[Check against delivery]
Good morning ladies and gentlemen,
It is a pleasure to be here with you in Basel and it is great to see so many familiar faces. We are more than half way through this high-level meeting, and yesterday’s discussions on the challenges facing financial stability in Europe, in particular the focus on digital challenges, are certainly important areas for our work at the SRB.
Yesterday was not only an important day in driving the financial stability agenda forward, it was also the day when we marked seventy-three years since the Schuman Declaration was signed.
In that declaration, Robert Schuman wrote that
“Europe will not be made all at once, or according to a single plan.”
He could just as easily have been making reference to the Banking Union!
Like Europe, the Banking Union is not something that is being created all at once, nor according to one single plan, but rather, it is being built, step by step, through concrete achievements and steps. Of that, I have no doubt.
[Introduction: achievements to date]
In less than a decade, we have made significant steps with the first pillar of the Banking Union. The Single Supervisory Mechanism, or SSM, established high supervisory standards right across the Banking Union, and enhanced banks’ resilience. I am pleased to see some of our supervisory colleagues here in the room this morning. Although our areas of work are different, as you and I both know, it is vital we continue to work closely together in the spirit of good cooperation.
We also have the second pillar, the Single Resolution Mechanism, or 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. This second pillar has led to banks becoming not only more resolvable, but also more resilient.
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.
These are remarkable achievements for a relatively young Banking Union. However, there is no room for complacency here. Look at the FDIC: despite over 90 years of a well-functioning bank failure management regime – recent weeks have shown that even a well-developed regulatory architecture can come under pressure.
Back in Europe, while we have made some concrete achievements in building and implementing the Banking Union in Europe, there is still more to do – and we must remain on our guard. That is why I am pleased to address you this morning on the topic of what is missing to complete the Banking Union.
In particular, this morning I would like to look at three areas, which are particularly connected to resolution issues; no surprise here, and a bit less connected to the supervisory ones:
- First of all, I want to look at what is needed in order to improve the European resolution framework that covers the twenty seven EU countries. What is missing to really make this framework work better?
- Then, I want to shift the focus slightly and look at what is missing within the SRB and the SRM more narrowly. What challenges do we face in order to be able to better preserve financial stability?
- And finally, I will look at what is missing more generally, perhaps what could be done outside the framework?
[1. What is needed to make our framework work better?]
So, onto the first point then, I want to look at what is needed to make our framework work better?
Let me start by eliminating two elements. I think we do not need to introduce a system for full coverage of deposits and a systemic risk exception.
Perhaps you will be surprised here. However, if we consider we have a framework which is strong enough (in supervision and resolution) to provide confidence, normally speaking, we do not need to go for these considerable changes, as they would entail real changes of paradigm: full coverage and/or systemic exceptions mean moral hazard and pressure for using public money, which are contrary to the aim of the EU resolution framework: ending too big to fail, plus financial stability without public support. I know the FDIC also suggested to enlarge the scope/size of the covered deposit accounts while not going as far as a full coverage: let’s analyse thoroughly what the effects, including indirect ones, would be first.
Another 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 (ECB, EBA, SRB) just after Credit Suisse. And we need to keep the AT1 instruments in this stacking order, as they provide for a useful source of funding for banks.
These are “distractions” from all the other important things that are required for the resolution framework to function better, and here I would like to mention three ideas. Let’s start by the CMDI review.
- The CMDI will modify the EU framework, not only the Banking Union one. To be clear, these are imperfect, but good proposals. If adopted, they will enable EU authorities to manage bank crises in a more efficient and harmonised way.
However, 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 they could ease the access to the Single Resolution Fund. One thing I am sure of: the enlargement of the scope cannot go without its funding.
- Liquidity in resolution is the elephant in the room. Nothing new, but still unsolved.
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. This is something that is missing in our EU resolution framework. Liquidity provision was a key element of resolving the crisis in both Switzerland and US. The lines provided by the Federal Reserve System in the US, and the Swiss National Banks were critical in order to manage the crisis in these jurisdictions.
If something similar were to happen in the Banking Union, the SRF would only be available to provide support for a resolution, and the SRF would not be able to provide the extremely high levels of liquidity provided by the Swiss authorities.
And, while I’m on the issue of liquidity, for the sake of avoiding repeating it in my second part, as far the Banking Union is concerned, we need the ESM treaty to be ratified so that the backstop to the Single Resolution Fund can provide confidence to the market in a time of turmoil.
