- Date 06 November 2019
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Ladies and Gentlemen,
Thank you for the invitation, and thank you for giving me the opportunity to speak to you today. I am very pleased that Bloomberg has decided to hold this “Future of Finance” event in Frankfurt for the first time. This decision highlights Frankfurt’s growing importance as a financial hub in Europe and worldwide – a trend that goes well beyond the effects of Brexit and the transfer of business from London to the continent.
I can imagine that the issue of Brexit has kept many of you busy in recent days and months. I can reassure you: For the next 20 minutes or so, you will not need to think about Brexit or even have to hear about it.
However, Brexit emphasises the urgency of the project which I will address, and which is central to the Eurozone and the European Union as a whole:
Today, I will be talking about the Banking Union.
Ladies and Gentlemen,
Let me be clear from the outset: We need to move forward with the Banking Union. And we need to move forward now.
The necessity of deepening and completing the Banking Union is undisputed. Parliamentarians, Finance Ministers, supervisors, academics and market participants easily agree in principle. The reason for this is straightforward: Because it is in our best interest. It is in the interest of the European Union. And it is in the interest of each Member State – including Germany.
A Banking Union that is equipped with the right regulations, institutions and procedures will enable us to overcome the still existing market fragmentation and let capital and liquidity flow to where it is most needed. It will strengthen the competitiveness of European banks and enhance the stability of our banking sector as a whole. It will improve the ability of the Eurozone to respond to macroeconomic shocks and weaken the sovereign-bank-nexus in Europe, which is still too strong. This Banking Union will benefit European businesses, investors and depositors and protect European taxpayers.
To make a long story short: A completed Banking Union will establish a common market for banking services, further strengthen our internal market and generate welfare gains for the entire Union.
All this is common knowledge. And it can easily be confirmed by a brief look at the United States, where the alignment of laws and procedures and the centralisation of competencies has created a huge and unified banking market, generated competitive advantages for US banks and helped the US to reach a higher growth path.
In Europe, we have taken major steps forward: We have created the Single Supervisory Mechanism and the Single Resolution Mechanism, and we are establishing the ESM as backstop to the Single Resolution Fund. We have harmonised deposit insurance legislation and aligned rules on capital, liquidity and bail-in. We have reached these sometimes difficult compromises because we were ready to set aside individual, short-term concerns and to think and act European.
On other major key issues, however, we are experiencing a standstill. Technical discussions on a European Deposit Insurance Scheme have gone back and forth for many years. Progress on other issues seems impossible as long as the question of a European Deposit Insurance remains unresolved – and the inverse is true as well. General political willingness has been expressed by all parties. But these statements of political will too often failed to deliver practical results.
We cannot afford this deadlock any longer. It affects the functioning of our internal market. And it affects the trust of EU citizens in our ability to solve problems – even those problems that we have fully acknowledged.
It is time for a breakthrough. It is time to put together a package to complete the Banking Union, based on the 2016 roadmap: A fair and balanced Banking Union that enhances stability, competitiveness and growth in the Eurozone and in the European Union. Today, I want to lay out what this package should look like.
It consists of the following main elements: further enhancing our crisis management and supervisory regime; further risk reduction; and better rules to avoid harmful arbitrage. And this package also includes a common European Deposit Insurance.
Let me describe in more detail the elements which we should agree upon now and implement consistently, step by step. I will start with the enhancement of our supervisory regime and crisis management.
Ladies and Gentlemen, We need to further improve the institutional and regulatory set-up in order to ensure the continuous review and management of risks in our banking sector.
The SSM and SRM have proven their operability. However, the SRM applies to large, systemically important banks. Smaller banks in crisis are dealt with on the national level and under national rules, in particular national insolvency law. Experience shows that this can lead to situations in which smaller banks or their creditors are treated in a way that is inconsistent with European resolution principles – for example, when unsecured creditors are protected that would have been bailed-in under the SRM.
At the same time, because national insolvency laws serve as point of reference for SRM resolution, differences in these national laws make the cross border resolution of large banks more complicated and contentious.
If we look at the situation in the United States, the strong position of the FDIC can teach us two lessons:
First, instruments that have proven useful under the resolution framework for large banks should also be part of the harmonized deposit insurance toolbox for small banks under insolvency. This includes the establishment of a bridge bank or the transfer of deposits. Where necessary, these alternative deposit insurance measures can be financed by the relevant deposit insurance fund – as long as a strict “least cost principle” is applied. In other words: Alternative deposit insurance measures need to be less costly for the deposit insurance fund than a pay-out of ensured depositors. The SRB should play a significant role in decisions on these alternative measures.
Second, given the frictions between European resolution regulation and national insolvency law that I just mentioned, we need to adopt genuinely European bank insolvency legislation.
