Check against delivery
Good afternoon ladies and gentlemen,
Thank you very much to the EBI for organising this event and for the invitation to take part once again this year, in this the 3rd edition. I remember this time last year when addressing this conference, I mentioned what was then the 2nd wave of the Covid-19 pandemic. Twelve months on, it seems we are preparing to enter, or have already entered into what is being called the 4th wave. Perhaps we did not expect the pandemic to last quite so long, however, there are reasons to be cautiously optimistic about the future.
Today, we have an effective vaccine, with a record-breaking roll-out across the EU, and we are learning to manage Covid-19 - hopefully without having to shut down large parts of the economy once again. The EU’s Covid Digital Certificate shows that where there is a political will to advance together, integrated and interoperable EU solutions can be deployed quickly. All of this is cause for some hope as we manage our way through the current pandemic.
The Financial Crash vs Covid-19
Inevitably, comparisons are often drawn between the last crisis 13 or 14 years ago, and the one we are experiencing today.
There are three main characteristics of each crisis.
Let us look first at the great financial crash.
- First of all, we must bear in mind that the crisis of 2008/2009 was a financial one, striking at the core of the banking system right from the start.
- Secondly, within the Eurozone, different states felt the financial crash to very differing degrees, so having a unified, EU response was difficult to non-existing.
- Thirdly, the response ten years ago was also hampered by a lack of regulatory oversight at EU level (and not least adequate capitalisation of banks). We had created the euro and the ECB, but we had not created sufficient regulatory oversight mechanisms at EU level.
If we compare these three points with today’s crisis, we see that:
- First of all today, we are dealing with the economic impact of a health crisis.
- Secondly, all countries have experienced the impact of Covid-19 and all countries have had to put in place fiscal supports for their people and businesses.
- Thirdly - today, we have the required regulatory architecture at EU level, even if that is still not complete. I will come back to that later. We can also say, and credit where credit is due, that in this crisis, banks have been part of the solution, lending money to businesses getting back on their feet post pandemic. This is in stark contrast with the last crisis, when they were the cause of the problem.
The past year
At the SRB, we have continued to run operations smoothly right throughout Covid-19. Banks have held their own, continuing to build-up MREL as well as continuing to work based on the SRB’s annual priority letters to ensure resolvability. They have also been making their contributions to the SRF, which is on track to meet its final target of 1% of total covered deposits by the end of 2023.
Good news has come too, in the form of the entry into force of the common backstop, which will roughly double the firepower of the SRF, should it be needed. We expect it to be in place and ready for use in less than three months’ time. So far, so good – but we must be clear – the crisis is not over and when we note the decreased number of insolvencies since the start of the pandemic, we can be sure that NPLs will rise soon to normal – or even higher than normal – rates again. Some successful businesses prior to the pandemic will not survive, even if others have been able to prosper in this new landscape. That is why I repeat the mantra that banks must prepare for NPLs post-pandemic, and the time to ensure adequate provisioning is now.
Emerging from the crisis – completing the financial stability architecture.
So, how will we see economic recovery and growth in a post-pandemic world? Well the first thing I might say is that we are not finished with the pandemic just yet, but one thing is certain, regulation will have an important role in any recovery.
From the SRB’s standpoint, we must complete the reforms in terms of EU financial stability architecture. Yes, we have developed part of the Banking Union, but it is not complete. The final major priority in order to complete the Banking Union will be the development of a common deposit protection scheme or EDIS at EU level. I think we can learn a lot from the USA where the FDIC combines the resolution, insolvency and deposit insurance function. This model is working exceptionally well and can help our thinking, not withstanding the differences between the two jurisdictions. A combined Deposit insurance and Resolution fund could be used to reduce costs to all stakeholders in helping to make alternative solutions in case of a bank failure possible, without putting the burden on the taxpayer.
We have been talking about deposit insurance for some time now, and I hope that the political will is there to see it pushed over the line very soon. I very much welcome the Eurogroup’s President, Pascal Donohoe’s determination to make progress on this.
