[Check against delivery - 14 March 2024]
Good evening, ladies and gentlemen, I would like first to thank Ian for inviting me to speak in this forum and Jerome for hosting this event.
Tonight, I would like to give you some insights of how the SRM’s new strategy for the coming years will have an impact on your work, on what’s next for MREL and share some thoughts on our lessons learned from the recent turmoil.
A. SRM Vision 2028
Some of you may have attended last year’s dinner. In that occasion, Sebastiano Laviola, one of our Board Members, sketched out what our new strategy – then in the making - would look like. Now, that strategy is ready and I would like to discuss with you how it will impact yours and your teams’ interactions with the SRB.
The SRM vision 2028 is a new milestone in the SRB’s life. It aims to help us dealing with future risks and to ensure that we are ready and resilient to meet the challenges of the road ahead.
Let me focus on two key areas of our new strategy: crisis preparedness and transparency.
Crisis preparedness
We want to ensure that your banks are ready for resolution. To do so, we will work further on testing your capabilities to handle a crisis and will perform more deep-dives and on-site inspections.
a. Resolvability testing
Resolvability testing is not an entirely new workstream. We have started testing some of your capabilities since a couple of years already. This year, for instance, all banks under our remit with a resolution strategy have been asked to test their liquidity and valuation capabilities.
However, what will change, going forward, is the amount and the variety of tests that your teams will have to carry out. In the next months and years, we will start asking you to systematically test all resolvability dimensions, principles and capabilities.
Let’s be clear, this testing may require a review of internal governance procedures and investments from banking groups. These investments will carry relevant value in terms of operational readiness in resolution, and financial stability.
The SRB will publish guidance for banks on its expectations on resolvability testing. This guidance will be subject to a public consultation.
The SRB and NRAs will develop multi-annual testing programmes for banking groups. You will know, well in advance, what tests will need to be carried out and when. These bank-specific programmes will cover three years, and will be updated yearly, on a rolling basis. They will also take into account other engagements such as deep-dives, on-site inspections and workload coming from the supervision. The topics will be based on the specific needs of each bank also in light of the resolvability and SREP assessments.
Banks will have to incorporate these multi-annual testing programmes in their overall governance structure for resolution-related topics.
There will be an impact on your resolvability assessment, of course. As you know, on a yearly basis, the SRB assesses how banks have progressed towards resolvability. The results of the testing will be used to support our resolvability assessment. It will provide comfort that capabilities are not only there on paper but are readily operational in crisis time.
b. Deep dives and OSIs
Talking about deep dives, from 2021 to 2023, the SRB conducted 45 deep dives on 32 banking groups. Deep dives will be an important component of our new strategy. They are a very effective mean of obtaining in-depth information on the readiness of a banking group. The SRB intends to continue to organise regular deep dives, whilst extending their scope.
We will also launch our first round of on-site inspections. We will start small - with a few banks. We will then expand over time our capabilities and, in turn, the number of inspections that we carry out per year.
To bind it all together, at steady state, the outcome of testing exercises will be one of the drivers for the SRB to decide whether to conduct deep dives and OSIs – a true risk-based approach.
2. Transparency
Let me discuss, now, very briefly another dimension of our strategy that we are already implementing.
We strive for a more transparent SRM. This is why I am keen to attend events like this one and also why our conference was all geared towards giving visibility on our future plans.
Our openness does not stop there. We want to give you full clarity on our requests. This is why, we have started publishing a one-stop-shop list of consultations and requests to the industry on our website.
Another example of this new open and transparent approach is the MREL policy consultation (that you will find in the list I just mentioned). We are currently analysing your answers and we see already very valuable input.
B. MREL and CMDI
MREL
A sufficient and easily deployable MREL capacity is key for a successful resolution. This said, MREL is not the only ingredient. In fact, MREL is only one of seven resolvability dimensions in our Expectations for Banks.
An important difference from the past is that, now, the vast majority of banks under our remit have reached their MREL targets - on time. Only a handful were granted an extended transition due to their specific needs. This is good news. Now, that most banks have reached MREL compliance, we can better shift our focus towards operationalisation and testing of our strategies.
This is why our MREL consultation does not seek a complete overhaul of the policy but simply minor adjustments. We want to have an MREL policy that is fit-for-purpose and stable - granting you maximum visibility to plan your issuances.
2. CMDI
Let me digress one minute here. As you can see, MREL is bound to remain the first line of defence for absorbing losses and ensure market discipline in a crisis. This, though, does not mean that we should not have a fail-safe - past MREL - to defend deposits. The Commission’s CMDI proposal goes exactly in that direction.