Another improvement of our supervisory system and crisis management tools has to do with the integration of cross-border banking groups. I am talking specifically about the allocation of capital, liquidity and bail-in buffers between a parent company and its subsidiaries. This issue has been discussed under the keywords “ring-fencing” and “home-host”, where “host” countries call for the protection of subsidiaries in times of crisis, whereas “home” countries support the free flow of capital and liquidity within a banking group.
A forward-looking and equitable solution must take into account host country demand for fair burden sharing while allowing as much integration as possible.
In my view, the right solution would be a combination of both: maximum flexibility to efficiently allocate capital and liquidity within the Banking Union in normal times; and a clear allocation of capital and liquidity between parent company and subsidiaries in times of crisis.
This allocation would follow a mandatory “waterfall” payment scheme, based on statutory provisions and a decision by the SSM and the SRB.
In order to be fully effective, this new framework may require the harmonisation of bank company law. One option would be to create a European legal form for banks or to refine the design of the European Company (SE).
Ladies and Gentlemen, A stable banking sector requires further risk reduction. This includes the consistent and sustainable reduction of non-performing-loans as agreed in 2018; we have agreed on far-reaching rules such as the NPL prudential backstop, which will be implemented now. And it also means that we must further improve our policies and practices to combat money laundering and terrorist financing across the EU.
The most contentious issue of risk reduction has so far been the regulatory treatment of sovereign risk, as already foreseen in the 2016 Roadmap.
Still, neither risk weights nor large exposure limits apply to sovereign debt. We acknowledge that any reform to the treatment of sovereign debt holdings by banks needs to be carefully calibrated in order to avoid risks to financial stability.
Nevertheless, in the wake of the financial and sovereign debt crisis, there is general agreement in principle: Sovereign bonds are not risk-free. Furthermore, a high exposure to a specific sovereign, often the bank’s home country, also poses a risk to financial stability – the keywords here are: “home bias” and “sovereign-bank nexus”.
Any solution must take these aspects into account. The solution I propose is: risk based concentration charges and “safe portfolios”.
The model of risk based concentration charges combines three components: (1) an allowance for sovereign debt of an individual country or borrower unit that would be exempt from capital requirements, (2) basic risk weights based on credit quality, and (3) a concentration factor reflecting the concentration of a specific sovereign risk on the bank’s balance sheet.
This approach would create strong incentives to reduce home bias and diversify sovereign risk. A careful calibration and an adequate phase-in period would prevent excessive burdens on banks and avoid financial stability risks.
Over time, banks in all countries would build up “safe portfolios” of sovereign bonds. This would achieve two-fold benefits: It would enhance the stability of banks, and, at the same time, it would help countries with weaker credit ratings.
Ladies and Gentlemen, In my view, a common European Deposit Insurance should be part of the Banking Union framework which I have described.
We have discussed the Commission’s EDIS proposal since 2015, with no agreement in sight. Interestingly, no Member State has ruled out a European Deposit Insurance in principle. There is general agreement that a European scheme could counteract bank runs caused by a loss of confidence in national institutions and thus stabilise the financial system. However, many Member States, including Germany, worry about creating wrong incentives by shifting liabilities from the national to the European level.
I am convinced that a European Deposit Re-Insurance System could reconcile the various concerns and cut the Gordian Knot.
This Re-Insurance System would be based on an Intergovernmental Agreement, and it would complement national Deposit Insurance Schemes fully set up under the DGSD with a European Deposit Insurance Fund (DIF).
The DIF would consist of different national compartments and be administered by the SRB. In case of a bank failure, a three tier mechanism would apply: First, national DGS funds would be used according to the DGSD. Second, if national capacities have been exhausted, the DIF would provide limited additional liquidity through repayable loans. And third, in rare cases where additional financing is needed, the respective Member State would step in, possibly supported by a regular ESM programme.
This European Deposit Re-Insurance System would significantly enhance the resilience of national Deposit Insurance Schemes while at the same time ensuring that Member States fulfil their national responsibilities. In a second and final phase, once all elements of the banking union have been fully implemented, a limited loss coverage component could be considered in addition to the repayable loan.
A common European Deposit Insurance is seen by some as an instrument to promote a level playing field between banks in all EU Member States. I share the objective of fair competition. This brings me to my last point: the need to avoid harmful arbitrage in the Banking Union.
One key factor that leads to the distortion of competition among Member States is tax law. Germany, working together with France, is pushing for a common corporate tax base (CCTB) and a minimum effective taxation. Progress with the Banking Union must not lead to a situation where tax arrangements continue to distort competition. For this reason, we must ensure the uniform taxation of banks within the EU. This includes the uniform tax treatment of SRM levies, which is already stipulated in the SRM Intergovernmental Agreement.
Ladies and Gentlemen, To sum up: The completion of the Banking Union is a key project for enhancing stability, competitiveness and growth in the Eurozone and the European Union. It is in our common interest.
I have outlined the measures that need to be taken. This is a comprehensive, fair and balanced package. We have proven that progress is possible when we adopt a European perspective and when we are ready to compromise. It is time to move forward. Now.