Fernando Restoy: The Banking Union - achievements and challenges
Speech by Mr Fernando Restoy, Deputy Governor of the Bank of Spain, at the closure of the
presentation of the third report on the Banking Union "La Unión Bancaria: suma y sigue",
organised by Centro de Sector Financiero PwC and IE Business School, Madrid,
2 December 2015.
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1. Introduction
Let me begin by thanking the organisers, both PWC and the Instituto de Empresa, for their
kind invitation to participate in the closure of this presentation of the third report on the
Banking Union.
We can hardly overstate the importance of the Banking Union for the European construction
project and, in particular, for ensuring the sound working of Economic and Monetary Union
(EMU). A true monetary union among sovereign States is not confined to the use of the
same banknotes and coins in each country, nor to the denomination of trade transactions
with the same metric. Monetary union requires the conditions in which liquidity is exchanged
to be homogeneous across the entire area. Insofar as these exchanges are typically
intermediated by financial institutions, by means of whose liabilities trade and financial
transactions are settled, the appropriate flow of liquidity within a monetary union demands
that the risk associated with these liabilities should not depend on the location of the
institution issuing them.
Naturally, to achieve this homogeneity, bank crisis-prevention and management mechanisms
are needed along with risk-mutualisation arrangements that minimise the link between
national economic and fiscal conditions and the ability to preserve the value of bank liabilities
in each jurisdiction. These requirements include a single supervisory mechanism as a
prevention tool, a single resolution mechanism that pursues the homogenous treatment of
banks with viability problems and has a common fund to make this economically feasible,
and an integrated deposit guarantee scheme that ensures identical coverage throughout the
monetary area for eligible deposit-holders.
We can already claim that the project to set up a Banking Union that includes the
abovementioned ingredients is close to becoming a tangible reality. Just a few weeks back we
celebrated the first anniversary of the start-up of the first of the three pillars of the Banking
Union project, the Single Supervisory Mechanism (SSM); the Single Resolution Mechanism,
the second pillar of the Banking Union, is now under way and will be fully operational from
1 January 2016.
Admittedly, certain relevant aspects have still to be set in train. First, the single resolution
fund must be strengthened to ensure that it is strong enough to withstand future banking
crises, without destabilising the public finances of the countries concerned. Further, we must
step up efforts to move forward on the third pillar of the Banking Union, the establishment of
a common deposit guarantee scheme, based on the proposal released by the European
Commission last week.
I would like to focus today on the Single Supervisory Mechanism, the most developed
component of the Banking Union. In this connection, I shall review the milestones reached
and address what I consider are the main challenges ahead for us.
2. SSM milestones
The first SSM milestone took place precisely before it assumed full supervisory responsibility,
and it entailed successfully conducting the "comprehensive assessment" of all significant
euro area banking groups. This review helped to enhance the information on the situation of
European banks and to identify the measures that could be necessary to strengthen their
solvency.
In this respect, it should be recalled that Spanish banks were those that evidenced fewest
incidents in the asset quality review process, which entailed adjustments of little more than
0.1% of its risk-weighted assets. This outcome, along with the limited impact of the stress
tests, highlighted the fact that the reform of the Spanish banking system undertaken in
previous years had met its objectives.
At present, we are working on the stress test scheduled for the coming year. This test,
following the methodology of the European Banking Authority, will be made on a sample of
banks - six of which Spanish - covering 70% of euro area banking assets. The results will be
published at the start of the third quarter of 2016.
One of the main challenges of the SSM at the outset was to make its complex governance
structure workable. This complexity derives from the institutional restrictions imposed by the
Treaty, from the need to ensure the separation of the monetary policy and prudential
supervision functions attributed to the ECB, and from the objective of achieving a suitable
incorporation of the national authorities into the new framework without impinging on the
ECB's leadership in supervisory decisions.
As you know, the central SSM body is the Supervisory Board, which is responsible for the
planning and implementation of oversight tasks and for submitting decision-making proposals
to the Governing Council, which the latter may approve or object to, but not amend. The
Board is made up of 25 members: the Chair, Vice-Chair, four members appointed by the
ECB Governing Council and the representatives of the national supervisory authorities of the
19 participating Member States.
The Supervisory Board is intensely involved in all the SSM's key actions, as a result of the
competencies directly attributed to it under the prevailing European Regulation and the
absence of extensive delegation powers. Indeed, in its first year alone, the Supervisory
Board has adopted around 1,200 decision proposals. This heavy workload, far greater than
is habitually the case for the maximum decision-making bodies of supervisory agencies in
other jurisdictions, is an operational challenge of the highest order that the Board is so far
responding to with considerable effectiveness, maintaining a high frequency of face-to-face
meetings complemented by numerous teleconferences and written procedures.
