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[Introduction]
Dear Chair, Honourable Members, Ladies and Gentlemen,
Thank you for the invitation to be here before your committee. First and foremost I want to say congratulations to each and every one of you. Not only have the peoples of Europe put their trust in you to be their representative at the European Parliament, but you have also managed to be elected onto one of the most dynamic and interesting committees in Parliament. Mr Chair, I’d like to congratulate you, also, on your reappointment to this role.
I look forward to working with you in the coming mandate. Together, we can build financial stability in the EU, while ensuring that our taxpayers never again have to foot the bill for a bank bail-out.
Dear Chair, if I may, I’d like to start - on this, my seventeenth visit to the ECON committee - with an overview of what the SRB does. Then, I’d like to give a brief synopsis of some of the areas where we have made good progress to date. Then, to finish, I will look at ongoing files and forward, to the key priorities and challenges for the SRB – although some of this information was in our recently published annual report, which no doubt you have read from cover to cover!
[The SRB’s Mission]
First a word on the SRB itself.
The creation of the Banking Union was the cornerstone of the EU response to the crash of 2008. The Banking Union contains three pillars, the first being the Single Supervisory Mechanism (SSM), the second being the Single Resolution Mechanism (SRM) and the third, which is still not in place, is to be a common scheme to protect deposits of European citizens, harmonised across the continent.
The Single Resolution Board (SRB) is part of the second pillar, the SRM, and we are governed by the provisions of the BRRD and the SRMR. The recent Banking Package improves that framework.
I’ll come back to our work in a moment, but first I want to say a word or two on the concept of resolution.
The idea of resolution is, put simply, to ensure that a bank that runs into trouble can be dealt with effectively, having the smallest possible impact on the taxpayer - in other words, no more bail-outs - and at the same time, causing the least amount of damage to the wider economy.
Most banks will fall under normal national insolvency proceedings in the same manner as any other failing business is dealt with. However, for what we call ‘systemically important’ banks - whose failure would have a ripple effect on the rest of the economy - we have the new concept of resolution. But it is the exception, not the rule.
Resolution is for the few, not the many.
Right from the beginning it’s important to note that resolution is not some kind of panacea to take away all the damage inherent in failing banks. Our job, as the Single Resolution Board, is to make sure that this process is managed fairly and that the damage caused by a mismanaged bank is kept to a minimum. Bail-outs are preventable with the right tools.
Indeed, the resolution of Banco Popular is proof of this.
[A brief look back at the main achievements]
We successfully dealt with our first Resolution case in 2017 with Banco Popular – protecting the Spanish taxpayer and ensuring stability in the financial system. In summer last year, we began the Right to be Heard process – which is still ongoing - in order to ensure full transparency.
Another achievement is the ongoing build-up of the Single Resolution Fund – a fund to ensure taxpayers won’t have to bail the banks and their bondholders out. The Fund today stands at just under €33 billion. It is on target to reach 1% of covered deposits by 2023, which would be somewhere around €60 billion.
Thirdly, we have developed resolution plans for all the relevant banking groups under our remit and we continue the work to strengthen and update those plans to ensure that banks become resolvable.
[Implementing the Framework]
More generally, now that the framework for the SRB is broadly in place, we are moving from policy development to action and implementation. We have worked with industry and the national authorities, putting in place policies and guidance documents to operationalise the resolution framework. In terms of ensuring banks make themselves resolvable, we focus on a number of core topics.
MREL is possibly the best known condition to making banks resolvable. Our MREL policy ensures that banks have sufficient funds to absorb losses and be recapitalised - thereby replacing the need for a taxpayer-funded bail-out with a privately financed “bail-in”. Ensuring sufficient MREL is one of our most important policies, but it is not the only thing necessary for resolution.
Other potential obstacles to resolution include:
- Group structures and operations – especially when they are complex and cross border.
- The lack of efficient and well connected IT systems to ensure the timely flow of accurate data.
- The issue of operational continuity – how can we make sure that there is continuity of operations in a resolution case?
- The lack of clear governance and communication. It is important that both internal and external communication is fine-tuned so that everyone understands what is happening – but all this requires time and resources.
Of course, these are issues at a macro level. The SRB’s work is also focused on issuing specific, tailored guidance to individual banks. The current resolution planning cycle runs over 2018 and 2019, but from next year, as we strive to get to the ‘steady state’, the cycle will be annual, even if the long consultation processes required under the rules make this a serious challenge. Our resolution teams have already communicated individual priorities for each bank as part of the 2018 / 2019 cycle. In the autumn, we also expect to set out a more general and comprehensive public outline of what are our resolvability expectations for all banks, which should further the general understanding of resolvability.
[Improving the Framework Going Forward]
Dear Chair, Honourable members,
As I said at the start, our very reason for existing as an organisation – our raison d’etre - is to promote financial stability, while protecting the European taxpayer. In the years to come, we want to continue that work – so what would our ‘wish list’ look like, in terms of improving the framework for financial stability?
- First off, we’d like to see the completion of the CMU. This is no doubt a core piece for the single market, but it is also key for the SRB. Banks need to strengthen their capital as well as issuing and maintaining the needed MREL. Banks have already come a long way, but still need to issue a considerable amount of liabilities to meet their MREL targets. This should be doable in a deep and liquid capital market in Euro, not just US Dollars.
- In terms of improving the financial stability framework – a word on the Risk Reduction Package. While this package contains many features that strengthen resolvability, such as the requirements regarding the quality and quantity of MREL, there are also certain provisions that have the potential to lead to frictions. The implementation of these highly complex new provisions will constitute a major field of activity in the near future. Nothing is so good that it cannot be improved. Our guiding principle should be clear competencies and strengthening the framework.
- In upcoming legislation, the Commission may undertake a review of the existing legislation, as envisaged by the legal text. In this case, we would count on all of you to support our cause in further strengthening the resolution framework and sharpen the tools in our toolbox.
- Next on the list we’d like to see the promised third pillar of the Banking Union become a reality. Reducing or ending the divergence of national insolvency laws is important, at the least having harmonised administrative procedures for banks going into insolvency. Within this context, the depositor guarantee scheme should provide the needed tools to liquidate banks, as well as being truly European. And to be ambitious: the FDIC model is one we might need to take a very close look at in Europe – it would be the logical next step.
- Liquidity in resolution is another area we’d like to see dealt with. It is a key gap in the current framework. The SRF could play a role in liquidity provisioning, but this role will be limited due to the SRF’s size both during the transitionary period and after the target level is reached. 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. Here concerted solutions that include central banks are needed.
- And last but not least on our ‘wish list’– we would like to see the development of a resolution framework for CCPs, as the largest banks under our remit are often clearing members of these CCPs and are therefore exposed to their tail-risk. This file should not be forgotten.
[Conclusion]
Dear Chair, Honourable Members,
We have made good progress, but there is much more to do. I am confident that we can work together to ensure we have a stable financial system in Europe and that we protect our taxpayers from any future bail-out. In the near future we also hope to welcome Bulgaria and Croatia to the Banking Union. This is proof that the Banking Union is working and desirable, even for those not part of the euro.
I am very much looking forward to working with you over the next five years.
I now look forward to questions from the Honourable Members.
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