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Good afternoon ladies and gentlemen,
Thank you very much to the EBI for organising this event and for the invitation to be here. I am pleased to be able to address you, and update you on the SRB’s activities.
To say that these are challenging times is probably an understatement. Aside from the human suffering invoked because of the virus, there is the economic impact to be considered; and even more so now that we in Europe and the US seem to be in the midst of a second wave of Covid-19.
At the SRB, we must reflect the current economic situation in our approach, and adjust our tools, within the resolution framework. In order to promote financial stability and protect the taxpayer, it is more important than ever that all banks are resolvable.
In my speech today, I want to explore just how we can achieve these goals. I want to outline to you three key themes I will discuss this afternoon.
First, I will examine the current regulatory environment in Europe;
Second, I will look at the measures authorities have taken, as well as the work still needed on making banks resolvable;
Third, I will ask how we might see the unwinding of these emergency measures -and here you might have some ideas too! - and I will look at the medium term and what needs to be put in place to ensure financial stability in Europe and beyond.
[1. Current landscape / regulatory environment.]
So to my first point, a quick look at the regulatory environment. At European level, what we can say with certainty is that the measures implemented since the last financial crisis have paid off. We would be in a very different place today without those reforms. Politicians have put in place a new financial regulatory architecture and strengthened the financial framework, and bodies like the SRB continue to implement that architecture, in conjunction with industry.
I still consider the Banking Union a milestone, with its first two pillars, the SSM and the SRM firmly in place. The SRB is fully operational, and has built-up experience and expertise over the five years of existence. Every bank under the SRB’s remit has a decent resolution plan and our teams are constantly working to update and strengthen those plans.
In addition, the Single Resolution Fund was set up and is funded by banks’ contributions. It currently stands at ca 42 billion euro; 80% of its means are already mutualised. We are well on track to reaching our goal of 1 per cent of total covered deposits by 2023, which will be somewhere north of 60 billion EUR.
Of course, there is still work to be done to complete the regulatory architecture, and I will come back to that later. I’d now like to take a look at the emergency measures that were brought in since the start of the pandemic as well as areas banks need to focus on to get through these challenging times.
[2. Emergency measures, continuing to build resolvability and the job for banks.]
When the impact of CoVid-19 became obvious like others, regulators also reacted swiftly:
Financial authorities at EU level provided a rapid and coordinated response. The ECB, the EBA and the SRB together with our national and international peers worked hard to adapt to the situation.
The SRB’s approach during Covid-19 has been to support the banks where necessary with operational relief measures, using the flexibility in the resolution framework and building on the work done so far and the close contact between our teams and the banks. We focussed on pragmatic and flexible measures while making sure that our objective of reaching resolvability has not been compromised.
Together with the national resolution authorities, the SRB postponed less urgent information or data requests related to the upcoming 2020 resolution planning cycle.
We also took note of the measures adopted by supervisory authorities to provide capital relief to banks in support of the economy and are reflecting this in our 2020 MREL decisions. In addition, the SRB carefully monitors market conditions and of course the impact of Covid on banks’ balance sheets, and we will assess the need to adjust transition periods for the build-up of MREL. The good news is that at least so far the need for such adjustments is limited. The situation of the banking sector is better than many had initially feared.
On a wider scale in Europe, the EU SURE tool was created, borrowing limits for EU member states were suspended - temporarily at least - and governments right across the EU have been providing many different types of support for the real economy. Banks have a crucial role to play in keeping the economy turning, and the banks were and are playing this role currently. They are not part of the problem, but part of the solution. With that, I want to look at some of the areas of work ahead in banks in the coming months.
‘To fail to plan is to plan to fail’. This quote, often attributed to Benjamin Franklin, could be adjusted to read ‘to fail to prepare is to prepare to fail.’
We are confident that we have prepared.
I mentioned that we gave banks some operational leeway to reflect the challenges they, we all are currently facing. But we made it also absolutely clear that this is not the time “to take the foot off the resolvability pedal”. In fact, this is a time for driving ahead, making sure we continue to strengthen all the elements that are important for resolvability.
Let me look at a few of these now, starting with MREL.
MREL is central to resolvability. Banks must have enough capital built up in order for resolution to be a realistic possibility.
In the second quarter of this year, we observed MREL issuances amounting to 88 billion euro, meaning a total MREL stock of 2.3 trillion euro. New issuances declined by 4% compared to the first quarter of this year due to Covid-19. But the good news is that after the volatility of funding costs - of subordinated and senior bonds - and yield-to-maturity of subordinated debt peaked in March, the cost of funding actually decreased over the summer period until mid-September 2020. Clearly, banks must keep up the momentum on increasing MREL, especially in light of the new rules and deadlines in the BRRD2. There are no excuses
Expectations for banks
Our Expectations for banks documents remains the clear and transparent guide for banks in order to work on making themselves resolvable. It spells out the SRB’s position on resolvability up until 2023.
Based on the Expectations for Banks the SRB provides the banks under its remit with taylor made ‘priority letters’. These letters break down the objectives in the expectations for banks document, to ensure that banks receive a specific, tailored work program and of course feedback on the work they are carrying out to become resolvable. We have always stated that banks are best placed to make themselves resolvable. Where banks are not making sufficient progress/ where impediments to resolvability are not adequately addressed we will use the tools the BRRD / SRMR provide.
An area I would urge banks to focus on is that of non-performing loans. The SRB expects banks’ management bodies and senior management to stay focussed on ensuring the resolvability of their banks and NPLs are a big part of the picture.
The severe restrictions that had to be taken in recent months, and that might unfortunately be with us for some time, will have an impact on the economy in the quarters ahead.
