Check against delivery
Good afternoon, and thank you for inviting me to join today’s event. This is my second time at the European Financials Conference organised by Morgan Stanley.
The title of this session, “Towards Resolution Readiness”, also represents the journey undertaken by the SRB since its establishment, in 2015, until today.
In a nutshell, our job is simple: to promote financial stability in Europe and beyond, and do so, while protecting the taxpayer. But it is only simple in theory !
We promote financial stability and protect the taxpayer by ensuring that each and every bank under our remit is ready to be resolved at a moment’s notice, should the need arise. I will speak about our most recent resolution case in a moment.
Exiting COVID-19 and the invasion of Ukraine
A few weeks ago we were discussing about the exit of our financial system and real economy from the Covid-19 pandemic, but then the war in Ukraine has started with an unfolding human tragedy there. Before providing a few reflections on the latter, let me provide a short overview of the state of the banking system.
Thanks to the successful coordination of fiscal, monetary, and Banking Union authorities during the pandemic, the euro area banking sector is well capitalized. CET1 ratio was 14.8% at the start of the pandemic and even increased further since then, reaching 15,4% in Q3 2021. Concerning MREL buffers, the SRB has monitored the build-up of MREL stocks, and we expect most of the banks under our remit to be compliant with the intermediate MREL target, the first binding target since the adoption of the resolution framework. Despite the pandemic, 2021 was a strong issuance year; total issuances amounted to EUR 216.7 bn, driven by favourable market conditions. In Q3 2021, the average shortfall against the MREL binding intermediate target including the CBR was limited to 0.07% TREA (or EUR 4.9bn) for resolution entities. The SRB closely monitors MREL levels for all banks under its remit, publishing an MREL dashboard on a quarterly basis on its website.
The build-up and safeguard of adequate MREL resources and a sound resolution framework are even more important during difficult times, as they are key to withhold shocks and support economic recovery.
From a financial perspective, the banking sector must address the geopolitical risks triggered by the invasion of Ukraine by Russia. The fall-out of the conflict has now taken the centre stage. The direct exposures of the EU financial sector to Russia are limited and seem manageable, but the impact of the war could be larger than expected, reflecting supply chain disruptions and second round effects through higher prices and costs. Between end-February and early March the SRB had to intervene with regard to Sberbank Europe AG, which was assessed as “failing or likely to fail” by the European Central Bank. The Russian-owned bank experienced sudden deposit outflows in consequence of the reputational impact of geopolitical tensions.
The SRB is competent for the entities in the BU, Austria, Slovenia and Croatia. It confirmed the ECB assessment and issued a 48 hours moratorium, in order to be able to decide the best course of action according to the legislative provisions. The SRB adopted resolution decisions for the Slovenian and Croatian subsidiaries, transferring their shares to other banks, while it decided that resolution was not in the public interest (therefore not necessary) for the Austrian parent, which has therefore been put into liquidation according to Austrian national law. The crisis case has shown that the resolution framework works. Indeed, the SRB has acted to protect financial stability and the public interest without using public funds. Depositors until EUR 100.000 in Austria have also been fully protected. The cooperation among all the authorities involved, at EU and national level, was excellent to deal with a complex cross border case.
2021 SRB’s main achievements and 2022-23 workplan
As the title of my intervention says, at the SRB we have been continuing our work towards crisis readiness, in order to be able to switch quickly into crisis management setting if need be, as the recent case has shown.
As Board Member in charge of resolution policies, let me first recall a few achievements of the past year: we have defined a tool to monitor, benchmark, and communicate on banks’ progress towards full resolvability, something we call the resolvability heatmap. The SRB is also considering the yearly publication of an anonymised heatmap – providing investors with an overview of the progress of the European banking system towards achieving resolvability.
In 2021 we also provided further guidance to banks on two important aspects of resolvability: separability for partial transfer tools and the solvent wind-down of trading books. We expect banks to prepare plans to facilitate the transfer of assets or legal entities during resolution, as well as the wind-down of their trading and derivatives books. In addition, we revised the methodology we use to decide whether a bank in crisis should be resolved (at the EU level) or liquidated according to national legislation, the Public Interest Assessment (PIA) test. Starting from last year, we consider the potential impact of the bank failure not only under an idiosyncratic scenario, but also under broader financial instability or a system-wide event, in line with the requirements of the legislation. Last but not least, we continued to test our resolution framework by performing dry-run exercises, to ensure that we are prepared during a crisis situation.
Coming now to the current year and beyond, the SRB has ambitious but realistic objectives. In the next month, we will publish targeted amendments to the MREL Policy, including, among others, the implementation of the modifications to the Capital Requirements Regulation related to resolution (indirect holdings of subsidiaries in a chain, or daisy chains, and clarification about the treatment of multiple point of entry strategies), the refinement of the methodology to address “No Creditor Worse Off” (NCWO) risks, the widening of the scope of material non resolution entities subject to internal MREL.
We have provided banks with common and individual working priorities for this year. The common ones concern a continued focus on separability and reorganisation plans. An asset transfer system needs to be in place not only in case of resolution via partial asset sale, but also in case of open-bank bail-in. After the bail-in, it is very likely that the resolved bank will need to spin-off some assets or sell some legal entities, and we want to ensure that appropriate preparation and information systems are in place. We will also continue to focus on banks’ capabilities in managing liquidity and funding in resolution.
In addition, the SRB wishes to see further improvement in capabilities of the Management Information Systems (MIS) of banks. A timely resolution also requires timely availability of resolution data, and this is not possible in case of less-than-optimal MIS capabilities. In other words, we expect banks to prioritize the management of IT systems for resolution.
Finally, a word on the possible incoming legislative review of the crisis management framework, including EDIS, the third pillar of the Banking Union.
We should use the occasion of the ongoing Crisis Management and Deposit Insurance review to upgrade our crisis management framework. We should achieve progress in the harmonization of the insolvency framework for banks. The recent crisis case has shown the existence of different national procedures. The liquidation of banks, just like resolution, could take place at the European level. We should continue to strive towards a European FDIC model with one fund to cover deposits and facilitate – under strict conditions – resolution. In order to be able to do this, we should revise the super depositor preference that today the national DGSs enjoy, and harmonise the conditions of the least cost test.
Notwithstanding the above, EDIS is still required in order to instil confidence, that is, to ensure depositors that they are equally protected independently of the country of establishment of the bank in the BU countries, in this way also mitigating the feedback loop between banks and sovereigns. We can take a staggered approach, providing only a centralised liquidity mechanism at the beginning, but there is no doubt that a fully fledged common deposit insurance system should be realised if we want to have a fully functioning Banking Union. Recent discussions among Governments induce me to be optimistic.
So, I hope I have given you some food for thought and impetus for some questions. I look forward to our discussion.