The SRB's fifth anniversary in times of an unprecedented pandemia
Both because of its global scale and dramatic social and economic impact and because continued uncertainty regarding its ultimate scope and consequences, the crisis resulting from the Covid-19 pandemic is an unprecedented challenge being faced by global society.
At an institutional level, this crisis teaches us two very important lessons: one, our limitations in terms of being able to reliably predict and prepare for the infinite types of risks we may encounter and two, the fragility, not only of our own lives, but also of our way of life and the foundations on which our institutions are built. When faced with challenges of this magnitude, we realise, yet again, like we did in the previous financial crisis, that the best defence mechanism is to have strong, yet flexible institutions, with the capacity to adapt to the changing realities, institutions that are unwavering in their goals, but flexible in their means to reach them.
Overshadowed by the Covid-19, 2020 marks the fifth anniversary of the SRB’s coming into being. A short but intense period of time in which a young institution has earned its place among Europe’s most seasoned authorities. I am well aware of this since only two years after its creation, in Spain we witnessed firsthand how the SRB’s decisive intervention in a bank failure was able to avoid damaging effects on depositors and public resources.
The SRB’s own track record is the best example of how much has been accomplished. We face the current situation in better conditions, from a prudential, resolution and institutional perspective. However, the health crisis we are experiencing also serves as a reminder that the SRB and the NRAs must continue working together to strengthen the resolution framework.
I would like to highlight just a few of the challenges ahead at the level of the SRM.
Flexibility in resolution planning. Commenting on the behaviour of the Bank of England in the 1825 crisis, Thomas Joplin said: “There are times when rules and precedents cannot be broken; others, when they cannot be adhered to with safety. In these circumstances, intervention is an art, not a science”. Sometimes the success of institutions must indeed be measured by their resourcefulness and capacity to adapt.
And all European and national authorities have stepped up to the task of adjusting their activity to soften the shock on the financial sector and the economy. In this vein the SRB, as its Chair already explained in this same blog, has offered relief measures in resolution planning to reduce the operational burden on banks and proposed a forward-looking approach with regards to MREL monitoring. This flexibility is important because we must not forget that resolution planning is not an end in itself but a means to achieve the ultimate objective of minimising the negative impact of a bank’s failure.
The SRB’s challenge ahead will be to continue advancing in ensuring resolvability of banks across the Banking Union, while at the same time supporting economic recovery and the sector’s stability, in particular providing the necessary flexibility in the entities’ path to building up MREL. In this respect, it will be important to maintain the close dialogue with the banks to follow the evolution of their funding and balance sheet size, as well as to monitor market conditions.
Focus on crisis preparedness and resolution execution. As I mentioned this crisis has highlighted our limited capacity to foresee all possible scenarios. Situations are constantly changing and as a Prussian general once put it “no battle plan survives contact with the enemy”. Now that work on plans is well advanced, it is important for the SRB and NRAs to prioritise crisis preparedness and the operationalisation of resolution strategies, including through dry runs and simulations which allow teams to learn from and prepare for potential real life situations, building resilience and capacity to adapt to any circumstance, no matter how unexpected. In other words, five years into the new framework, it is key for the SRB and NRAs to stay “young”, to avoid turning too bureaucratic or settling for a mere application of the rules. On the contrary, the SRM must continue to adequately prepare for any possible “battle”, not only through the development of bail-in playbooks, national handbooks and the many instruments and policy documents under way but also through the consolidation of dynamic and multidisciplinary teams covering the entire process from the moment an entity experiences difficulties until the last loss is allocated or the last asset liquidated.
European leadership in the debate on banking crisis management. A lot has been achieved in only five years in crisis management but more remains to be done and the SRB must be a leading voice in this reform. An effective and harmonised defense of financial stability, with a minimum cost for taxpayers across the Banking Union has yet to be achieved. Many issues must still be addressed, among them the absence of a common deposit guarantee system effectively supporting crisis management; the difference in treatment of bank failures between State aid and the resolution framework; or the lack of a harmonised insolvency regime at European level.
The quality of our institutions is determined by their ability to respond to the challenges they encounter. In its only five years, the SRB has faced quite a few of them, and I am confident to say that, whatever the future may bring, we are better equipped to face it than ever before. We have come quite a long way together and I am proud of the work done by the SRB in close cooperation with the NRAs, as well as of all the expertise and knowledge generated and shared. As I approach the end on my mandate as FROB´s Chair, my great hope today is that the SRB will emerge from the current threat even stronger and wiser and duly empowered, at all levels, to defend European citizens’ interests in the face of a banking crisis. After all, the SRB is still a young institution with a bright future ahead.
Recently on our blog
It is now a decade since the Liikanen Report was published. While the proposal for structural reform in the banking sector was not implemented in the EU, many of the ideas brought forward by the high-level expert group can be found in in other regulatory...
Euro area banks have emerged from the pandemic largely unscathed, mainly due to the unprecedented support from governments, central banks, regulators and supervisors. Bank capital in the form of Common Equity Tier 1 even increased throughout the pandemic...
About the author
Jaime Ponce is, since 2015, Chairman of FROB, the Spanish executive resolution authority, which has played a fundamental role in leading the process of banking sector restructuring in Spain. He is also the Spanish representative on the Single Resolution Board Plenary. Previously, he was Deputy Director of Regulation and Financial Policy at the Treasury and deeply involved in the profound reform of the banking and...