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Speech by Dominique Laboureix at the European University Institute (EUI) - "Supervision and resolution: cooperation or conflict?"


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Ladies and gentlemen, first, let me tell you what a pleasure it is to speak to such a nice audience here today - in this beautiful venue.

As you perhaps know, like you, I also used to work within the SSM in the past. This is why the first pillar of the Banking Union has remained very close to my heart, even if today I work for the second one. Another reason to be happy to be here with you!

Also, before I start, let me congratulate those of you who graduated yesterday! 

To set the scene for what is certainly going to be an interesting discussion on SSM integration, I will touch upon the Banking Union’s recent achievements, SRM and SSM cooperation today and how that might look in the future. Finally, I will briefly touch upon what is missing for a complete Banking Union.

1. Recent achievements of the first and second pillar of the Banking Union

Let me start from the beginning. 

At the inception of the Banking Union, the SSM had the daunting task of harmonising long-standing supervisory practices and cultures across its Member States. Building upon the good work in these early days, the SSM developed into a world-class supervisor. 

This was in full display last year when our banks avoided the worst of the banking turmoil. The quality of the supervision was one of the key issues in the US and Switzerland. Not here!

The resolution framework and its implementation in the Banking Union were also two major brand-new steps. 

When the BRRD became law, supervision, and even deposit guarantee schemes, had been in place for a long time. Resolution started from scratch in the EU, and the SRB was created to implement this new framework. 

If we look at the past decade, we can see that we have made significant progress in establishing a well-functioning first and second pillars of the Banking Union. The SSM and the Single Resolution Mechanism established high standards and enhanced banks’ resilience while starting from very different positions. 

From this year, I think that we can safely say that the Single Resolution Mechanism is reaching a new phase - from build-up to maturity.

First, the Single Resolution Fund, our emergency fund that can be called upon to finance a bank resolution, has reached its target value of 78 billion euro, or 1% of covered deposits. It is now fully funded and mutualised

Second, all banks within our remit, large and small, except for a few special situations (meaning longer transition period for some banks), have reached their MREL targets, on time.

Moreover, besides their MREL buffers, under the SRB’s guidance, banks have also built important capabilities in all resolvability dimensions. This means that they are now much more resolvable, and, as a result, safer, than 10 years ago. The improvement is remarkable. However, much remains to be done, and I will return to this point later.

2. Cooperation

2.1 Cooperation to build trust

The banking crisis framework involves a number of stakeholders and authorities. When there is stress and pressure, relationships can come under strain. To make it work  we have to get used to work together and  have to cooperate both to prepare for crises, and deal with them should they arise. 

The progress I just described would not have been possible without the close cooperation and open communication with all stakeholders, starting from the colleagues at the ECB and national authorities.

In the European Union, we know a 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 and the Single Supervisory Mechanism at European and national levels. 

Of course, the communication and coordination work does not stop there. Our relationship with the SSM is critical. 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 counterparties in Frankfurt and beyond.

We are truly successful in dealing with a crisis if, and only if, citizens feel protected by their institutions at all times. For this to happen, all authorities need to work as one. Our work should be perceived as a seamless continuum spanning from national to EU authorities. From supervision to resolution. This is how we establish trust in our system! 

Let’s not forget that SSM and SRM are not silos. Progress on resolvability improves resilience of the banking system also in going concern. If you have any doubts about this, just consider how a layer of TLAC to absorb losses before depositors could have significantly mitigated the SVB bank run; depositors would have felt more protected and less inclined to withdraw massively their funds – maybe SVB would have avoided the worst. 

In the same way, for example, the work on risk management or liquidity that the SSM carries out every day is absolutely critical for banks to be resolvable. 

2.2 Our cooperation today

Let me give you a glimpse of the day-to-day interactions between SSM and SRB colleagues. First and foremost, we keep each other up to date, taking into consideration each other’s views. 

This starts from the top. Formally, the Chair of the SRB takes part in the Supervisory Board meetings for relevant topics, as an observer. The ECB in turn has a permanent observer status in all meetings of the Executive and Plenary Sessions of the SRB – our decision-making bodies. 

These more formal meetings are complemented by continuous informal interactions. Let’s just say that Claudia and I speak… quite often! Jokes aside, the SSM and SRB, for instance, have also organised a series of joint country visits to discuss with national authorities “as one”. For instance, we are coming back for a joint visit in Italy on 17 October. 

Our bank-specific teams have exchanges on a daily basis as part of our respective tasks. Joint supervisory teams and internal resolution teams consult each other on bank-specific issues, such as setting MREL and preparing recovery and resolution plans, on a continuous basis.

Our teams cooperate closely on horizontal issues. For instance, the SRB and SSM developed a joint liquidity exercise to ensure that banks report consistently on their liquidity capabilities for both supervisory and resolution purposes. Our communication teams also cooperate closely, holding joint events and amplifying our common messages.

Also, SSM and SRM secretariats have been discussing digital tools to support decision making and SSM and SRM middle management meet regularly to enhance coordination. 

Last example (but not least). Our cooperation on developing our pools of talent is also growing. For example, we recently set up a staff swap programme with the ECB. What I would like to achieve with these swaps is that SSM supervisors and our resolution experts integrate both supervisory and resolution dimensions in their respective approaches.

2.3 SRM Vision 2028 – How will it enhance the cooperation between SRB and SSM

Of course, the way we work together with the SSM will need to evolve over time, as we face new risks and new realities. Let me give you a hint of how our new strategy, SRM Vision 2028, will improve our working together. 

