Solid frameworks and cooperation: critical elements for the resilience of the banking sector - Keynote speech by SRB Chair Dominique Laboureix

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Ladies and gentlemen, first, let me thank Nigel for inviting me today and the UBS team for the organisation of this event.

It is not the first time I participate to this event. Last time, it was in 2023, some weeks after the last series of banking crisis cases. Two years after these events, where are we?

As the Chair of the Single Resolution Board, I will share with you my view on the resilience of the European banking sector and its future prospects. I will also touch upon some global regulatory developments and the importance of international cooperation. 

1. Resilience

1a. Resilience built so far

European banks have shown remarkable resilience in the face of several shocks that they have been facing lately - from the turmoil in 2023 to the market gyrations of the last months.

This is good news. 

I do think that the work done by supervisors, resolution authorities and, of course, the banks themselves has a lot to do with this resilience. 

Since 2008, tremendous progress has been achieved on crisis management: from the establishment of the FSB, to the agreement on the key attributes to their implementation in many of our jurisdictions. 

Whole departments and agencies – like the SRB and the SSM – have been established. Thousands of people around the world – in both the authorities and the banks – have dedicated years of their careers to ensure that banks become resolvable, or more resolvable, to avoid bailouts. 

For over a decade, at global level, agencies have been talking to each other, carrying out simulations together, and, thus, creating trust and, in a virtuous circle, improving each other.

Banks themselves have been accumulating loss-absorption capacity, established well-staffed resolution planning units and developed capabilities and know-how that will be critical in case we need to resolve them. 

Interestingly, loss-absorption instruments - MREL debt - proved quite resilient in its own right. Despite the extreme volatility seen in the last weeks, the European market for MREL has remained quite steady. 

Secondary markets are functioning and the primary markets are gradually reopening, and investors keep their demand for EU financial paper. Strong national champions were the first banks to return to issue in the primary markets, but as the market normalises the market will likely open to all players. 

Overall, issuance of European bank bonds in the first 4 months of the year is in line with last year’s. In particular, issuance in the more subordinated tranches - AT1, T2 and senior non-preferred - is above the 2024 figure. 

Spreads also held relatively steady throughout the year.

So, the resilience of the banking sector seems to be well understood by capital markets.

Also, European banks, even use MREL issuances to gain rating notches on their senior tranches. Hence, junior instruments play their role, at the right place in the waterfall, and the spreads well reflect this situation.

1b. How to stay resilient

I don’t want to sound too optimistic. In fairness, there is still a lot to do to preserve this resilience. At least in my field. Let me focus on what we do in the crisis management and what we still need to do. 

From that perspective, the Credit Suisse transaction represents, in a nutshell, an interesting case. 

Let me explain:

At the end of the day, the global bank crisis management framework – the so-called “Key Attributes” – is about dealing with the crisis of a global bank such as Credit Suisse. 

So, both nationally and internationally, we all asked ourselves: Did they work? 

In short, the answer is yes, but with some caveats, which are currently under the scrutiny of the FSB. 

On the positive side, financial stability was preserved – so good. In addition, Credit Suisse was treated as one single entity and no ringfencing along national borders was ever on the table. This would have been unthinkable a decade ago and it was enabled by the cross-border work of all authorities involved. 

On the other side, to be clear, let me start by the obvious: the Credit Suisse decision was not a “resolution decision”, complicating the analysis of the pros and cons of the decision.

2. Global regulatory developments 

In October 2023, the FSB published a report drawing some lessons from the 2023 cases. 

This report raises several issues which are now at the centre of the regulatory discussion across the globe. 

However, its primary conclusion was that there was not a fundamental need to reshape the regulatory framework; it is more about implementing it and operationalising it in concrete terms.

2a. Importance of sale of business

One of the important lessons learned from the 2023 turmoil is the importance of being ready to use all available tools, not only the “famous” bail-in tool. This means that bail-in remains – in certain circumstances – the most appropriate tool. 

Optionality and flexibility are key words for resolution authorities.

In fact, we should try to always be in a position to sell the bank in crisis. That is exactly why, for the banks in our remit, we are developing “variant resolution strategies” alongside our preferred ones.

