SPEECH
SPEECH BY GOVERNOR LARS ROHDE
AT THE ANNUAL MEETING OF
FINANCE DENMARK 2018
CHECK AGAINST DELIVERY
3 December 2018
Thank you for inviting me to speak here today.
In an age when partnerships are discontinued, and walls are built
between countries, I find it important to focus on the considerable ad-
vantages to our society and its continued development which rule-based
international cooperation offers.
I have chosen to talk about three topical issues which, in their separate
ways, relate to cross-border cooperation and which are essential to fi-
nancial stability in Denmark. They are: anti-money laundering, crisis
resolution of mortgage credit institutions and the banking union.
But first I would like to express my appreciation of the good cooperation
we have had in many areas. You contributed strongly to the process of
connecting the Danish krone to TARGET2-Securities. It is a great step
forward that Danish banks are now able to settle securities via the single
European settlement platform.
Many of you have also helped to launch Kronos2, and we have jointly
achieved significant results in the Payments Council. In the FSOR, we have
increased the cyber resilience of the financial sector, and we have agreed
to perform sophisticated tests of the resilience of the individual
institutions in the coming years - known as the red team tests.
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Unfortunately, money laundering has been on everyone's lips in 2018. A
simple search in Infomedia shows that the Danish word "hvidvask" has
been used four times as frequently this year as in 2017.
We have witnessed extensive misuse of the financial infrastructure for
illegal activities. There has been and still is a need to strengthen efforts in
this area.
At Danmarks Nationalbank we are interested in this issue because money
laundering can jeopardise financial stability. Customer and investor
confidence is an essential prerequisite for providing financial services. So,
loss of confidence can be very harmful for a bank. If confidence in a single
participant is eroded, this may rapidly have an impact on the rest of the
sector.
The reputation of the authorities and the country may also be severely
affected. This became very clear to me at the IMF Annual Meeting in
October when I received many enquiries about the money laundering
challenge in the Danish financial sector.
Banks play a key role in the financial infrastructure. And with this role
comes an important social responsibility. A responsibility for ensuring
that their businesses are not used for illegal activities.
The number of suspicious transactions reported to the anti-money
laundering secretariat has soared in recent years. If this continues, the
authorities will face a huge task in relation to handling the volume of
reports.
There are indications that the lines of defence are too far back. They
should be reached long before reporting becomes necessary. In other
words, the banks should have knowledge of their customers.
As payment systems have become faster and more efficient, it is of
paramount importance that the banks have in-depth knowledge of their
customers.
It is the role of the authorities to investigate cases of money laundering if
there is suspicion of illegal activities. But before it comes to that, the
banks have a responsibility not to engage in customer relationships if the
real motives of the customers are dubious.
The political agreement to strengthen anti-money laundering efforts in
Denmark that was concluded in the autumn was necessary. But money
laundering knows no borders. Cross-border activities call for
strengthened cross-border supervision in the EU.
So, it is essential also to enhance European cooperation. That will
provide a far better overview of the activities of international banking
groups. And it will also enable the build-up of stronger competences in
this area.
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Now I will turn my attention to another topic. Something that I have
talked about previously. Resolution of mortgage credit institutions. My
interest in this topic is not purely academic. I myself witnessed the
neardeath of a mortgage credit institution in the 90s, and I know that others
who are present today shared that experience. It made an impression on
me - and presumably also on you.
So, I would like to reiterate: one of the key lessons learned from the
financial crisis was that it must be possible to manage crises in the financial
sector without the use of government funds.
It must be possible for the large, systemically important institutions to
continue in case they experience problems. They perform functions that
are critical to society and essential to financial stability.
How do we ensure this? Well, one of the preconditions is that there are
sufficient owner and creditor funds that can absorb losses, also known as
eligible liabilities and own funds.
As you know, Danish mortgage credit institutions have been exempted
from the minimum requirement for eligible liabilities and own funds,
MREL. Instead, they must meet a debt buffer requirement. In Danmarks
Nationalbank's opinion, that is a bad idea. And we still think so, even
though things have changed since I last addressed you:
Since then, a legislative amendment has been introduced for SIFIs that
include mortgage credit institutions. For them, the sum of the MREL and
capital and debt buffer requirements must constitute at least 8 per cent
of total liabilities and own funds.
The amendment is a step in the right direction. However, it does not
solve the problem; there are still SIFIs for which the requirements are not
sufficiently high for the institutions to be recapitalised and continued in a
crisis situation. Furthermore, the problem with the current requirement
for mortgage credit institutions is that it is not risk-sensitive.
The MREL is. It increases when risks increase, as they typically do in bad
times. That is why we need an MREL for mortgage credit institutions.
And here is the good news. At Danmarks Nationalbank we have
calculated the costs of introducing an MREL for mortgage credit institutions now
that we have the 8 per cent requirement. And the costs are negligible.
