Completing the Banking Union will help to weaken the links between banks and sovereigns and to be better prepared to deal with large macroeconomic shocks. Fostering the Capital Markets Union will help to promote greater diversification of private sector funding sources and greater robustness of private risk-sharing arrangements. These projects pay attention to the two main channels through which credit flows to the economy in Europe, and they are key blocks in EMU’s future architecture. A window of opportunity seems to be open now and it should not be wasted.
Secondly, focusing on the Capital Markets Union, despite progress having been somewhat slow, there are certainly areas where advances have been made. Later today, the programme of this conference offers an opportunity to hear directly from the European Commission on the Capital Markets Union. Accordingly, my objective now is merely to point out a couple of areas where initiatives have been taken to reactivate specific markets. One of those areas is the securitisation market. Another one is the covered bond market.
Both securitisations and covered bonds have traditionally been important financing sources for banks and it is my opinion that they will regain importance in banks’ funding strategies as the ECB’s targeted longer-term refinancing operations (TLTRO II) progressively mature, opening up new opportunities for the markets.
In the field of securitisations, despite the stigma that has surrounded this product since the recent financial crisis, the European authorities have considered that appropriately regulated and well-structured securitisations can contribute to diversify funding sources, to promote better risk management and, ultimately, to mobilise more funds for the real economy.
Lastly, in addition to the specific initiatives already taken under the umbrella of the Capital Markets Union to activate certain markets, I would also like to mention that other opportunities for the markets may arise from new instruments. I have in mind here, for example, the recently created non-preferred senior debt instruments. This new category of debt instrument ranks behind ordinary debt in the order of seniority of claims in insolvency proceedings and extends the range of liabilities that banks can issue to comply with their MREL requirements. Some Spanish banks started last year to issue this new debt instrument and others will follow soon.
On 29 March 2017, the United Kingdom notified the European Council of its intention to leave the European Union. This means that 30 March 2019 is, in principle, the “withdrawal date”. So far, in the draft Withdrawal Agreement, there is no specific regime with regard to financial services and this unquestionably generates a context of uncertainty that affects all market participants. Allow me to focus on how it affects banks.
“Wait and see” is not an option. Banks need to prepare. Within the framework of the Single Supervisory Mechanism (SSM), the ECB, together with National Competent Authorities, is trying to communicate, to banks which may be considering relocating their banking activities to the euro area, the SSM’s supervisory expectations on different aspects such as: authorisations and licences to carry out banking activities in the euro area; internal governance and staffing arrangements; or authorisations and use of internal models.
These expectations have a key underlying principle, which is the need to guarantee consistency across the existing and the relocating institutions, so that they both operate under the same regulatory, prudential and supervisory standards.
There is another key aspect, which is the need to ensure that relocating banks are not empty shells. The concern about empty shells arises because, given the uncertainty about the future relationship between the UK and the EU and the cost of making organisational changes, a good number of institutions are studying how to adapt to Brexit minimising the changes to be made to their structures, management and business models. They may be considering making extensive use of the capabilities of their UK headquarters through the use of back-to-back booking models for risk management, maintaining shared governance structures, extensive outsourcing within the group or keeping the bulk of their workforce in the UK through the artificial use of branches in the UK.
Empty-shell banks do not have risk management and governance structures that ensure a safe continuation of the local business or a smooth wind-down in crisis situations, and may present operational risks and financial stability issues for the countries hosting them.
For this reason, when assessing booking models, the ECB and national supervisors will pay attention to whether banks have adequate: (i) internal governance and organisation; (ii) access to financial market infrastructures; (iii) booking and hedging strategies; iv) intragroup arrangements; and v) IT infrastructure and reporting.
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