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Introduction
Ladies and Gentlemen, Mr Tuohy,
Good morning and thank you for the invitation to be here in Dublin once again. I was here just two months ago, and next month the SRB has been invited to speak at the European Financial Forum in Dublin Castle. I am very pleased to be here, especially during these important times given the happenings across the Irish Sea.
And it is with great pleasure that I come here – Ireland is set for an uncertain few months and I think it is important to show - through actions and words - that whatever happens in the coming months, we will work with Ireland – and with you, the representatives of its finance industry - to ensure stability well into the future – no matter what actually transpires on March 29th. Sabine has already elaborated on Brexit, and you can rest assured that the SSM and the SRM are working hand-in-hand with the national authorities as this issue develops.
Coming back to today’s event – this title of which is the future supervisory landscape, which of course is not something that is always easy to predict. Although humans can’t easily predict the future, we are hopefully able to shape it.
At the SRB, we are tasked with helping to shape the future. We are here to help shape a future that protects the taxpayer from any future bail-out, while ensuring financial stability in the European Union and beyond. We are here to work with the finance industry to make sure it becomes more responsible in the decisions it makes. We are here to end the concept of ‘too-big to fail’.
And I think that the future we are helping to shape, is a future that will benefit citizens and industry, a future that contrasts with the events that took this country to the cliff-edge just over a decade ago. Those events have been well recounted, so I will not dwell on them too much, other than to say this: I am aware, as you are, of the disruption and suffering caused to both the Irish economy and to Irish society because of the financial crisis. Let us all work to ensure that this does not happen again.
A decade on from the crash, the European Union is still putting in place its response, which, as you may know, is the Banking Union. It is made up of three pillars – the Single Supervisory Mechanism, that Sabine has so eloquently covered, the Single Resolution Mechanism – where the SRB lies - and the third pillar, the European Deposit Insurance Scheme, which, we all hope (!) will be part of the future supervisory landscape at EU level in the not too distant future.
If I may, I first want to look at the role of the SRB, and give a little context as to where we fit into the overall regulatory structure in the EU, before moving onto some concrete policy areas for 2019.
Role of the SRB and the shift of the past decade
The SRB was set up in 2015 in order to create a single European authority responsible for developing and implementing resolution plans for banking groups in the euro area. The whole concept of resolution is a relatively new term. In fact, just ten years ago, the term ‘resolution’ had not even been coined, if you’ll pardon the pun!
A resolution was something you made at the start of the new year, but by around this stage of the year – two weeks in – resolutions would have already been forgotten! But let me reassure you, for us, resolution is here to stay. This year, all year, and for many years to come! Now that we have created the concept of resolution, the work of the SRB is really about developing and strengthening our resolution planning, and making sure that all plans are constantly as fine-tuned and up-to-date as possible.
Failure is normal
In assessing the role of the Single Resolution Board, it is important to note that if a bank fails, this must not be seen as a failure of the system. On the contrary, banks should be able to fail; the exit of failing firms in a free market system is normal and ending the concept of ‘too big to fail’ is one of the SRB’s key priorities.
However while banks might be private businesses in the free market system, we of course recognise the difference between them and other businesses in the free market economy because of their underlying roles in areas such as credit flow to other businesses. Therefore we must have measures in place to ensure that the ‘domino effect’ is minimised as far as possible – every financial institution must be resolvable, and in accordance with free market principles, it should be banks’ investors who bear the brunt of any failure – not the ordinary citizen. That might not be an immediately popular concept for industry, and there is of course a cost to the sector, but the result is far greater stability, which is good for the economy. I might also add that greater stability provides greater certainty for investors in the sector going forward. It’s important to have balance – balance between agile banks and clear regulation to ensure financial stability. Even though it is crucial that all banks are resolvable, we must remember that resolution is for the few, not the many. In most cases, insolvency will be the procedure at play.
Europe has seen a paradigm shift in the past decade; from taxpayer-funded bail-out – due to lack of alternatives – to the financially responsible tool of bail-in.
Role of the Industry in Making Banks Resolvable
The SRB is here to provide guidance to banks so that they can become resolvable. The industry over the past decade has become more responsible too, thanks to the new rules. It is you people, working in financial institutions, that know your institution best. You know how best to make it resolvable. We want to work with you – we do not want to impose a ‘one-size-fits-all’ type of regime – what is important for us is that we achieve resolvability for every institution.
The SRB sets the direction, but the banks that are responsible have already taken steps to make their bank resolvable. Yes, we issue guidance and monitor the progress being made across all of the institutions under our remit. But let me be clear, banks in Europe are being given the chance and the responsibility to make themselves resolvable. However, if they ignore this chance, the SRB will have no choice but to intervene. I am pleased to say that on the whole, the Irish have been playing their part. In the end, this means that you are choosing the most efficient way to become resolvable, since you are listening to our guidance, and then identifying and handling obstacles yourselves, rather than waiting for an outside force, such as the SRB to dictate the steps to be taken.
MREL – Latest Developments
I want to be clear: there is no silver bullet, no one element that will make banks resolvable. It is only a suite of measures combined that will make every bank resolvable. However, one of the fundamentals in making banks resolvable is of course the building up of loss absorption capacity. Only yesterday, the SRB published a new policy document with regard to MREL. In 2018, the SRB split the cycle for resolution planning into two waves. This has followed a transitional two-step approach to the MREL-setting process. This policy applies to the second wave of resolution plans which are those of the most complex groups. The first part of this two-wave process was published in November 2018. The first part covered banks that did not have binding targets – those without presence outside the Banking Union. We published the second part yesterday, and I want to say a few words on this now.
