The measures put in place since the financial crisis of 2007/08 were well warranted. They ensured that the banks, this time round, are and hopefully stay part of the solution. So far, I think we can say that banks have weathered the storm well.
"First of all, I want to thank you for the invitation to join you
again this year, even if for now it is only virtually. I am sure we will
meet again in person, it is only a matter of time. But for now, this is
the next best thing and I am grateful for the chance to interact with
you.
While our file has been one of the least contentious ones
between our jurisdictions in the past years, there is in my view still
scope for further and deeper cooperation and certainly for better and
more thorough understanding. The so-called TPLE, dedicated
exercises between the resolution authorities of the US, the UK and the
Banking Union are a very valuable tool as they spell out communalities
and differences, highlighting the areas and topics to work on in the
future.
We know that alone we may move faster, but we also know that together we move further.
So, let us be cautiously optimistic as we move forward and embark on a
new chapter of the financial stability journey together.
[A brief look back at 2020]
But
of course in order to move forward together, we have to take stock of
where we are right now, and also the road travelled so far. I might now
give you a quick look at the past year from the SRB’s perspective.
It
is now almost 12 months since Europe and then the US began their first
wave of lockdowns, which were necessary to protect human life. Right
across the world, these lockdowns were accompanied by massive government
support. Europe was no different. There is no doubt that, were it not
for the fiscal policies implemented by governments in many countries,
our economies would be in a far worse state than they are today, with a
corresponding knock-on effect on our banking sector.
In the EU,
state borrowing limits have been temporarily put aside. Businesses of
all kinds of shape and size have received payments – and rightly so -
from the public purse, be they direct grants or payments to employees or
in some other form. Mortgage breaks were granted to many commercial and
residential account holders. These types of support are, in many cases,
the lifeline allowing businesses to continue to function. However,
while these supports have done their job pretty well up until now, at a
certain point, that support must end and businesses must prove to be
viable in a post Covid world.
[The reaction to the Covid crisis as it unfolded in the Banking Union]
Although
in Europe, at the start of the crisis almost 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. They ensured that
the banks, this time round, are and hopefully stay part of the
solution. So far, 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. We did not
have to build a new boat to deal with rising floodwaters. In Europe, we
now have a strong, well-crafted financial stability framework, capable
of dealing with choppy waters, even if there is still room for
improvement.
The current European framework provides for some flexibility, but it is also a prudent one. At
times when stormy seas may be on the horizon, then it is all the more
important to batten down the hatches, and make sure that everything is
in order so that we can ride out any potential storm.
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 the FDIC.
[Completing the financial stability architecture]
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.
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. In order to break the bank-sovereign doom-loop, it was always envisaged that the Banking Union would rest on three pillars
– supervision, resolution and deposit guarantee at Union level, but
progress on this last pillar has been slow, to put it mildly.
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.
We all know that the US regulatory system developed to where it is today over a century or even longer. There
are clear similarities between the EU and the US, but of course, the EU
is a club of independent countries who have decided to pool their
sovereignty in certain areas.
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 I am curious to hear what you have to say to this.
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. However, 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. For
me, harmonising at least the bank insolvency procedures is linked to
the common deposit protection scheme, or EDIS, and to the resolution framework. We need to stay ambitious here.
These
are items on the list for our political masters in Europe, however, and
I now want to turn my attention to the months ahead.
[Ending public support / outlook for 2021]
So,
let us take a look at the outlook for 2021. 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 continent (and of course in the
US), 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, 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 perhaps even as a lesson from the last crisis, if banks act properly
and proactively, they will stay part of the solution not the problem. The message is clear: use this time to deal with the oncoming onslaught of NPLs. Use this time wisely.
Doing this now will be less expensive, and depending on the severity of
NPLs at a particular bank, the work being done in this period might be
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 welcome management
tool.]
The current crisis should also be seen as an opportunity
for banks to advance in digitalisation and reorganisation to become
more efficient and customer-focused. It is also an opportunity for
regulators and legislators and the Commission is already beginning to
review its Crisis Management Framework.
[SRB outlook for 2021 in Europe]
For the SRB, in the coming years, our focus will continue to be on building resolvability. Unsurprisingly, the SRB will continue to focus on making all banks under our remit resolvable.
This relates to operational resolvability, as well as the necessary
build-up of MREL, a key tool in resolution. We must keep up the momentum
on increasing MREL, especially in light of the new rules and deadlines
in the BRRD2 – 2020 was a transition year in terms of BRRD2 application.
Another area of focus for the next few years will see the SRB fully operationalise the use of resolution tools, and their combined use. In this regard, more work is needed on transfer tools in particular at SRB, but also for the banks.
We
must implement the existing resolution framework as effectively as
possible to achieve actual resolvability. To this end and for reasons of
predictability, we published a reference document last year. The ‘Expectations for Banks’ document clearly shows the direction of travel for banks. On top of that, all banks under our remit have received individual work programmes for 2021.
The ‘Expectations for Banks’ document sets out the capabilities the SRB
requires banks to demonstrate in order to show that they are
resolvable. It describes best practice and sets benchmarks for assessing
resolvability. It also provides clarity to the market on the actions
that the SRB expects banks to take in order to demonstrate
resolvability.
All this will be phased in till end 2023. Where
needed and on a bilateral basis, the SRB and banks may agree alternative
phase-in dates. The Expectations are tailored to each individual bank
and its resolution strategy, allowing for flexibility and
proportionality.
In 2021, we will also continue to build up the Single Resolution Fund as we will do every year up until 2023,
when it will be fully funded. We are on target at present. Just to
remind you, the SRF is a fund that can be called upon in the case of
resolution. I am pleased that the backstop to the Single Resolution Fund
will be in place from next year. The decision to implement the backstop
effectively doubles the amount of firepower of the fund, and in this
will provide confidence to the markets when it is needed most.
[Conclusion]
Ladies and gentlemen, I am coming to a close.
I suppose it is difficult to predict with certainty what 2021 will hold for the banking sector. We can say one thing, however, with deep certainty, 2021 is going to be a year with much uncertainty.
So, the challenge of ensuring financial stability is great; but it is not unsurmountable.
- Today, we have a better supervisory system and a proper resolution mechanism;
- Today, we have a better management of risk in individual banks from the outset;
- Today, we have placed the risk of a business with its owners and creditors, and we have better capitalised banks;
- And tomorrow, it is my hope that we will reap the benefits of those changes.
That
said, there is always room for improvement. We must use this time
wisely as a trigger for further progress to equitable financial
stability.
SRB
© Single Resolution Board