One of the first outcome of the strategic review is that SRB staff members will spend more time visiting banks premises in on-site inspections and deep dives. These exercises will need to be well coordinated between SSM and SRM. 

Also, we will organise more dry-runs, our regular drills in which we “wargame” a bank failure. Colleagues at the SSM are involved in these exercises. As such, more JSTs will have the occasion to take part in these useful exercises. Another important aspect is our work on sharing relevant data and streamlining and coordinating our requests to banks.

Our new strategy will also deepen integration with national resolution authorities, with the aim of building a common culture within the SRM. For instance, we are increasingly involving NRAs in the drafting of our policies from the very beginning. This is, of course, a lot of work for all parties involved but the gains in terms of integration are substantial. There is no need to spend more on this topic as it will be certainly covered in the workshop on SSM integration that will start in a few minutes. Our integration challenges are, in fact, very similar. 

3. A fully-fledged Banking Union – What is still missing?

As you can see, the SRB and SRM, together with the SSM, work very hard to ensure financial stability. However, we can only be as strong as the framework that underpins our work. This is why it is key that our policy makers keep developing and updating the resolution framework - our toolkit.

Today, we talked a lot about the first and second pillar of the Banking Union. But let’s not forget that “our house” is still missing one pillar, a European deposit insurance scheme.

In fact, a number of reforms are still missing. However, I think we can all agree that our political masters have charted a route towards a fully-fledged Banking Union. It is a step-by-step approach. Unfortunately, baby steps at times! But, nowadays, where do we stand?

3.1 CMDI and ESM treaty revision

Let’s start from the ongoing negotiations:

The crisis management and deposit insurance reform proposal – CMDI for short – can make the resolution toolkit stronger and more flexible to handle the failure of smaller and medium-sized banks. 

The ECB and the SRB have been vocal supporters of this reform. Together - another example of cooperation by the way - we have also been supporting the work colegislators on this package from the very beginning. 

This reform could be very useful. Let me state this again, resolution is a superior tool to liquidation when dealing with bank crises – this is why a broader scope of resolution remains a good idea. At the same time, we should be granted the necessary flexibility to smoothly execute resolutions also for smaller banks. Regrettably, the latest news coming from the Council is not entirely encouraging, despite reaching a compromise. In fact, we are not sure of the effectiveness of the Council’s agreed text.

Another ongoing negotiation, unfortunately, is the Common Backstop one – a potential credit line provided by the ESM to complement our financial means (the so called SRF) to handle a crisis. The ratification of the revision of the ESM treaty should be a “no-brainer” - as we keep reminding all the relevant stakeholders. As I mentioned earlier, our Single Resolution Fund is a powerful liquidity tool. However, the March 23 turmoil has shown that the liquidity needs of a bank in crisis can be immense. This is why the Single Resolution Fund needs to be backed up by adequate liquidity facilities, which will give confidence should we face a crisis. Nobody gains from holding this useful reform up.

3.2 Liquidity in resolution and EDIS

This leads me to those discussions that could be unlocked once CMDI and the Common Backstop are settled:

EDIS, the much-debated proposed European deposit insurance scheme, is still the missing third pillar of the Banking Union. EDIS, once in place, will ensure level playing field across the Banking Union. How can we honestly say to European citizens that we achieved a single market in banking if a depositor in Member State A is less protected (despite the alignment of legal coverage) than a depositor in Member State B, as there can be differences in the DGSs size and strength? We really cannot! The recent report on EDIS approved by the European Parliament’s ECON committee could be a clear signal to restart this debate. 

Equally, the absence of a public backstop to our liquidity facility is clearly something that our framework lacks. I am not too fond of the expression “lender of last resort”. This is because it gives the impression of good money being thrown after bad money. On the contrary, as our Swiss colleagues have demonstrated last year, a public backstop just consists of short-term loans that protect financial stability at a minimal risk for the taxpayer. The Swiss government even turned a profit out of the guarantees it has provided to UBS last year. 

Let’s not forget that having the same crisis management tools as our international peers (like the US or the UK) is a key prerequisite for our domestic industry to be competitive. 

4. Conclusions

Let me conclude. 

Resilience and resolvability are neither static conditions nor binary questions. Building resilience and resolvability is an iterative process requiring us to continually adapt to rapidly changing market conditions and emerging risks. 

Our common work - over time - will increase trust in the Banking Union’s crisis management framework, making us all even safer, more resilient and integrated. Trust, in my view, is what will break some of the issues that have been challenging the Banking Union since its inception – such as the “home / host” debate.

The final objective should be a fully integrated Banking Union, even if there is a clear legal separation between going and gone concern actions.

The last nine years of dialogue between the SRM and the SSM is a testament to how we can build trust working together.  

However, dialogue and cooperation do not always come easily. Possible conflicts are always “behind the door”. We have managed well so far. What is important is to remember that there is no supervision without resolution and vice versa. This is why we should always choose cooperation! 

For the sake of financial stability – that underpins all our economies – we need market players and citizens must trust our system. This is why we should all work together and, in parallel, push for our framework to be as comprehensive and up-to-date as possible. 

Thank you very much

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Recent speeches

Jun 7 2024
The speech at Goldman Sachs highlighted the SRB's key achievements, including the fully funded Single Resolution Fund (78 billion euros) and banks meeting MREL targets, the SRM Vision 2028 focusing on crisis preparedness, addressing new banking risks like cyber threats, and enhancing transparency. Dominique Laboureix emphasised the importance of liquidity in crisis management and supported the CMDI reform to strengthen the crisis management framework for smaller and medium-sized banks.