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Introduction
Ladies and Gentlemen, fellow speakers, distinguished guests, good afternoon.
Today, we are lucky once again to have so many high-level and distinguished speakers as part of this panel. We have a key question before us today: How to make resolution work? There is no one answer to this question, there is no silver bullet. However, I am sure that given the range and quality of the panellists this afternoon, we will have some ‘food for thought’ as we continue the process of making every bank resolvable.
The SRB Chair, Elke König has often said that resolution planning is a marathon, not a sprint. This is very true. It is not something that we can expect banks to do overnight, at the flick of a switch. It takes time – banks need time to adjust to the new realities of resolution, but they must maintain a steady pace in order to reach the finish line. Regulators such as the SRB also need to advance at a steady pace.
To make resolution work, we have to do several things:
- we have to get on with the job of implementing the rules that our political masters have set out for us.
- We have to clearly communicate with banks what is coming down the line, and I think at this stage, banks know the direction of travel.
- And then we have also to assess what is working, and what still needs fine-tuning.
We work very closely with a whole range of partners, including industry and the other institutions. We are experts in resolution, sure. But we do not have a monopoly on wisdom, so we really value the input and feedback we receive. In this way, we can make resolution work together.
Theme of the Panel
So in this session, we have to deal with three items.
- legal loopholes,
- institutional implementation challenges and
- impediments to practice
Ladies and gentlemen, I’m conscious that we have an excellent panel of speakers this afternoon, so I don’t want to take too much time. If I may, I want to touch on just a few points that are important for the SRB in order to make resolution a reality.
Harmonisation
The first point concerns the need for further harmonisation of insolvency law in the European Union and for an EU administrative bank liquidation framework. the lack of a harmonised EU liquidation regime is an obstacle towards a fully-fledged Banking Union. With nineteen different insolvency frameworks in the Banking Union, the analysis of the insolvency counterfactual for a cross-border bank in resolution is a challenge, and results in diverging outcomes depending on the home country of the institution.
Liquidity in Resolution
The second point I want to make is on liquidity in resolution. The lack of a liquidity facility to finance banks in resolution is a key gap in the current resolution architecture. Following the resolution weekend, banks are going to be well-capitalised but could possibly lack adequate collateral to enter into secured-financing operations, which are going to be the only source of external liquidity for a resolved bank.
While the Common Backstop will cover all uses of the SRF, including liquidity in resolution, this would still not address the liquidity needs of a large bank – let me be clear about that.
We must look at eventually creating a new resolution liquidity framework for the Banking Union.
Improving resolvability from a financial continuity perspective is only one of the several dimensions of resolvability covered in SRB Expectations for Banks. This draft document was launched for public consultation last week, and I would encourage you to give your feedback through the SRB website, up until the 4th of December.
MREL / Banking Package
My third and final point indeed relates to those expectations - what banks themselves need to do in order to become resolvable. There are many strands of work, that we’ll no doubt touch in in the discussion in a moment, but one important area is that of MREL - Loss absorbing and recapitalisation capacity.
Among the resolvability elements, the Loss Absorbing Capacity represents the key one to a successful implementation of a resolution strategy. Every year the SRB set a bank-specific level of MREL – the requirement that ensures sufficient loss absorbing and recapitalization capacity to restore the banks’ capital position after resolution.
The implementation of the recently adopted Banking Package will have a direct impact on day-to-day resolution planning as it fundamentally revises the MREL framework. The Banking Package’s overhaul of the MREL framework brings significant changes to the quality and quantity of loss-absorbing resources, and so the SRB will update its policy accordingly, while working with our stakeholders.
The SRB intends to publish by the first quarter of 2020 its final SRMR2/ BRRD2 MREL policy, which will form the basis for MREL setting under the new framework.
The MREL framework is not cost-neutral for the banks, as they may need to restructure themselves or their funding structure to comply with the requirements. In particular, building-up MREL could be particularly challenging for banks that have no history in issuing unsecured debt in the wholesale markets. The SRB is fully aware of these challenges and has therefore consistently pursued a gradual approach to MREL – again in line with the ‘marathon not a sprint’ analogy. Our approach is to set appropriate transition periods tailored on each banks’ funding ability. Overall, we report that banks are taking opportunity of the favorable market conditions to issue MREL eligible liabilities. So the message to banks is clear - Do it now, while rates are favourable, because you are going to have to get in line soon anyway[1].
Conclusions
Ensuring resolvability is a process that takes time. The SRB needs solid, profitable banks in order to ensure solid resolution plans. However, we are now 11 years after the crisis, and we see that there is still much work to be done in order to get to the stage where we can confidently say that every bank is resolvable.
Thank you for your attention and I look forward to the discussion.
[1] In the first half of 2019 the gross amount of MREL issued at consolidated level reached €187bn [source: internal quarterly MREL monitoring].
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