More generally, the start-up of the SSM has necessitated major changes in the internal
structure of both the ECB and the national authorities. In the case of the ECB, four new
directorates general for microprudential supervision have been created, and the staff has
been increased to assign to this new function more than 1,000 employees.
At the same time, the national authorities have made a great effort to adapt to this new
framework. In our case at the Banco de España, the Directorate General Banking
Supervision was restructured and its departments reorganised to create a structure mirroring
that adopted by the ECB, so as to provide for smoother interaction between both institutions.
However, the most significant change has been the creation of the joint supervisory teams,
made up of employees from the ECB and from the national authorities. These teams are the
basis for the day-to-day supervision of each significant bank. They are coordinated by an
ECB member of staff, who is assisted by one or several sub-coordinators from the national
authorities, on whom the coordinator draws support for the organisation of the work and the
management of the local teams. This admittedly novel design is in response to the need to
combine a centralised management framework while harnessing the knowledge and
proximity to banks that national supervisors provide.
It should be stressed here that more than two-thirds of the members of these teams are from
the national supervisors. The staff from these authorities are also generally entrusted with
leading on-site inspections within their jurisdiction. Moreover, as you know, the national
supervisory agencies keep functions relating to the direct surveillance of the so-considered
less significant banks.
This all explains why the start-up of the SSM has meant no saving in supervisory resources
at the national level. On the contrary, the national authorities have had to address the
considerable challenge posed by the loss of human resources to the ECB. In our case,
thanks to the success of Banco de España candidates in selection processes, approximately
one-quarter of our supervisory staff have moved to work for the ECB, including three senior
managers who today occupy high-responsibility posts - one Director General and two
Deputy Directors General - in this institution.
The third milestone has been the setting in place of an operational framework for the pursuit
of the supervisory functions of the SSM. In this connection, work has been performed since
the outset of the project to define common frameworks for action enabling the different
practices pursued by different national authorities, with their greatly differing supervisory
cultures, to be overcome. This work saw a Supervisory Manual devised in which processes
and the operational methodology are described. Naturally, certain key aspects of supervisory
procedures have still to be smoothed. In fact, the Manual should be seen as an evolving
document, the regular update of which on the basis of experience accumulated is needed to
complete convergence towards better supervisory practices.
Likewise, to achieve greater consistency in the regulatory framework, it has also been
necessary to review the national application of the various options permitted under European
regulations.
European solvency regulations - namely the Directive and Regulation on capital
requirements - confer some degree of discretion upon Member States and national
supervisors in the implementation of specific regulatory aspects. Such aspects include the
timetable for the progressive adoption of new solvency standards and the granting of
exceptions in respect of compliance with certain prudential requirements.
This degree of national flexibility had to be accepted at the time by European legislators in
the complex Directive and Regulation negotiations. Naturally, the fact such a diversity of
rules are in place hampers supervisory action and prevents the homogenous treatment of
banks based on their objective position.
Accordingly, in recent months, the SSM Supervisory Board has worked intensely in this field.
Their efforts have seen a preliminary agreement allowing a common approach to be adopted
in relation to the application of these "national options and discretions" in the hands of the
supervisory authorities. The terms of this agreement are now being subjected to public
consultation, a process which will finalise on 16 December. I trust that this agreement, once it
is finally approved by the ECB, may be implemented in the opening months of 2016 and that,
in any event, future revisions of European legislation will envisage less room for discretion on
the part of the Member States, so that the singleness of the relevant legal framework for
banking activity throughout the EU may become firmly anchored.
To wrap up this first part of my speech, allow me to highlight certain relevant decisions taken
by the Supervisory Board during this first year. Among the most important are those relating
to the Supervisory Review and Evaluation Process (SREP), which has for the first time been
carried out with a common methodology for all SSM banks. This process, which includes
both quantitative and qualitative aspects, determines the risk profile of each significant
institution, the sufficiency of its liquidity and solvency in terms of this profile and, finally, it
sets the minimum capital levels to be maintained. The decisions on capital, the adoption of
which for 2016 will be shortly formalised, will, for all the SSM's significant institutions, entail
average capital requirements somewhat higher than those of the previous year: around
30 basis points (bp), rising to 50 bp if the impact of the phasing-in of the capital buffers
envisaged in European legislation is taken into account.
As you will recall, in January this year a recommendation on dividend distribution policy was
adopted in which banks were urged to keep conservative dividend distribution arrangements
so as to preserve their solvency. This recommendation will be shortly reassessed. In turn,
common criteria have been laid down for recurring decisions such as authorisations for the
acquisition of qualifying holdings in credit institutions, assessment of fitness and properness
of board members, or the requirements to be made in capital reductions and issuances.
