MBR_ISSUE 46_NOV_DEC_18_LowRes

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Malta Business Review SPECIAL FEATURE: SRB INTERVIEW Single Resolution Board (SRB) Chair, Elke König Interview with the Malta Business Review - By Martin Vella Dr Elke König is Chair of the SRB, being responsible for the management of the organisation, the work of the Board, the budget, all staff, and the Executive and Plenary sessions of the Board. The General Counsel, the Policy Coordination and International Relations Unit, the Communications office and the Internal Audit function report directly to her. She was President of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) from 2012 until 2015. After qualifying in business administration and obtaining a doctorate, Dr König spent many years working for companies in the financial and insurance sector. From 1980 to 1990, she worked for KPMG Deutsche Treuhandgesellschaft in Cologne, auditing and advising insurance undertakings, from 1986 as a holder of a special statutory authority (Prokuristin) and from 1988 as a director and partner. From 1990 to 2002, Dr König was a member of the senior management of the Munich Re Group (Head of Accounting); she then moved to Hannover Rückversicherung AG as Chief Financial Officer. From 2010 to the end of 2011, Dr König was a member of the International Accounting Standards Board (IASB) in London. Dr König was also a representative of the Supervisory Board of the Single Supervisory Mechanism. MBR: Ten (10) years after the crisis: have banks become truly resolvable and has the regulatory reaction been sufficient? EK: Casting our minds back just ten years, the insufficiency of pre-crisis regulation is clear. The lack of an effective resolution regime meant that authorities were not able to manage the failures of systemics banks effectively. In particular, the existence of banks deemed ‘too big to fail’ meant that ordinary people, through their governments, were left to foot the bill when things went wrong. The EU now has a bank resolution regime. This regime was implemented in the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation (SRMR). The SRMR created a new agency in charge of resolution, the SRB. Our day-to-day work is to proactively ensure that banks are resolvable, in line with the objectives set out in European legislation. But bank resolution is a journey, and there is much to be done before we reach our final goal. The reforms – those that took place and those that are still in the legislative process taken together - are probably sufficient and will be effective; but implementation of these reforms is not yet complete. Moreover, it is not only up to the authorities to enhance the system. Banks themselves must adjust their procedures and perhaps even their business models to align to the new regulatory framework. Only working together, can banks and the authorities make resolvability a reality, and deliver financial stability to Europe. I think we should also start perceiving the concept of “resolution”, at some point, as a common good or in the interest of everyone – that is for the taxpayers but as well as contributing to financial stability instead of being “just” an additional burden to the industry. After all, the public, and more particularly the markets, should respect and reflect that the banks which are resolvable should be better priced compared to the ones which are not. MBR: What has really changed, what have we learnt and where will the world go? EK: Avoiding the mistakes that led to the Banking Crisis is central to our work. One lesson we have learned from the 2008 crisis is that banks are often global in life and national in death. In Europe, the high level of interdependence across Member States’ banking systems meant that a coordinated solution was needed to manage bank failure. In effect, the aim of the Banking Union is to enable the authorities to manage the failure of banks, so that even in death banks are dealt with from a European perspective. A core element of the regulatory response has been the establishment of the Single Resolution Fund, which today stands at €24.9 billion and will be built up to 1% of covered deposits. The taxpayer has contributed - and will contribute - nothing to this fund. Instead, it is entirely funded by banks. Implementing the agreed upon Common Backstop for the Fund is also critical. This will give markets the confidence that resolution will work even for large, complex banks, and reduce stress on the financial system in the event of a bank failure. Beyond the backstop, it remains fundamental to press ahead and complete the Banking Union’s third and final pillar through the development of the European Deposit Insurance Scheme. For the proper functioning of a Banking Union, there should be no difference in the strength of protection available to depositors in each individual Member State, and a failure should not fall on the national public coffers. MBR: Within five years of the advent of the Crisis, the policy debate across Europe on tackling it focused on demand management and monetary policy. Despite German reluctance, public investment was an important and undeniable policy goal. But given that different countries needed different treatments, how difficult is it to agree on one common policy and have a sound legislation in place? EK: This is a question for the Co-legislators to answer. From the SRB’s perspective, it is worth mentioning that the Banking Union has created a European authority for supervision and resolution and – of course – a single rulebook. The direct application of the SRMR as a regulation is an important first step. The agreement on a Harmonised Creditor Hierarchy will help because an aligned creditor hierarchy across Member States will improve market transparency, help with the pricing of instruments and enhance the implementation of resolution tools. However, the SRM framework for resolution is faced with 19 or more different insolvency procedures. In some Member States, insolvency proceedings are well established, 28
