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Single Resolution Board Annual Conference Brussels, 19 September 2022
Armed peace and risk proportionality: how to strike the right balance
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
It is a great pleasure for me to be with you at the European Commission for the
2022 SRB annual conference, and I would like to warmly thank Dr Elke König
for her invitation to give this keynote speech today. Above all, I would like to pay
tribute to Elke for her hard work as first Chair of the SRB since its creation in
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2015 SRB staff can also be very proud. You have a strong ally in France, with
whom I have great pleasure working each and every week: Dominique
Laboureix. I won't be betraying any great secrets by saying how much he
enjoyed taking part in this creation, and how much he remains attached to the
SRB.
The title of this conference ("European banks: resolvable and ready for crisis?")
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may cause some anxiety yet a healthy type of anxiety. It reminds us of possible
dangers ahead, and serves as a strong reminder of what happened to banks
during and in the aftermath of the great financial crisis. The temptation to forget
about these events would be a huge mistake: lessons of the past, especially of
that kind, should remain vivid memories that motivate us, day after day, to build
"philosophy of resolution"
a safer system. The is rooted in those rough times;
want to live again under the threat of "too big to
we do not fail", and without living
wills.
EU lawmakers and regulators quickly learned the lessons. Beyond the crisis
management regulation (BRRD and CRR), the Banking Union launched in 2014
is in its own way an illustration of
Clausewitz's military theory. It has strategic
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objectives (or Ziele in German) establishing a stable, safe, and reliable
banking sector, but also offering the right conditions for the emergence of pan-
European groups. It also set political goals (Zwecke) through its three
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pillars. And lately, it has directed its efforts (Schwerpunkt) mainly and maybe
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excessively towards the third pillar EDIS (European Deposit Insurance
Scheme).
Today we should turn our main efforts to enhancing implementation of
resolution, in order to make it even more efficient. Although it is less frequently
commented on, let me stress that resolution is just as important as supervision.
It echoes that famous Latin phrase: si vis pacem, para bellum (if you want peace,
prepare for war). That goes without saying, but for the sake of clarity, do not
take this military metaphor literally: we are not warmongers of any kind.
However, decision-makers in charge of resolution, like generals, need to act
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within a very short timeframe -typically a weekend in order to find the right
solutions to complex emergency situations. Resolution authorities need to be on
a war footing at all times.
Coming to a concrete and operational perspective, I will first give a few personal
suggestions on how the resolution framework could evolve over the coming
years (I), and then highlight why and how supervision and resolution authorities
should work more closely with one another (II).
I. How resolution could evolve over the coming years
Resolution currently stands as the only harmonised crisis management
framework at EU level, and is therefore a public good to be preserved and
enhanced. After seven years of determined preventive action and two
successful resolution decisions, the SRM is entering a more mature phase
where it can start contemplating how resolution may evolve, taking advantage
of the upcoming revision of the crisis management framework.
Primarily, we should broaden the scope of banks that could be subject to
resolution measures, by considering the regional impacts of a failure in public
interest assessments (PIAs). The SRB and some national resolution authorities
have already taken a first step in this direction. I very much welcome this
evolution, which in my view could go one step further to enable medium-sized
banks to be subject to resolution measures if their PIA concludes that there is a
public interest in doing so. We would naturally have to determine the criteria for
identifying medium-sized banks, and for excluding small banks whose limited
footprint would never justify resolution. Furthermore, instead of focusing
exclusively on bail-in, resolution planning should ensure that the whole range of
currently available tools are considered. Finally, some efforts should be made
to harmonise the main features of national insolvency proceedings, such as
creditors' hierarchy, rather than creating parallel crisis management paths which
would simply duplicate the existing resolution tools while triggering significant
level playing field issues.