Our calculations show that the sector's total costs will be in the range of
kr. 100 to 200 million.
The institutions can finance this by reducing costs or dividend payments.
If they choose to raise their administration margins instead, we have
calculated that the cost is equivalent to an average increase of less than 1
basis point in administration margins.
Surely that is a low price to pay for ensuring that mortgage credit
institutions can be resolved without jeopardising financial stability and taxpayer
funds?
As I see it, this is the right thing to do. I would like to wake up in the
morning, drink a cup of coffee and know that we make the right choices
for society.
Doing away with the exemption will also give the authorities the option
of using the Resolution Fund if required.
My final message regarding resolution is this: a precondition for credible
resolution is that financial institutions can be handled without any
knockon effect on the sector overall.
I would like to make it clear that for Danmarks Nationalbank it is of the
essence that mortgage bonds do not suffer losses. Fortunately, the Bank
Recovery and Resolution Directive - BRRD - provides a solution: it is
possible to exclude certain liabilities and own funds from being written down
or converted. That should be the case for mortgage bonds. Instead,
there must be sufficient eligible liabilities and own funds.
That is why we should have an MREL for mortgage credit institutions.
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Anti-money laundering and crisis resolution rules - the two topics I have
talked about so far - are examples of areas where binding international
cooperation offers clear advantages.
The government envisages that next autumn a final decision will be made
on Danish participation in the banking union.
What would it mean in terms of anti-money laundering and resolution of
failing banks and mortgage credit institutions if Denmark joins the
banking union, we might ask.
About anti-money laundering, supervision will still be a matter for the
national authorities.
When it comes to crisis resolution, the single insurance element of the
banking union is important, but the probability that it will be invoked is
very low.
However, there are a number of other good reasons why Denmark
should join the banking union.
The union has not been established for the sake of the banks but to serve
the interests of citizens, firms and financial stability. And it is a further de-
velopment of the single market for financial services, which strengthens
competition.
For some banks, this increased competition may not be an advantage.
But for citizens and firms it is a clear advantage.
The ECB's Single Supervisory Mechanism, SSM, has now existed for four
years and has proved to be a strong and capable supervisory authority.
The SSM can bring together strong skills and analytical powers. This is
necessary for effective supervision of the largest banks, which are com-
plex, operate across borders and use sophisticated models.
The SSM does not necessarily give the banks more latitude. But it
underpins financial stability. In this context, the parallel to anti-money
laundering is also relevant. The cases we have seen illustrate that international
activity requires a response in the form of close and binding international
collaboration between authorities.
The greatest change if Denmark joins the banking union will be that
Danish banks will be subject to the SSM supervisory practices. The impact will
be most direct for the large banks, which will be supervised by the ECB
via instructions to the Danish Financial Supervisory Authority. The smaller
banks will still be supervised by the Danish Financial Supervisory
Authority within a framework defined by the ECB.
Participation in the banking union will give Denmark a say in relation to
the single supervisory practice via participation in the ECB's Supervisory
Board. And via the ECB we will have a voice and influence in the Basel
Committee and the Financial Stability Board, which are key bodies in the
design of financial regulation.
Those who are against Danish participation in the banking union often
argue that Danish taxpayers and bank customers risk footing the bill if
banks in e.g. Greece or Italy fail.
At Danmarks Nationalbank we have studied this aspect closely. The heart
of the matter is the joint liability of banking union participants and the
likelihood that it will be invoked.
Our reply is that the structure of the banking union means that joint
liability will apply only in very extreme loss scenarios. The joint liability is a
kind of insurance against disaster, it will not result in regular flows of
funds between banking union member states.
We are not the only ones who are concerned about ending up with bills
that others ought to pay. The very structure of the banking union and the
practice that has characterised the euro area member states' handling of
the euro debt crisis reflect precisely these concerns.
Very large and very influential euro area players share our views and will
ensure that we do not move too far in the wrong direction.
Reluctance to transfer funds between member states has been seen in
connection with the crises resolved within the banking union until now.
Most recently, we have seen that Italy has provided government support
- but without the use of funds from other member states.
The joint liability which is already part of the banking union in the form of
the Single Resolution Fund, SRF, being built up also contains protective
elements. This means that a loss scenario must reach a very late stage
before the SRF can be activated.
And finally, it has also been established that a single deposit insurance
scheme will apply in connection with extremely large losses only.
Irrespective of how this single deposit insurance scheme is designed.
This does not mean that the single insurance elements do not matter. But
it means that they should not be conclusive arguments for or against
Danish participation in the banking union.
Let me sum up what I have said by emphasising that rule-based interna-
tional cooperation is the best solution to cross-border challenges. Not
least for a small country like Denmark.
Thank you.