While this policy on MREL is based on the current legislative framework, the SRB is raising the bar in terms of banks’ resolvability and MREL targets to prepare the ground for future regulatory changes in the context of the “Banking Package” , recently agreed upon but not yet formally adopted by the co-legislators back in Brussels.
The SRB will therefore review its policy for MREL setting for further updates in 2019 on the basis of the publication of the Banking Package in the Official Journal of the EU, with the aim of charting a consistent path and preparing banks to transition to the new regime, as well as to reflect any change necessary due to those requirements potentially coming into force in 2019.
While the 2018 SRB policy follows a number of the elements defined in the 2017 policy, some new elements are added into the 2018 policy. There are three elements of note:
1. Location of eligible resources
2. Subordination
3. Setting of MREL at individual level
I’ll take a look at each of these in turn.
Location of eligible resources
First up – the location of eligible resources. Progressing from the consolidated approach counting all liabilities issued from entities of the same resolution group in the 2017 policy, a Point-of-Entry approach will now apply for liabilities other than own funds instruments. Only liabilities issued directly by the resolution entity will be considered eligible to meet consolidated targets. The amount of own funds instruments issued by the resolution entity or the subsidiaries within the resolution group that are recognised for meeting the consolidated CRR prudential requirements will continue to be included in MREL calculations taking into account the loss-absorbing capacity of own funds instruments located outside the resolution entity.
Subordination
Subordination is instrumental for making resolution strategies more credible and feasible. In order to improve resolvability by addressing ‘No Creditor Worse Off’ risk and to support banks in effectively planning their funding needs, the SRB now moves from informative benchmarks in previous policy towards determining binding subordination requirements for all banks with a consolidated target, at increased levels.
Subordination levels will be set based on a combination of a general level, applicable buffer requirements and a metric, taking account of the bank-specific nature of the assessment of ‘No Creditor Worse Off’ risk in the senior layer of liabilities.
Introducing MREL at individual level
Finally on the policy published yesterday, with a view to ensuring a sufficient quantum of loss absorbing capacity in all parts of the resolution group, the SRB starts issuing binding targets at the individual level to subsidiaries of banking groups, prioritising the most relevant entities. Calibration of individual targets generally follows the methodology for consolidated targets, taking into account the applicability of individual components of prudential requirements of the default formula at individual level, as well as specificities in subsequent adjustments.
While standard BRRD eligibility criteria apply, supplementary informative guidance on achieving internal MREL, aligned as closely as possible with eligibility for internal MREL as foreseen in the forthcoming Banking Package, is given to banks to enhance the internal loss absorbing capacity within the resolution groups and preparing banks for the future legal framework. Just to be clear: Banks need to build up the required MREL but they also need to develop the playbook on how to operationalise a write-down or bail-in.
Operational Continuity
Before I come to a close, just a few words on operational continuity. To ensure continuity of a banking group’s critical economic functions and core business lines, which is one of the key resolution objectives, it is necessary to maintain the parallel continuity of the services and contracts that underpin them, including the continuity of
- access to FMIs services for example payment systems, securities settlement systems and;
- (ii) financial contracts for example OTC derivatives, securities financing contracts.
Any resolution of a failing bank would fall to the first obstacle if the interruption of critical services cannot be prevented upon the bank is put in resolution.
Therefore, part of our resolution planning involves making sure that in times of crisis, operations can continue in as normal a fashion as possible. Irrespective of the service delivery model adopted, banking group are expected to structure their operational arrangements to facilitate the continuity of critical services in resolution. This, in particular, requires:
- Undertake a comprehensive identification and mapping of critical services to critical functions and core business lines and an adequate documenting of contractual arrangements and service-level agreements;
- Maintaining access to key operational assets (e.g. IT infrastructure) and mitigating key staff departing;
- Achieving resolution-resilient contractual service provisions;
- Ensuring financial resilience of service provision;
- Ensuring appropriate governance arrangements.
Now that we have resolution plans in place for all of our institutions, the work of the SRB has also begun to focus on fine-tuning each plan so that it is truly ready to be sprung into action at short notice. In this context operational continuity has been considered one of the priorities of 2018 resolution planning cycle.
With specific regard to the Irish context, it is worthwhile to mention that there are some domestic banks which have UK subsidiaries for which the PRA requirements on operational continuity apply since January 1st, 2019. However, the banks have taken an overarching group-wide approach in order to meet also the SRB expectations on operational continuity. The same approach is followed by UK banks with subsidiaries in Ireland where the SRB is the host authority, in order to ensure that operational continuity in resolution will be achieved on a group-wide basis and not just for group entities in the UK.
Conclusion
Ladies and Gentlemen,
I have given you a flavour of the work of the SRB in terms of MREL. I suppose there are other topics I could have addressed too, such as Brexit, although Sabine has already given you a good overview into that one. The third pillar of the Banking Union, the Backstop to the Fund or the need to harmonise our 19 different insolvency regimes would be other areas I would have addressed had time allowed, but perhaps we will get to some of those in the Q&A. However, as my time is about up, I will conclude.
I want to thank the BPFI for the invitation to be here today, and indeed, I understand that Brussel’s loss at the next European Parliament election, will be the BPFI’s gain, when MEP Brian Hayes will become the BPFI’s CEO. He has done some excellent work on the ECON Committee in the European Parliament and I am sure he will be an excellent addition to your organisation.
Thank you and I look forward to hearing the words of Ms Pelissier in a moment as well the questions and answers session that will follow.
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