Speech at Financial Stability Conference 2017

18 October 2017

Speech

Berlin, 18 October 2017 – Ten years after the onset of the most serious financial crisis in recent history, the EU’s financial framework is still not consistent and needs to be further strengthened to ensure financial stability. Further reforms to improve the resilience of the banking sector are still needed to turn the current cyclical recovery into a sustainable structural recovery.

At today’s high-level Financial Stability Conference in Berlin, hosted by the Financial Stability Network, Senior Policy Adviser Christian M. Stiefmueller reiterated Finance Watch’s key positions on the continuing debate about bank resolution and banking sector reform:

  • A solution for the European Non-Performing-Loans (NPL)  crisis is long overdue. Measures should be taken at the national level, in the Member States most affected by the crisis, coordinated and supervised at the EU level and funded by the private sector, without recourse to the taxpayer;
  • The “burden sharing” principle enshrined in EU legislation, specifically the Bank Recovery and Resolution Directive (BRRD), ought to be respected. It requires shareholders and other investors of an EU-based bank to contribute at least 8% of all liabilities, including own funds, to the cost of its resolution before any external funding can be accessed. The “precautionary recapitalisation” clause, which allows public money to be used in some cases without shareholders’ and creditors’ participation to protect financial stability, has been overdue for revision by the legislators for nearly two years. It has proven to be a convenient escape clause for those, should finally be revoked to restore a level playing field and ensure that EU law is applied uniformly across Member States;
  • The resolvability of all banks, regardless of size and geographical reach, is of paramount importance to reduce moral hazard and maintain financial stability. Banking groups must be obliged to adopt structural reforms, if necessary, to ensure that they can be resolved in an orderly way and without falling back, once again, on taxpayer support.

In this context, Finance Watch welcomes the European Commission’s recent communication on completing the Banking Union by 2018. We would wish to point out, however, that the included Banking Package comprises are a number of highly disputable proposals which we strongly recommend should be reviewed, and removed, before the Package is passed:

  • The Banking Package contains, in numerous instances, unacceptable restrictions to the supervisory and resolution authorities applying their expert judgment in the exercise of their respective duties. This applies for instance, to the conversion of binding regulatory requirements (e.g. Pillar 2 capital, MREL) into non-binding guidance, the effective introduction of caps (e.g. on MREL) and a de facto reversal of the burden of proof in respect of some of their regulatory decisions. Finance Watch objects against these measures which are likely to weaken the quality of regulatory oversight;
  • Whereas we strongly support the introduction of the Leverage Ratio and the Net Stable Funding Ratio as alternative, in our view more reliable, metrics to the risk-weighted capital framework, we are disappointed that the implementation of the leverage ratio, in particular, is incomplete and does not account for the additional level of loss absorbency that is required from Global Systemically Important Institutions (G-SIIs) and Other Systemically Important Institutions (O-SIIs) under the risk-weighted framework. The EU should not be lagging behind other major G‑SII home countries, such as the US and Switzerland, in introducing these requirements;
  • It is important to point out that the amendments made to the existing bail-in framework in connection with the introduction of the international loss-absorbing capacities’ standard, TLAC, should not become an entry point for a general dilution of the existing “burden sharing” rules. We would, to the contrary, expect that TLAC’s stricter requirements regarding the subordination of eligible liabilities are applied to the European loss-absorbing capacities’ standards, MREL, so that financial and other unsecured claims are clearly separated and legal certainty is assured for all creditors in resolution.

Finance Watch supports the proposed third pillar of the Banking Union, the European Deposit Insurance Scheme (EDIS). We would caution, however, that the introduction of EDIS can only be realistically contemplated once the European banking sector has been stabilised, NPLs have been restored to normal levels, and national deposit guarantee schemes have been built up to adequate levels, in accordance with the Deposit Guarantee Scheme Directive (DGSD). As with DGSD, suitable phase-in periods will need to be observed.

Senior Policy Adviser Christian M. Stiefmueller, said:

“Whereas we agree that a speedy completion of the regulatory reforms is desirable, we call upon the legislators not to rush through measures that amount to a weakening of the existing framework but, instead, complete the regulatory agenda and lay the basis for a stable, sustainable and effective financial system in Europe.”

Links:

Finance Watch, Policy Brief “Should precautionary recapitalisations make taxpayers nervous?”, October 2014