To support this effort, both the EU and the UK are working on proposals similar in nature to facilitate bank sales (the so called CMDI proposal in the EU). 

I also saw a recent speech delivered by FDIC Acting Chair Hill in which he would like to focus more on selling banks. The FDIC is also debating on the merits of the sale of business versus the bridge bank. 

In the Banking Union, it is even harder than in the US. Selling a bank or creating a bridge bank needs to follow European and the national rules of the different member states of the Banking Union. This is why we are very busy operationalising all the available tools with our colleagues in the national authorities.

Anyway, in different ways, we seem to be aligned in the UK, US and Europe on the importance of better developing the sale of business tool, potentially in combination with other tools.

Let me also tell you that the Financial Stability Board’s Resolution Steering Group is expected to focus this year on operationalisation of resolution transfer tools. 

2b. Cross-border bail-in

Another aspect that emerged during the Credit Suisse crisis is the need to work further on the operationalisation of the bail-in tool in a cross-border context, where loss absorbing instruments are issued in a foreign jurisdiction and/or held by non-domestic investors. 

Compliance with applicable securities laws, such as the US one, could be an issue in some cases. In this regard, the SRB is working intensively on various levels from the FSB to the single bank.

Other elements are mentioned in the FSB report, starting by a topic very well known here in Switzerland, and that I will not develop more today: liquidity in resolution and the need for a public backstop.  Here again, it is less a question of building a new regulation than implementing the key attributes we have already defined.

We need to be sure that the attributes work, in concrete terms.

2c. AT1s

Let me briefly digress on a supervisory topic. There has been quite a lot of debate on whether AT1s are a useful capital instrument. I even mentioned it last time I was here a couple of years ago.

One of the last updates on this debate is that, at the end of last year, APRA – the Australian supervisory authority – has decided to phase out AT1s as capital instruments. 

I am going to have to disagree on this one. AT1s, perhaps, have not always been so effective in “going concern”, but are certainly very needed instruments in “gone concern”.

When regulating, deregulating or simplifying [- another big topic perhaps for another time -] we should be very careful to look at rules in a holistic way. 

Nobody should forget that resolution is in a continuum with supervision. In fact, all resolution rules are based on the supervisory ones. The “loss absorbing capacity” is not a stand-alone element. It is the capacity allowing authorities to recapitalise the bank after the resolution weekend so that is solvent again. “Solvent” meaning … compliant with the solvency rules!

Nor banks nor financial regulation work in silos. And neither should we!

3. Seamless international cooperation

Let me give you a final word, this time on international cooperation

Bank crises know no borders. In the run-up to and during a resolution, we need to be able to swiftly coordinate and cooperate with authorities across the world. 

This is why we are spending time to test and improve our interactions – at all levels – with our international counterparties.

Besides the regular bilateral contacts and the work in the Crisis Management Groups, which are built bank by bank, the SRB participates in a number of international exercises aimed exactly at honing the international cooperation in case of a global bank failure.

For example, together with our British and American colleagues, we regularly organise trilateral crisis simulation exercises (called TPLE). 

In this exercise, we work closely with regulatory and supervisory authorities, central banks, and finance ministries of the United States, the United Kingdom, and the European Banking Union institutions. 

The aim of these drills is to strengthen coordination on cross-border resolution, and promote confidence in and commitment to the orderly resolution of global banks.

This format is very useful to discuss a number of aspects of our work. For instance, we can test in practice whether the FSB Key Attributes can be properly enforced everywhere – including in the US -– when executing a bail-in measure. It goes without saying that items, such as this one, are also discussed at FSB level. 

To sum up, for successful crisis management, it is critical that everybody around the table remains engaged, open and cooperative. 

I don’t see any reason today to cast doubts on the fact that this statement is shared by all the authorities involved in crisis management.

4. Conclusions

I would like to conclude.

Only a few steps away from the International Olympic Committee, I have to indulge in a sports reference. 

Building and maintaining the resilience that European banks are showing is a marathon and not a sprint. 

However, when the next crisis comes, and it will, we may have to resolve one or more large banks over a weekend. 

And that, [believe me], is certainly a sprint and not a marathon.

We better be well trained, banks and authorities, for when the day comes.

Thank you for your attention.