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[Introduction / Cooperation with the Swiss]
Thank you Peter,
First of all, thank you to the Swiss Finance Council for organising this event. Given the very international and interconnected nature of finance, and the importance of the financial sector of Switzerland globally, I am pleased to be part of this event.
In preparation for this event, I was reminded of the SFC’s tagline: Fostering international dialogue. Now, as we are forced to stay apart, it is more important than ever that we have that international dialogue and work together.
We know that while our jurisdictions have many differences in financial regulation, we also have many areas in common. And what is clear is that we all have the same objective: financial stability. In fact, I think, both Swiss and EU authorities have a vested interest in ensuring good cooperation, since the ripple effects of any major trouble in one region will surely be felt in the other. We saw that borne out in the last crisis of 2008 and I think that organisations such as the Financial Stability Board, based in Basel, have played a sterling role in promoting and fostering international cooperation.
I am pleased that we enjoy a very good working relationship with our Swiss colleagues, particularly with our colleagues in FINMA, who are of course also responsible for resolution in Switzerland. Indeed I hope we can build on this cooperation in the future.
Today, I want to address a number of areas in the next 15 minutes or so:
- First, a brief look on the view from the EU with regard to the first 12 months of the impact of Covid.
- Then, secondly the gaps in the EU’s financial stability architecture
- And finally, my third point today, and always the most difficult one: predicting the future, or at least, sketching the possible outlook for the remainder of 2021!
But one remark before I move to these topics: the invitation here today of the head of the EU resolution authority, as the first keynote speaker, should not be misinterpreted. While banks were the problem in 2008, we should always keep in mind that this time round, banks are and can be part of the solution and we will do everything to ensure that it stays like this.
[1. Dealing with Covid: the View from the EU]
So, to topic number one: How we have dealt with the past twelve months from the SRB’s perspective?
This week marks 12 months from when many EU countries began their first wave of lockdowns, which were necessary of course, to protect human life. Right across the world, these lockdowns were accompanied by massive government support – whether in Switzerland, the EU or further afield. We know that the fiscal policies implemented by governments were necessary and also shielded the financial sector from the CoVid impact, but we will now have to look at the impact on our financial sector as these supports are inevitably rolled back in the coming months. Businesses must prove to be viable in a post Covid world and, if this is not the case, then there is going to be an increase in NPLs, sooner or later.
Although in the EU, at the start of the crisis 12 months ago, there were calls for a suspension of certain regulatory measures, I think we should start by the simple fact that all the measures put in place since the financial crisis of 2007/08 were well warranted.
The irony is not lost on me that while some bankers were looking to suspend regulatory measures, they were also asking the ECB for exemptions so they could pay dividends, but that is just an aside.
The regulatory measures we have in place today have ensured, so far at least, that the banks, this time round, are part of the solution. To date, I think we can say that banks have weathered the storm well. The regulatory measures that were put in place in the Banking Union since the last crash have proven to work well and to be flexible enough to adapt to different economic situations. In the Banking Union, we now have a strong, well-crafted financial stability framework, even if there is still room for improvement.
The current European framework provides for some flexibility, but it is also a prudent one. Of course, you will all be aware that in the EU, we have now implemented the TLAC standard. This was introduced under the Banking Package, and the SRB released an addendum on this policy already in 2019. We have continued to detail our policies since then, in particular with regards to internal MREL and TLAC.
Now – as we begin to see the effects of the pandemic from an economic standpoint – is not the time for light touch regulation. Instead, it is time to redouble our efforts, working with the banks, in order to make sure that every bank is resolvable.
Our mission at the SRB is to promote financial stability and protect the taxpayer, working closely with our international partners such as our friends in Switzerland.
[2. Completing the financial stability architecture]
Let me move onto my second point – further enhancing the financial stability framework. Just as now is the time to ensure all banks are resolvable, it is also an ideal time to finish what we started on a number of fronts in terms of financial stability in the EU.
