19 November 2021

Elke König, SRB Chair speaks to Boersen Zeitung on weak spots of bank resolution in the EU, the prospects for EDIS and the FDIC as a role mo

I firmly believe in a European deposit guarantee scheme – but with uniform rules of the game for all. What it cannot be is a European pot that is used according to national rules. I would say: The ones who pay are the ones who set the rules of the game.

Ms König, coalition talks are currently in progress in Berlin. What expectations do you have of the new federal government – for example on the subject of the Banking Union, which is also important for the SRB?

I hope we will keep the completion of the Banking Union on the agenda and continue to push ahead, even if at least one of the future coalition partners has so far been rather sceptical of the issue.

You mean the FDP.

However, progress in the Banking Union does not depend solely on the German side. In Germany, the European deposit insurance scheme (EDIS) is certainly a hot topic – even if there are a lot of false fears here.

What do you mean by that?

In my opinion, a few issues are mixed up in the debate on EDIS. No one wants to get their hands on the money in the private German deposit guarantee system. Nobody is putting an axe to the security systems of the cooperative banks or the savings banks.  This is about the statutory deposit guarantee, and the savings banks must now build it up, following the compromise they have reached with the ECB. The cooperative banks have already built it up. I think the discussion here is moving back and forth between real issues and emotions. And, of course, it cannot be detached from the harmonisation of the insolvency rules for banks.

Why is the issue of insolvency rules so important to you?

I firmly believe in a European deposit guarantee scheme – but with uniform rules of the game for all. What it cannot be is a European pot that is used according to national rules. I would say: The ones who pay are the ones who set the rules of the game. And there must be clear European rules on this one. Nevertheless, to simply say that the Europeans want to use EDIS to get their hands on the German deposit guarantee scheme is a bit short-sighted.

But is it not the case that European rules have long existed in theory, but in practice, as soon as it comes to the resolution of a bank, special national leeway is regularly granted and precautionary recapitalisation is declared?

It’s even more complicated than that. Insolvency rules in Europe are not harmonised. Insolvency law is purely national law. In the EU, however, harmonisation of the deposit guarantee rules has been put on top of that. And the legislator has put a uniform European resolution law on top of the colourful carpet of national systems. Of course, in the case of Banco Popular in 2017, we have already demonstrated that the European resolution regime is working. On the other hand, there have also been creative national solutions in parallel, and not only in Italy.

Nord/LB has been recapitalised and in Italy Monte dei Paschi could be expensive for the taxpayers following the transfer of the Venetian people’s banks to Banca Intesa in 2017.

I will not comment on the situation of individual banks.

Nevertheless, the question is pressing: where do you see room for improvement in the current regulations?

It is fair to say that we have put into effect the resolution regime with its bail-in rules at a time when the banks had not yet built up the capital needed to do so. And so far, we have not managed to anchor the system in such a way that insolvency – that is, a very deep bail-in – is compared with resolution. The debate is still about a bail-out as a perceived alternative. The European Commission’s banking communication from 2013 is still in force, although it also requires a partial bail-in, but it otherwise follows different rules of the game from our system.

That hasn’t changed in the meantime?

Not to this day. Now we want to link changes with the introduction of the new crisis management framework, which is being discussed in the context of the Banking Union (the crisis management and deposit insurance framework). We have to tackle the issue, because otherwise we will always have a situation where the incentive systems are not the same. What is less painful when a bank gets into a trouble: a bail-in that annoys many people, or a bail-out that taxpayers may quickly forget about? I would still say that the bail-out is the worst of all solutions, because it must be paid for by the young generation in the future and the resolution regime has just been created to prevent this.

What exactly is this new crisis management about?

The first is to get a solid, unified solution for all depositors in the banking union. Secondly, the rules on insolvency must be harmonised throughout Europe. Personally, I do not I think I will see a major insolvency law reform in my lifetime. But perhaps specific rules can be established for financial institutions only. Overall, it is complicated because many issues are interrelated in the crisis framework. The reduction of the risks from distressed loans plays a role here, as does the handling of sovereign debt, i.e. banks’ exposure to the respective Member State or other states. However, we need to make progress here and complete the banking union, also in order to have a single European banking market in the end. Unfortunately, we have less of a European market today than before the financial crisis, because many banks have withdrawn internationally. But you can only have really strong European banks if you have a single European market.

Why are they important?

A few strong European banks are already doing well for an industrial-state association like the EU. Otherwise, you would ultimately always have to be dependent on American banks for certain things. In which EU country a strong bank would be based is not really a concern to me.

What role does the Single Resolution Board actually play in the discussion about a new crisis management system and a possibly closer link between supervision, resolution and deposit guarantee? Do you hope that the SRB will be given additional powers?

The moment we start talking about what the SRB could do, any proposal would be dead, because it would immediately be said that we simply want to strengthen our own authority. However, Deutsche Bank CEO Christian Sewing recently said that a deposit guarantee institution modelled on the US FDIC would suit us well in Europe....

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