CMDI makes the resolution toolkit stronger and more flexible to handle the failure of smaller and medium-sized banks. CMDI expands the scope of resolution to a number of these banks. Critically, it also provides resolution authorities with the possibility to use DGS resources to fund the sale of middle-sized banks in crisis to a healthier peer.
In a nutshell, CMDI is not a paradigm shift and will not cost much. It is a targeted reform that helps protecting financial stability by making resolution more common and enriching resolution authorities’ toolbox, at a small price. We should all support it as it, simply, makes sense.
C. Lessons learned with a focus on liquidity
Lessons learned
Let me know discuss the lessons learned from the recent turmoil. I became Chair of the SRB at the beginning of last year. Just a few weeks into my mandate, we saw the turmoil of the US and Switzerland. A start with a bang!
[Since Sebastiano discussed the crises with you, regulators have worked very hard on these topics. In fact,] the Basel Committee and Financial Stability Board have published reports that extract lessons learned from this turmoil. To keep it simple, the review of the FSB concluded that, yes, the system worked but it also identified several implementation issues. In fact, FINMA was ready to act in case the UBS deal fell through. In addition, Credit Suisse was treated as one single entity and ringfencing along national borders was ever on the table. Finally, cooperation and crisis communication within the Crisis Management Groups (CMG) worked well, but only within.
This leads me to the implementation issues, for brevity, I underline only four of them:
The first one, indeed, is that we need to ensure that information sharing, also outside of Crisis Management Group (CMG), when relevant. The failure of a systemic bank could cause instability even in places where the bank does not operate directly.
The second one is that we need optionality for resolution strategies and tools - depending on the various scenarios, for example liquidity crises. At the SRB, we are already working hard on this.
The third one refers to the need to work further on the operationalisation of the bail-in tool in a cross-border context, where loss absorbing instruments are held by non-domestic investors. We need to ensure that, at bail-in time, we are fully prepared to comply with the relevant securities laws, such as the US one.
The fourth one is, the importance of liquidity in a crisis. Unsurprisingly, liquidity proved once more to be vital to restore stability.
2. Liquidity
We are acutely aware of the importance of liquidity in a crisis. This is why, since some years, the SRB has been working intensively with the banks to improve their capabilities to generate liquidity during a crisis.
In practice, the SRB has developed three principles that banks should comply with, in order to enhance the liquidity and collateral framework in resolution. In line with our strategy, we want you to be operationally ready.
First, banks should be able to estimate the liquidity and funding needed for the implementation of the resolution strategy and identify possible liquidity sources already during the planning phase (in “peace time”).
Second, banks should be able to report their liquidity situation in resolution (in “war time”). Due to the fast-moving nature of liquidity crises, it is of particular importance that banks are able to report this information at high frequency at both solo and individual level. Therefore, the SRB in 2024 expects, for the second time, that banks provide a standardised template during a liquidity exercise.
Finally, banks should be able to identify and mobilise assets that can be used as collateral to obtain funding during and after resolution. Mobilisation of a large part of banks’ assets, and in particular of assets that are not eligible for ordinary monetary policy operations, is especially relevant in resolution and is therefore the main focus of the SRB work with the banks.
As I am sure you are aware, regulators are debating on how to better ensure that banks have access to liquidity in a crisis. I am of the opinion that instead of introducing new ratios, as it has been proposed, we should focus on the tools we have.
Banks need to prepare themselves with an appropriate legal documentation to tap all the available liquidity sources in a crisis; I also believe that the suggestions on an increased prepositioning of assets could indeed be of help to reduce liquidity stress.
We want to work with other authorities, in a coordinated way, to test banks’ readiness and capacity to pledge assets in a crisis, including for instance to tap [the ELA or] the discount window. By creating a supervisory expectation and making it more of a routine exercise, we would hopefully help remove the stigma from this kind of operations.
Even if banks are very well prepared, we cannot rule out that their liquidity will not be enough in time of crisis. In times of need, our Single Resolution Fund stands ready to provide liquidity. The Single Resolution Fund has now reached nearly 80 billion euro (87 billion dollars), and its firepower will almost double if the revised ESM Treaty is ratified. I remain hopeful!
This leads me to my last point, and, I am sure, your favourite! The Single Resolution Fund has now reached its target level. So, this year, we will not collect any ex-ante contribution!
Thank you for your attention
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