Financial Stability Conference
Hungarian National Bank 25 March 2024
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Good afternoon, ladies and gentlemen, I would like first to thank Vice-Governor Virag for inviting me to speak in this forum.
In preparation of the interesting panel that will follow this introduction, I will give you some insights of our lessons learnt form the recent crises and on the elements that we hope will go to complement our framework.
1. Lessons learned
Last year, we witnessed the failure of three American regional banks, whose combined assets amounted to almost $550 billion. At the same time, we saw in Switzerland the demise of a G-SIB, which was in the end acquired by another G-SIB.
The authorities stabilised the situation both in the US and Switzerland. They protected financial stability with unprecedented measures implying also a support coming from public bodies. These events have prompted a range of questions about the adequacy of the prudential and supervisory frameworks and the credibility of the resolution regimes.
Both the Basel Committee and the Financial Stability Board, published in October 2023 reports presenting the preliminary lessons from these failures.
I will focus on the lessons learnt from a crisis management standpoint.
In terms of crisis management, the review of the FSB concluded that, yes, the system worked but it also identified several implementation issues.
Among the positive aspects, resolution planning and capabilities - coupled with enough loss absorbency capacity - provided a credible plan B to the UBS transaction. In addition, Credit Suisse was treated as one single entity. No ringfencing along national borders was ever on the table. A major improvement with respect to the past that was brought on by the framework and by the cross-border work of all authorities involved. This feat, only ten years ago, would have been unthinkable! Finally, cross-border cooperation and crisis communication within the Crisis Management Groups worked well. It allowed for thorough contingency planning in the build-up of the crisis.
This leads me to the implementation issues, for brevity, I will highlight only four of them:
The first one is that we need optionality for resolution strategies and tools - depending on the various scenarios, for example liquidity crises. Other strategies, transfer tools for instance, or a combination of strategies, could be more appropriate in certain situations. This, however, does not make bail-in less of a priority. Basically, we need to remain nimble, with backup options in our resolution strategies. We should be able to switch or combine tools to respond effectively to each situation. In Europe, the SRB is working intensively on the operationalisation of resolution tools and procedures, according to different scenarios. This is also done through dry-runs involving national authorities and other EU authorities.
The second 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. In such a case, compliance with applicable securities laws, such as the US one in the case of Credit Suisse, requires detailed preparation including potential disclosure of pro-forma financial statements to the market in the event of resolution. It is crucial that the main countries facilitate the recognition of resolution actions exercised by foreign authorities in other jurisdictions.
The third one is the importance of liquidity in a crisis. Unsurprisingly, liquidity proved once more to be vital to restore stability. With financial stability in mind, both the Swiss and the American authorities moved swiftly and decisively to provide liquidity. We are intensively working with our banks to be sure that they are able to mobilise all available collateral in times of need.
The fourth is that we need to ensure that information sharing, international co-operation for internationally systemic banks is further enhanced, including in cases where a resolution authority is not in a Crisis Management Group or where the CMG is not activated/non-existing. The failure of a systemic bank could cause instability even in places where the bank does not operate directly.
2. Communication
In the European Union, we know one thing or two about communication. Our system, with so many stakeholders, literally hinges on effective communication. This is especially important in times of crisis.
Within the Banking Union, we coordinate between the various authorities that compose the Single Resolution Mechanism at all levels. Most of our daily work is done is close cooperation with National Resolution Authorities.
Of course, the communication and coordination work does not stop there. For a number of the institutions within our remit, we also work with EU countries outside the Banking Union, like Hungary. Both in resolution planning -“peace-time” - and in a crisis - “war-time”- we strive to have, as much as possible, an open, direct and timely communication with our partners.
Banks operate across borders and a resolution is truly successful if, and only if, it preserves financial stability everywhere. For this to happen, all authorities need to work as one. Our work should be a seamless continuum spanning from supervision to resolution, from national to supranational authorities. This is how we establish trust in our system! This is why, for me, it is so important to visit European countries that are not part of the Banking Union. Our relationship with the local authorities is of the utmost importance.
3. Improvements to the European system
Speaking about trust, authorities can only operate within the boundaries of their framework. The fact that European banks were barely touched by the recent turmoil is a success of the current framework. Our framework is strong! This said, we should not be complacent and nurture our success by keeping our crisis management framework up-to-date. This is a key message to deliver in the country that will soon take the rotating Presidency of the Council.
The Crisis Management and Deposit Insurance proposal (“CMDI” for short) would indeed enrich our framework. CMDI increases the options and tools available to supervisory and resolution authorities for the management of a banking crisis and provides a pragmatic and efficient solution for the problem of mid-sized banks.
Indeed, CMDI introduces an alternative way of funding a market exit of the bank in crisis, if it is in the public interest. Resolution authority could tap Deposit Guarantee Schemes and possibly of the Single Resolution Fund, in lieu of depositors, to facilitate the sale of the ailing bank. By doing so, we would defend depositors without using taxpayers’ money. Losses from the banking industry would be confined to the banking industry.
The estimations published by the SRB show that the impact on industry funds would be limited, because MREL would be the first line of defence for the banks earmarked for resolution, and because of the relatively small size of the banks in question.
We are happy to see that the ECON Committee has found a compromise on this text. We are still analysing the impact of the final compromise amendments but I can already say that having a deal is an encouraging step forward.
Also on the liquidity side, some works remain to be done. 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 (SRF) stands ready to provide liquidity. The SRF has now reached nearly 80 billion euro (87 billion dollars), and its firepower will almost double if the revised ESM Treaty is ratified. [“I like to stay positive!”.] Yet, the liquidity needs of a global bank may go even beyond the SRF means. We stand ready to find a solution for these extreme cases. In this vein, given how critical liquidity is in a crisis, the SRB is also contributing to the FSB working group on the design features of public liquidity backstop mechanisms.
Finally, I dearly hope that in the next legislative cycle, perhaps already starting under the Hungarian presidency, the process of completion of the Banking Union is taken up again, even in the form of liquidity-only EDIS to start with. This hybrid model could be followed at a later stage by the introduction of loss-sharing provisions. This reform would encourage more cross-border banking and further strengthen competitiveness and resilience of the banking sector. Without these safety nets, it is very hard to remove the hurdles that stand in the way of the integration of our banking market.
Needless to say, a safer Banking Union means a safer European Union. We are all on the same boat, let’s not forget it!
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