Andreas Dombret: European banking union - where do we stand?
Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at a press briefing, Frankfurt am Main, 23 July 2014.
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1. Introduction
Ladies and gentlemen
I am delighted that so many of you have been able to attend our press briefing. But before
we kick off, I would first like to make a couple of points of my own.
I am certainly not overstating the case when I describe the banking union as the most
ambitious European project since the launch of the euro. Yet at the same time, it represents
a step forward that is as necessary as it is logical. A single monetary policy calls for
integrated financial markets, and that includes the banking union.
The banking union is set to become a reality on 4 November this year - at least in the form of
the European Single Supervisory Mechanism (SSM). The second pillar of the banking union
- the European Single Resolution Mechanism (SRM) - does not come into play until 2016.
The third pillar - a joint European deposit guarantee scheme - has been shelved for the time
being.
But the main topic I would like to discuss with you today is the Single Supervisory
Mechanism.
2. The world pre 4 November
Much remains to be done before the SSM can set to work on 4 November. The biggest
project leading up to the launch of the SSM is the comprehensive assessment, in which a
total of 128 banks across Europe will be subjected to a thorough health check, including a
"cardiac stress test". This check aims to provide maximum transparency and strengthen
confidence among market players, and to enable the SSM to get down to work free of legacy
issues.
The comprehensive assessment is made up of two core components. The first is the asset
quality review, or AQR. To stay with the medical metaphor, the AQR is rather like looking at
an X-ray image - it allows supervisors to detect any nasty surprises that might be lurking on
bank balance sheets. The second component is a stress test. This "cardiac stress test" gives
an outlook for the patient's health going forward. Its aim is to gauge the extent to which
banks can withstand a deterioration in the economic setting.
The bulk of the on-site inspections performed as part of the AQR have now been completed.
These inspections focused on scrutinising credit exposures and collateral valuations, looking
both at individual exposures and aggregate portfolios. The resulting data were used to
ascertain whether there was any need for valuation adjustments. Level 3 fair value
exposures were also inspected.
The findings, having been quality-assured at the national level, have, over the past weeks,
been forwarded to the ECB, which is now engaged in central quality assurance. The next
step will be to calculate an AQR-adjusted capital ratio. After that, banks will be asked to
make the adjustments needed under the accounting standards.
In the stress test, banks need to simulate two macroeconomic scenarios, the aim being to
discover how each bank's risks, and thus their CET1 ratios, respond under stress conditions.
The baseline scenario is largely consistent with the European Commission's 2014 winter
forecast, whereas the adverse scenario simulates a much more difficult economic setting in
which the euro area experiences a recession, with GDP shrinking by 0.7% in 2014 and by
1.4% in 2015, followed by zero growth in 2016. This simulated economic slump is
accompanied by rising unemployment and falling prices in the financial and real estate
markets. At the same time, the scenario simulates an increase in general interest rate levels
as well as renewed divergence in European sovereign bond spreads.
The final step of the comprehensive assessment is "joining up" the AQR findings with the
outcome of the stress test. Generally speaking, we should work from the bottom up wherever
possible - in other words, on the basis of the specific data provided by the banks.
Generalised assumptions should be made as little as possible. But the tight time schedule
naturally means that some trade-offs will need to be made. Publication of the final outcome
of the comprehensive assessment is scheduled for the second half of October.
As I see it, clear communication is crucial for the success of the comprehensive assessment.
The process needs to be as transparent as possible, and banks should be involved at the
earliest possible stage, ad hoc reporting requirements permitting. In any case, supervisors
constantly interact with the banks throughout the comprehensive assessment, from the
clarification of issues during the credit file reviews through to the supervisory dialogue, which
is when representatives from the ECB and the national competent authorities discuss partial
and preliminary findings before the final results are disclosed.
There is one point I would like to make quite clear. These inspections are being conducted in
an even-handed and open-minded manner. At the current juncture, it is simply impossible to
say with any certainty how the results will turn out. That's why I find it downright
illconsidered for third parties to suggest that they know the outcome. Bearing this in mind, I
trust you will appreciate that the Bundesbank will refrain from making any further public
statements on the comprehensive assessment as from mid-September.
If the AQR or the stress test reveal any capital shortfalls, it will be up to the banks to cover
them as quickly as they can, first and foremost by approaching their stakeholders for
additional funding. No later than two weeks after publication of the results, institutions will be
required to submit capital plans in which they explain in detail how they intend to cover any
capital shortfall.