- Another thing that is perhaps not sufficiently addressed in our framework is the agility needed to tackle new potential sources of financial instability. Are we given all the tools, powers and mechanisms to prepare ourselves for a cyberattack, for example when it hits banking and payment systems?
The current framework is designed for a 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.
[2. Elements lacking in the SRM]
I want to move onto my second topic now: elements lacking in the SRM. I won’t insist on the SSM, as it is generally considered as a well-equipped and well-functioning first pillar.
Let me start by what is not missing. One thing the SRM does not lack is trust between its key partner institutions. We enjoy a wonderful cooperation with the supervisor, the SSM as part of the first pillar of the Banking Union, and also with all of the NRAs that, together with the SRB, makes up the SRM that being the second pillar of the Banking Union.
- Despite that excellent cooperation, and despite the successful decisions taken on Banco Popular and on Sberbank, respectively in 2017 and 2022, we can all see that the SRM - and the BRRD more generally - do not always inspire full trust of our governments and statesmen and stateswomen.
We have to accept that while resolution in Europe clearly has shortcomings, what we have today is what Europe chose to put into place so that we can protect financial stability and at no cost to the taxpayer.
Therefore, when a bank gets into trouble, I urge those few who continue to look for a solution outside the framework to think about how to improve what we have, rather than looking elsewhere, using any excuse they can think of. The days of bail-outs have to be behind us.
Moreover, let me say that I am always a bit puzzled by the famous Home-Host issues, in particular inside the Banking Union, while, as we know very well, this Union means one single supervisor and one single resolution authority; from that perspective there is no reason not to recognize a single geography, as the BCBS rightly did in 2022 for calculating the GSIB surcharge.
If we have better and stronger buy-in from governments, we have improved cooperation and communication tools allowing us to face the challenge of misinformation on social media and the onslaught of fast withdrawals in the era of digital banking. The SRB depends on the buy-in of national authorities – all of them – in order to speak with one voice and to reassure the markets and depositors in a time of crisis.
Now heading the SRB, all my work will be about inspiring this trust we need in order to implement our framework and even more, to improve it.
- Then, and I know some of you are waiting for this one, there is the issue of a mutualised deposit protection scheme. It is perhaps on the political backburner for now, but I am deeply persuaded that we are missing a clear, coherent framework, that is unified and understandable by the ordinary saver, right across the Banking Union. I will not mention the name of this third pillar of the Banking Union, because I think we need a fresh start, but definitely, we cannot let the Banking Union incomplete.
- Finally, let me come back to the question of agility and flexibility. It is particularly true in the Banking Union that the number of rules to respect is extremely high (remember the ironic scheme drafted by Sven Giegold at the beginning of the SRMR). If we have greater trust in the resolution mechanism, we can have more flexibility and less constraints between the competing priorities. Here, I am thinking about things such as the 8% rule in order to access the Single Resolution Fund. Trust would give greater agility and allow us to tackle a wide variety of crisis cases.
[3. What is missing outside the framework?]
There are issues outside of Europe too, that could be tackled, in order to improve resolution, which is my third and final point - I promise it is a short one.
- Work is clearly needed on harmonising national insolvency procedures. Here, I welcome the work being done by UNIDROIT in highlighting the issues around having national insolvency procedures that vary hugely from country to country, even within the Banking Union and in trying to build a common approach that is acceptable by everyone.
- A second area that merits focus internationally, is how to tackle the risks embedded by certain actors that are still not really under the scope of any scrutiny. The issue of non-banking financial institutions is certainly cause for concern. Some of them are regulated, the insurance sector as an example, but others are much less. This is exactly the topic of the next panel and that’s why I will not develop it more.
Now, I’ve already spoken for quite a long time, and I hope that I have given some food for thought to our panellists for their discussion. On the Banking Union, we have made good progress, of that there can be no doubt. We have a good SSM. We have a good SRM. And we have a good set of reforms on the way, to help improve the existing framework.
For the SRB, we will continue to work to implement the existing rules, to ensure that if something happens this week, or this month, or this year, we are ready and able to implement a solution that will protect financial stability and at no cost to the taxpayer. That is our mandate and our mission, and I am pleased to work with all of you gathered here this morning to help make that a reality.