Finally, I must highlight the relevant role played by the SSM in the management of the Greek
crisis. The SSM not only monitored the situation of the banks continuously, but, once
agreement was reached between the European and Greek authorities last summer, it was
entrusted with determining the recapitalisation requirements of Greece's four significant
institutions on the basis of a specific comprehensive assessment exercise, whose results
were recently published. In the coming months, the SSM must ensure that the
recapitalisation of these banks goes ahead as stipulated.
3. Some challenges
That said, and as I stated at the outset, the SSM has numerous challenges to face in the
near future. I would like to mention four in particular.
Firstly, the microprudential policy stance sought must be clearly defined. The SSM, despite
its exemplary start-up, is still under construction and its criteria, practices and specific
objectives have not yet reached the degree of stability desirable. Evidently, we must shorten
the transition as far as possible, so that banks are aware with sufficient certainty of the
supervisor's requirements in the short and medium term and can, in this way, effectively
design their strategic and management measures.
True, this objective is currently hampered by the still-unstable international regulatory
framework. I trust the Basel Committee's announced intention in its recent report to the G20
to see through the regulatory reform next year will be fulfilled. In any event, in the supervisory
realm we must make further efforts to specify with greater precision and permanence the
solvency requirements for each bank based on its risk profile, and to establish certain clear
guidelines on the application of restrictions on the remuneration of capital instruments and on
directors' variable remuneration.
At the same time, as I previously pointed out, we must continue to work on the convergence
of supervisory practices, moving towards better standards, and on smoothing the differences
that still persist across the different SSM jurisdictions. For example, while some national
authorities have traditionally focused on reviewing management procedures, others have
placed particular emphasis on reviewing the classification and valuation of assets on
financial statements. These differences in supervisory practices involve, in turn,
heterogeneity in the professional profile of the employees of the various authorities now
sharing missions within the SSM.
Against this background, the Banco de España has a tradition - one that I think it is
comprehensively successful - of conferring high importance in its supervisory work to
monitoring the rigour of financial information and of the models used to calculate
riskweighted assets. Naturally, it is our wish that these elements, which crucially affect the
supervisor's capacity to properly measure banks' solvency situation, should be part of the
common model adopted by the SSM and applied uniformly to all banks.
A third significant challenge concerns achieving a fruitful framework of interaction between
the SSM and the Single Resolution Mechanism. The regulations have set in place a complex
structure in Europe, which includes the creation of a resolution agency (the Single Resolution
Board) separated institutionally from the supervisor. This agency has been granted
wideranging powers both in respect of the definition of resolvability requirements - which include
the determination of a minimum volume of instruments capable of absorbing losses - and of
the activation of resolution procedures for non-viable banks, as well as the selection of the
most suitable tools to implement them.
Resolution actions have direct consequences for financial stability, which is a public good
that the SSM seeks to protect, and they turn on the more vulnerable banks, which are
precisely those that require greater attention from the prudential supervisor. Accordingly, the
defining of effective information and analysis co-operation and exchange procedures
between the Supervisory and Resolution Boards is crucial for preventing dysfunctions,
overlaps and frictions that hamper the proper functioning of the Banking Union. A
Memorandum of Understanding between both agencies is currently being drawn up and will,
I hope, contribute to achieving the necessary coordination.
Lastly, we should sustain our efforts in order to achieve the degree of cohesion between the
various components of the SSM that effective supervision requires. The SSM directly
supervises 122 European banking groups, encompassing some 1,200 institutions. This is
done with supervisory teams that draw on staff from various institutions, with highly diverse
skill sets, seniority, experience and working conditions. Evidently, we must strive to fully
develop a sense of mission to which all the component parts must contribute, under the
leadership of the ECB and its Supervisory Board, without exclusions or unnecessary
subordination. That is vital for maintaining the motivation and commitment of all SSM
supervisory staff, irrespective of the authority to which they are attached. Indeed, they have
to date shown exceptional professionalism.
Final remarks
In concluding, I will say that the past year has seen major headway in setting the Banking
Union in place, but we still have some way to go. We must move ahead in a setting that will
be complex for the European banking industry.
Specifically, economic activity remains relatively sluggish, price stability is subject to
significant risks and, as a result of this, interest rates are holding at very low levels. Against
this background, banking business is feeling the effects of the difficulties in reactivating
credit, of modest net interest income and of the impaired assets still on their balance sheets.
And compounding this are growing regulatory demands which, though they should be
conducive to the industry's stability in the medium term, are raising the pressure in the short
term on profitability.
It is essential in this setting for managers and supervisors to revise the soundness of banks'
business model and, in particular, their capacity to generate resources in a stable manner
that will ensure satisfactory levels of profitability and solvency in the medium term. That may
require a correction of the European banking industry's excess capacity apparently prevailing
at present. It is important that the authorities involved should attempt to facilitate the process
- which should in any event be led by banks themselves - so that the correction comes
about in the most orderly fashion possible.
Thank you very much.