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. Some months ago, 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 – perhaps as an interim step - 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.
At the SRB, we very much welcomed the Commission’s initiative on the CMDI review and hope some much needed improvements can be made on the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation, as well as on the Deposit Guarantee Schemes Directive.
We have a good crisis management framework, but there is room for improvement. For example, at the moment, we are operating in a system which allows “creative” national solutions to be found, particularly in cases where resolution is not deemed possible. This leads to different outcomes depending on the country. This is hardly conducive to the development of a European internal market.
We have talked about harmonising or rather enabling bank liquidation for a long time – with no discernible result; and we have to avoid that this is taken as an excuse for ongoing bail-outs in disguise.
If we are serious about having a European framework that treats all banks and all depositors equally, then we do need to get reforms on the way, not least to the deposit insurance scheme in place. Equal treatment throughout the Banking Union with EDIS as a strong EU safety net, will bolster financial integration. This is needed to have a solid return on the investments made to establish the Banking Union and ensure the banks are able to support the recovery.
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.
Finally, we welcome the banking package measures announced by the European Commission last week , which includes relevant provisions for the resolution framework and the SRB. We support for instance the idea of introducing the failing or likely to fail declaration as a sufficient reason for withdrawing banks’ authorisation: this is something we had discussed with the supervisors and that could help to avoid limbo situations for banks that fail and are not to be resolved.
Moreover, we support the aim of the CRR “quick fix” to ensure sufficient loss-absorbing capacity in “daisy chains” of subsidiaries where instruments for internal MREL are indirectly subscribed by intermediate entities.
At first glance, we also welcome the objectives of aligning the treatment of banking groups with an MPE resolution strategy with the TLAC standard, and the specification of some of the criteria for eligibility for internal TLAC: these clarifications can help our work on MREL and more generally on resolvability.
Immediate SRB priorities
If I may, I’d like to take a brief look at some of the areas the SRB is busy working on at the moment, before concluding. Last month, we sent our individual ‘priority letters’ to banks, which set out what we expect them to work on in order to achieve resolvability by 2023, in line with our Expectations for Banks policy.
The focus in 2022 will be on liquidity and funding in resolution, separability and reorganisation plans, and information systems and Management Information Systems or MIS capabilities. Our resolvability heat-map will help gauge their performance in doing so and ensure continuity in our assessment.
On MIS, the pandemic has brought additional focus. For example, we have all had to learn how to conduct our daily activities in a remote setting. This has accelerated digitalisation in financial markets, in banks and also for the regulators. We have observed and encourage banks’ reorganisation efforts to become more efficient and customer-focused. However, ICT and cyber risks and their management should also be a key priority for banks.
In particular for mid-sized banks, we are prioritising the work on transfer tools, separability and adjustments of MREL for such transfer tools. “Sale of business” is one of the tools in our tool box. But we all know that it needs excellent and timely preparation and, of course, a willing buyer. It is a valid tool, not the magic wand. Last month we issued a guidance note on separability.
Banks under our remit have been able to raise capital and debt instruments and thus build up the necessary MREL issuances at record low interest rates this year. I expect most of the banks under our remit to respect the January 2022 intermediate MREL target. We encourage all banks to continue to build up their MREL in this favourable market.
Our policy work continues and we recently published additional guidance for the industry on various aspects like liquidity in resolution or business continuity when it comes to Financial Market Intermediaries. In this respect, banks will be held accountable for timely implementation as part of the next planning cycle which started some months ago in April.
Ladies and gentlemen, I am coming to a close, to allow us time to have a discussion on some of these, or maybe indeed other points.
There is no doubt that we are living in challenging times, certainly they are interesting ones from a regulatory standpoint. The task now, is to keep looking at the prize – financial stability - and to continue our work, step by step, in a consistent and coherent manner in order to achieve that financial stability in the banking sector, to benefit our people and our businesses.