Once these steps are taken, the probability of recourse to the Single Resolution
Fund (SRF) could increase. However, while the initial objective was to reach 1%
of the covered deposits, such a goal being evaluated at an amount of EUR 55
billion, this amount has been constantly revised, and the SRF represents today
EUR 66 billion and will reach around EUR 80 billion next year. This sharp
increase can be mechanically explained by the surge in deposits in the wake of
and "forced" savings.
the Covid crisis The fact remains that this very high
amount has never been used so far: we cannot completely ignore this question.
It can be discussed whether this amount is disproportionate compared with
European banks'
level of risk. If the answer is yes, then we should contemplate
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introducing a ceiling in absolute terms the level of which would have to be
determined. We should also use the flexibility offered by the current regulation
to alleviate the burden of the contributions for banks, so that irrevocable
payments commitments can represent up to 30%. All these questions need to
be examined.
II. Why and how supervision and resolution authorities should work more
closely with one another
Let me now turn to the way in which the two completed pillars of Banking Union,
namely supervision and resolution, could become more consistent with one
another and work more closely together.
Cooperation between the SRB and the ECB does exist, and is formalised by a
Memorandum of Understanding. This provides for ex-ante cooperation in calm
times, and close cooperation in early intervention and resolution phases. Thanks
to this tremendous ongoing preventive work conducted by the SSM and the
SRB, and to continued efforts from banking institutions, recovery plans have
significantly improved in recent years.
Beyond the current areas of cooperation, which could still be enhanced in
practice, greater coordination on policy issues appears desirable. In particular,
policy decisions that pertain to own funds have a very concrete impact on
European banks'
competitiveness, and therefore on the level playing field with
foreign banks. Here, we must find a trade-off between safety and competition
issues, with efforts needed on both sides. For instance, the SSM could further
consider a risk-based approach rather than a flat-rate approach to estimate
post-resolution Pillar 2 requirements. This entails a need to take into account a
forward-looking approach and the expected risk reduction that follows a
resolution. This should be acknowledged in the calibration of external minimum
requirements for own funds and eligible liabilities (MREL): banks are not at the
same stage today as they were seven years ago.
The resolution authority could, in turn, better take into account certain strategies,
and thereby accept a certain level of risk. A likely effect of recovery options or
transfer tools is that the structure of the remaining group might become less
complex and therefore carry less risk. Besides, the stance on waivers of internal
requirements for entities located in the same Member State (or even in the same
Banking Union) has proven overly conservative. We need pragmatism, and
consistency between the SRB and the SSM: when an entity has been waived
from capital requirements, or is simply not subject to capital requirements, the
resolution authority could apply the same on MREL.
Proportionality to risk could entail other changes, such as the calculation of
banks' contribution to the SRF. As of today, the size of institutions
has an
overwhelming importance in the determination of these contributions. This is
more than questionable: size does matter in order to bring an institution under
the scope of resolution, but size and risk are two different notions and they
should be more clearly differentiated in technical implementation. In order to
ensure the fairness of contributions, and greater adherence to the SRM overall,
it is necessary to adapt formulae accordingly. Beyond fairness, penalising the
largest banks or groups prevents the emergence of pan-European groups,
which is one of the Banking Unions' objectives.
Here let us acknowledge that
we have collectively failed so far; we have a Banking Union without really cross-
borders European banks. This is a major weakness. This is where we should
bring our Ziel, our strategic objective, into our field of vision. And even more so
since MREL requirements in the European Union are, on the whole, far more
stringent than the TLAC international standards and their translation into other
jurisdictions'
regulations.
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Let me conclude by saying that, in 2022, after the first seven years of existence
of the single resolution mechanism, it may be time to recall what Clausewitz
identified as the greatest difficulty:
rightly "to adhere steadfastly in execution to
the principles which we have adopted." That does not mean showing rigidity in
technical implementation, on the contrary. It means taking a risk-based
approach and conducting a balanced analysis of the best way forward in order
to serve these principles in a relevant way. I will end my speech with another
phrase of Roman wisdom: in medio stat virtus, virtue lies in the middle. I thank
you for your attention.