraw their money and creditors terminate their operations with the bank.  The second is difficulties in accessing market funding - private counterparties will likely be reluctant to deal with the bank in the immediate aftermath of a resolution, at least on an unsecured basis.

Secured funding, either with private counterparties, or more likely with central banks, will play a key role for funding in resolution, but enough collateral in both quality and quantity is not necessarily available in all cases.

If we do not have enough liquidity to handle a resolution, then we remove the option of resolution as a tool to preserve financial stability in the European Union.

The current framework is designed for crisis coming from credit risk, not for a crisis resulting from these new sources of risk, and even more, the framework is already not easy to implement for sanctions, anti-money laundering or even a bank run driven by social media.

And, as I said, the EU and Banking Union’s framework does not entirely tackle liquidity in resolution. We must be careful to be ready to fight the next war in financial stability.

[3. SRB’s work and priorities for the coming years;]

Allow me please to look at SRB’s work and priorities for the coming years – this the third and final part of my speech this afternoon. Here again, it is all about the challenges ahead of us.

As you may be aware, this year, the SRB is reaching a number of key milestones.

• We have put in place resolution plans for all our banks;
• The SRF will reach its target amount at the end of this year;
• MREL continues to be built up;
• And banks are reaching the target date for the implementation of our Expectations for Banks;

The milestones we are reaching could be considered phase one of the SRB.

However, after eight years of existence, it is time for the SRB to enter into phase two.

I want to see how the SRB could function and deliver better. We have undertaken a strategic review this year. We have launched surveys, thank you to those who answered them. With them, we will develop a new plan to take the SRB from 2024 until 2028. This will better equip the SRB to deal with the various challenges and to ensure banks can be resolved.

While in phase one, the focus was rightly on putting resolution plans into place, in the coming years, the SRB must shift its focus to make sure that resolution plans can be put into practice effectively. So, what does this mean?

This means pursuing all our core tasks, obviously, but on top…

This means testing and checking that the resolution plans actually work in realistic simulations; also taking into account that in the Banking Union, we still have a number of national specificities, in particular due to the lack of harmonization of the normal insolvency procedures.

This means having on-site inspections at banks premises;

And this means we have to keep our eye on a whole range of topics that that could impact our work and/or banks resilience.

It is all about being ready to act under all circumstances. To be ready means that all the stakeholders are ready starting by the banks themselves. The work headed by the IRTs is exactly about that.

[Conclusion]

Now, I’ve already spoken for quite a long time. When it comes to banking resolution in Europe, we have made good progress, of that there can be no doubt.

We have a good SSM – and we have excellent cooperation with Anneli and the team at the ECB in this regard.

We have a good SRM too, and I want to thank again our FROB and Banco de España colleagues for all of their hard work and cooperation;

We have, I hope you will agree, a good working relationship with the banking industry in particular the Spanish one. I want to see that continue.

And we also have a good set of reforms on the way, to help improve the existing framework. It is a pity not to have the 3^rd pillar of the Banking Union in place, but I am sure the topic will come back as I think it is necessary, more than ever after the recent crisis cases.

All in all, a number of challenges are still in front of us but our commitment, dedication to tackle them will give us the possibility to preserve financial stability in Europe.

Thank you.