Certain sectors are being severely hit and many businesses, in particular SMEs, are struggling. The impact on banks, that is to say, NPLs, will most likely take another few quarters to be felt, given the current high level of government support for business.
My message to banks is clear: put in place adequate measures to identify and deal with NPLs sooner rather than later. Put another way, banks must sort the viable loans from the unviable loans, as quickly as possible, so these loans do not start making a viable bank unviable. And, adequate and early provisioning for credit risk never harms.
I’m glad to see that the Commission, too, focusses on the topic with it’s action plan. Asset management companies/ bad banks can be a valid tool – in fact they are one of the tools in our tool box – but they are not the magic wand that make losses disappear and only very few asset classes benefit from being managed through them. SME and retail loans for example will not be improved by being pooled together.
In a world of many known unknowns, there is one thing we do know: Banks with weak business models and / or weak performance before the arrival of the pandemic will most likely not have become stronger in the meantime. So, while certain measures and support taken by European authorities might be necessary at the moment, any support for banks, or indeed any business, should only be for those with a sustainable business model post CoVid. Easily said, difficult to implement. This May become the real challenge.
So, what is the exit strategy? How are we going to move forward, what will the removal or reduction in the support measures mean for banks?
This takes me to my third and final point, the next steps – where to from here and what else is needed in the financial stability framework in Europe?
[3. From emergency measures to the next steps / Medium term]
The measures taken by public authorities were unprecedented, and yet at the same time one can argue that they were easy to take. It is easier to take decisive action to ward of the threat of a tidal wave. Time was of the essence in the early part of this year and almost all EU countries were affected within a few weeks of each other. Yet, we all know that these measures will eventually come to an end. We know that there will have to be an exit strategy.
Banks are clearly currently shielded from losses by the existing support for the real economy and it is also reassuring to see that the ECB’s vulnerability assessment has shown that banks can weather at least a mild to moderate storm. But we also need to consider an adverse scenario to be well prepared. And here the SRB’s work on resolvability kicks in. The good news is that we have a framework, the SRMR, that is fit for purpose -though of cause we hope that we will not have to use it too often. Recovery- and resolution planning provide a solid base for banks to act and if need be, for us to act.
In spite of this there is in some quarters a frankly bizarre discussion about ‘support measures” for banks. I think we need to be careful not to unwind the resolution framework we have worked so hard to put in place because of a confusion between emergency measures and aid for unsustainable banks or businesses. By the way, the Commission’s Banking Communication was last updated in 2013 and is in urgent need to be aligned with the bank resolution framework if we want to avoid wrong incentives, and to ensure they are aligned.
[3(a) The Medium Term]
Ten years have passed since the last crisis. We have put in place the Banking Union, but of course, there is still work to be done. I subscribe very much to the idea that we ‘should not waste a good crisis’.
Europe’s political leaders should use this time to realise that it is urgent we put in place the remaining missing pieces of Europe’s financial stability framework. I am speaking specifically about:
- a common European scheme for deposit protection;
- the backstop to the Single Resolution Fund;
- a fit for purpose Capital Markets Union; and
- harmonised insolvency regimes, or at least a bank liquidation framework,
Let me focus on that last point if I may.
The public interest assessment or PIA – i.e. the evaluation of whether a bank may be wound up under national insolvency proceedings or should be resolved to maintain its critical functions and protect financial stability – has triggered a lively debate. These criteria are laid down in the SRM Regulation and the SRB has published its policy on its website. In a nutshell: For the banks under the SRB’s remit the basic assumption is resolution; for smaller, less significant banks, insolvency will be the procedure at play if and when they fail.
There is a lively debate about the “middle class”, mainly deposit funded medium sized banks which some consider too big for being resolved under national insolvency procedures and too small for resolution. I sometimes wonder whether this is the right focus or whether the focus should rather be on the resolution strategy. In any case it cannot be that we consider banks too big for National Insolvency procedures but at the same time do not want to burden these banks with becoming resolvable
The SRB has been clear that the harmonisation of insolvency regimes for banks is a necessary end-goal. However, it is unlikely to be achieved in the short-term. The creation of a centralised administrative liquidation tool may be more feasible in the short-medium term, and would address many of the issues identified.
Such a liquidation tool could be created by amending the BRRD, SRMR and DGSD, and could provide for the powers to transfer (some) assets and liabilities in an orderly liquidation, much in line with current resolution tools. In the Banking Union, this could be entrusted to a central authority. As a first step, the SRB’s toolbox could be enriched with a “pre-liquidation tool”, allowing the application of resolution tools to save the good part of a bank without entering into liquidation, or without requiring a specific liquidation regime at European level. Let’s see what the Commission will come up with in their review of the Crisis Management Framework in 2021.
Finally, the ranking of creditors in insolvency is currently only partially harmonised: Directive 2017/2399 focused only on unsecured debt instruments in the hierarchy, while national differences remain on the ranking of the rest of the creditors, leading also to divergences in the protection of creditors and uneven loss absorption.
One thing we cannot allow happen in the coming months is that the ‘easy way out’ is put on the table for a certain cohort of banks. All banks under SRB remit must be resolvable, and the reason is simple: taxpayers should not be expected to foot the bill. We have a resolution framework in place that is fit for purpose.
There are many more initiatives worth mentioning, including the Backstop to the SRF, EDIS or CMU. But let me stop here.
Ladies and gentlemen,
While the resolution framework in the EU is by no means perfect, it is a framework that works: it has required banks to become better prepared to withstand shocks and it has allowed them to be part of the solution this time.
And we will continue to ensure we implement the provisions of that framework, to ensure it is robust going forward. We will continue to ensure that we have firm foundations for financial stability.