Work continues on the international level, including on Unallocated TLAC, where Mark Branson as Chair of the Resolution Steering Group of the FSB has been particularly active. This work has explored the possible use of unallocated resources at the parent level to recapitalise subsidiaries experiencing difficulties. Here, we are aware that the high levels of MREL and TLAC pre-positioning required under EU law may suggest that there will only be limited levels of unallocated resources at the parent level. And this clearly can be a concern. As resolution authority we are focussed on ensuring that resolution strategies work effectively, and retaining more resources at parent level depends on everyone’s confidence that those resources will be readily available when a subsidiary is in need. Here more work is clearly needed; the buzzword is “Home – Host – tensions”. There are other areas at the FSB level, notably bail-in execution and work on CMGs that should be expanded in order to continue to improve and fine-tune the global framework. Now is not the time to take the foot off the gas, let alone slam the breaks.
Within the EU, we must work to complete the Banking Union. The final major priority in order to complete the Banking Union will be the development of a common deposit protection scheme at EU level.
The other area the SRB would like to see progress on is the development of a meaningful Capital Markets Union to allow capital to flow easily right across the Banking Union. At present, different legal systems and other regulatory barriers make investing in another member state in the EU less attractive than investing in the domestic market. Clearly, this is anything but ideal for the EU’s internal market.
In the EU, we try to get the balance right for our circumstances, and the direction of travel needed for that is becoming ever clearer. In a recent op-ed, Axel Weber of UBS suggested we adopt a two-tier system, with a genuinely cross-border EU wide banking system regulated and supervised solely at the EU level and a layer of smaller banks subject to the current mix of national and unified EU rules. While I don’t want to comment on that proposal per se, he certainly tries to find an answer to the right questions and so it leaves a lot of food for thought, perhaps to be discussed in the panels today.
In Europe, we also need to see progress on a harmonised EU liquidation regime and harmonised insolvency procedures at national level. Even if I am a realist and understand that this is some time off, it is something worth pursuing. Currently, with twenty-one plus 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.
Finally, on this point of completing the financial stability architecture, the SRB is preparing at present its response to the European Commission’s crisis management framework review and we are following this file very closely. For me, we need to take a holistic view and make progress on all fronts to develop a consistent, fully effective framework, including through agreement on European Deposit Insurance. We need to stay ambitious here and we clearly need to avoid re-nationalising. This we should have learned from the financial crisis.
[3. Ending public support / outlook for 2021]
As we all know predicting the future is tricky! Of course, I do not have a crystal ball, so I cannot be 100 per cent certain, but I do think that the year ahead may be a bumpy one, at least for some banks. With vaccines being rolled out across the European continent, pressure will build to return to some kind of ‘normality’. This will bring about a whole series of questions around the exit strategy, not just the exit from lockdowns, but also the exit from governmental support for the economy. We all know that this support must end, but at the same time, we all are concerned about potential cliff effects.
The overriding principles of our framework are safeguarding financial stability, while limiting recourse to public funds when banks are ailing. These two require careful balancing.
For banks – be they in the EU, Switzerland or further afield - no doubt one of the main concerns in 2021 will be the rise in NPLs. Banks must put in place the measures to identify and deal with NPLs, sooner rather than later, and cautious provisioning has never been harmful. However, and as a lesson from the last crisis, if banks act properly and proactively, they will stay part of the solution not the problem. Dealing with NPLs now will be less expensive, and depending on the severity of NPLs at a particular bank, the work being done in this period might make the difference between survival and collapse. [Dealing with NPLs is first and foremost a task for banks or even broader, the private sector. AMCs/ bad banks can be part of the toolbox and the EC action plan is a welcome refresher. But let us also be clear here, bad banks do not make losses caused by NPLs go away, even if they can be a valuable management tool.]
The focus of the SRB in the coming months will of course be on making all of our banks resolvable. Our priorities for the coming years are contained in our Multi-Annual Programme, available on the SRB website. I won’t go over all of that detail now. The most important, I would even say “must read”, for banks are the “Expectations for banks” we published last year and that clearly spell out what we expect banks to do to become resolvable and by when.
Ladies and gentlemen,
It is difficult to predict with certainty what 2021 will hold for the banking sector no matter where we are in Europe. We can say one thing, however, with deep certainty, 2021 is going to be a year with much uncertainty. The challenge of ensuring financial stability is great; but it is not unsurmountable.
Authorities across the world have become much more organised and vigilant since the last financial crisis. Our challenge now is to make sure we do not let our guard down as we try to emerge from the pandemic safely and in an economically sound way.
I am sure, that if we continue to work together, to keep each other informed of developments in our respective jurisdictions, we will come through this.
Danke. Merci. Grazie. Grazcha.