However, let us not forget one thing. The comprehensive assessment is based on balance
sheet data as at 31 December 2013. When considering the published results, it is therefore
important to pay particular attention to the column listing the capital measures taken in 2014.
We expressly welcome the fact that several banks have strengthened their capital base in
recent months. This helps make the banking system more stable.
If there are not enough private funds to fill any capital shortfalls identified, the state in
question will be obliged to provide a "backstop". As a last resort, the government is to
recapitalise banks, issue guarantees or take on risks. However, this government support is
subject to strict conditions. The bank must be solvent, and the support must not offset any
accrued losses. Moreover, government assistance may be granted only if it serves to avert
disruption to the real economy or dangers to financial stability.
The comprehensive assessment is a major organisational undertaking for all involved, and
one which must, furthermore, be implemented under massive time pressure. At its peak,
more than 1,700 auditors and 230 Bundesbank and BaFin supervisors were involved in
Germany alone. Moreover, my experience in the Bundesbank is that, ultimately, far more
colleagues are, of course, involved in the comprehensive assessment than just those
officially assigned to the project. Some are helping out temporarily or indirectly, while others
have had to take on tasks originally performed by staff now directly involved with the
comprehensive assessment.
For banks, too, taking part in the assessment involves a lot of work. And yet, the
comprehensive assessment is decisive if the Single Supervisory Mechanism is to get off to a
good start.
3. The world post 4 November
Under the Single Supervisory Mechanism, the ECB will take on direct responsibility for
supervising the 120 most significant euro-area banks from 4 November.
What does that mean for Germany? First, BaFin and the Bundesbank will continue to directly
supervise around 2,000 smaller German credit institutions; second, we will hand over direct
supervisory responsibility for the 21 German SSM banks to the ECB, but will continue to
provide them with ongoing supervision; third, we will be involved in supervising the 99 foreign
SSM banks.
How will that work in practice? Supervision of the SSM banks will pass to what are known as
Joint Supervisory Teams. These teams will be headed by an ECB coordinator. Under current
plans, the coordinator of a Joint Supervisory Team may not come from the country in which
the supervised bank is headquartered.
The teams themselves are largely made up of staff from the national competent authorities.
The Bundesbank and BaFin will consequently continue to supervise the German SSM banks.
That ensures that national supervisors' expertise is not lost. In terms of the Bundesbank, it is
not just our know-how and experience that count, but also the fact that we have offices in
those locations where the banks are headquartered and operate - whether that be Munich or
Hamburg.
The SSM's clout hinges on the people behind it. And herein, too, lies a major challenge. The
ECB is planning to employ around 770 staff for the new supervisory body. In addition, it is
looking for some 200 employees to undertake support functions.
Given the proximity, moving to the ECB is, of course, particularly attractive for Bundesbank
staff working in Frankfurt. So far, 48 colleagues have taken up regular SSM positions, nine of
which are managerial positions, including one Deputy DG post, while 32 have taken working
level positions and 7 are employed in support functions. In addition, 19 Bundesbank staff are
currently seconded to the ECB to assist with the SSM on a temporary basis. A very
prominent example of a Bundesbanker currently working for the ECB is, of course, our
former Deputy President, Sabine Lautenschläger.
As the majority of the selection decisions are yet to be taken, we expect more Bundesbank
staff to switch to the ECB by November. To fill the resultant gaps, we carried out what we
refer to as "frontloading" at the beginning of the year. Our plan is to fill any vacancies that
arise in the meantime as rapidly as possible by advertising internally and externally and by
allocating more junior staff to the area.
Allow me to mention one last point. Who will pay for the new European supervisory
authority? How can the costs be distributed fairly across institutions, and what is the right
allocation key? In my opinion, all banks should be involved, albeit in proportion to their size
and risk weight. A level playing field can be guaranteed only if supervisory activity is
exercised appropriately, ie in proportion to a bank's size and risk. The Bundesbank is
particularly committed to this objective, but our ECB colleagues have also stressed this to be
a concern. Ultimately, however, smaller institutions will also benefit from the Single
Supervisory Mechanism, even if they are not supervised by the ECB directly.
4. Conclusion
Ladies and gentlemen
We have set ourselves an ambitious goal, to make the financial system more stable. The
banking union is, without doubt, one of the largest steps towards achieving this objective. I
am confident that it will get off to a smooth start when the Single Supervisory Mechanism is
launched on 4 November. Then, when the Single Resolution Mechanism starts its work in
2016, we will have gone a long way towards creating a more stable financial system.
However, there is still a lot of work to be done.
Thank you very much.