SPECIAL FEATURE: SRB INTERVIEW Malta Business Review while in others, the procedures are unclear and have long, uncertain timeframes. A clear and transparent process is absolutely essential for markets to help creditors to understand the potential risks and to inform the price-setting and funding to the banks. MBR: How has the banking system been made stronger and more resilient to avoid cases like these and similar crisis of unassailable debt, when problems of insufficient public investment – and problems with the Stability and Growth Pact – have persisted? EK: Since the crisis the regulatory framework has strengthened significantly. All SRB banking groups will be covered by a resolution plan in 2019. Our tasks will increasingly focus on tailoring resolution strategies to a bank’s structure and business model, and identifying and addressing impediments to resolvability – such as lack of proper management into systems. "From a resolution perspective, blockchain plays no important role at the moment. Thanks to the EU reforms, the SRB is now equipped with a number of tools that help us enhance the stability of the banking sector. A key tool to achieve resolvability is, and will continue to be, MREL. Through setting MREL targets, the SRB ensures that banks have a healthy amount of loss absorbing capacity, so that resources are available to enable the effective application of resolution tools when banks fail. In this way, the SRB makes sure that banks have appropriate buffers to deal with shocks and are thus more secure. In 2018, we have set binding MREL targets at consolidated level for the most important banking groups, while informative targets have been communicated to the remaining banks. 2019 will see sizeable progress in the definition of MREL requirements, including the location of MREL. MBR: Ten years from the crisis, we are now talking of new technology, such as Blockchain, cryptocurrency and Bitcoin, with the Maltese PM stating recently that: “Blockchain is the technology of trust”. Does the SRB share this view, what are your comments and how will the SRB recommend to set up a regulatory function within the EU to monitor countries who are harnessing this technology, within an EU legal operational framework? EK: Our objective is to create a safe and stable financial market. New technologies can play a role in this, but risks and opportunities should be appropriately assessed by the industry and by regulators. From a resolution perspective, blockchain plays no important role at the moment. MBR: What stage of development has the European Deposit Guarantee Scheme reached? EK: Although we have unfortunately seen limited progress in the last year, the SRB strongly believes that EDIS as the third pillar of the Banking Union must become a reality as soon as possible. Having unified supervision and resolution, harmonising the protection of depositors is a logical step with obvious benefits to financial stability. The Commission communication last year offered new approaches to unlock progress on EDIS. Following that communication, we would strongly welcome a more pragmatic attitude towards finding an agreement on EDIS, so that the deadlock in the discussion can be broken. We hope that the Commission’s suggestion of a targeted AQR to assess NPLs and Level III assets as a precondition to sharing credit risk in EDIS will address the concerns of stakeholders. MBR: No part of the financial sector will remain unregulated! Governments and parliaments declared the end of “light touch” regulation… they promised that complex financial products will not be traded anymore in the shadows. And last but not least, no more bank bail outs! Now in 2018, the implemented financial regulation have hardly changed the way banks, investors, or speculators operate. Worse, new financial risks and financial market instability have created new crises. Under these circumstances, how should we modify our approach, as well as have a robust regulatory agenda and financial guidelines/legislation? EK: I am not sure I follow your line of argument. Financial stability has tangibly increased since the last crisis and regulation has moved in a sensible direction. Now it is paramount to avoid weakening the standards already agreed. The last few years have seen a material enhancement of regulation in response to the crisis. Yet when memories fade, there is a distinct threat that we forget the significance of the regulatory systems put in place. That means that at this point the authorities should take advantage of positive market conditions to push forward with finalising reforms. This will further strengthen the Banking Union through both risk-reduction and risk-sharing measures, ensuring the authorities are able to manage future bank failures without the use of taxpayer funds. This holds true for the industry too: They know the topics that need to be addressed from “capital” to “NPL” to “obstacles to resolvability”, thus they too should push forward in these areas. There is no reason to wait. After all, ‘Let’s make hay while the sun is shining’. And if the industry does not take the necessary steps of its own accord, we will have to make them. In regards to new risks, it is important for the authorities to monitor developments in the market and adapt the framework, where necessary, to account for these risks. An important area for future development are Central Counterparties, which have grown ever more important since the crisis. The SRB has an interest in the development of an effective CCP resolution framework because many of the banks under our remit are clearing members of these CCPs and are therefore exposed to their tail-risk. CCPs should be robust with appropriate recovery and resolution regimes, and we welcome the ongoing work on the Commission in this area. MBR Credits: Single Resolution Board All rights reserved - Copyright 2018 www.maltabusinessreview.net 29
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