During the last exchange in ECON with SRB chair Elke König, I reached a small but interesting step towards more transparency in European banking resolution. Much of the work of Europe’s banking resolution authority, the Single Resolution Board (SRB), is notoriously opaque. The resolution plans of the large European banks and the bespoke supervisory requirements based on these plans are not open to the public. On 27 October 2020, the Chair of the SRB Elke König appeared before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament. During the meeting, I called for the publication of aggregate time series data on the levels of bail-inable debt of EU banks. Ms König kindly committed to publishing this data in the future. This will allow stakeholders and the public to better assess the progress made by European banks towards resolvability. Yet, further transparency is urgently needed.
Following my initiative, the SRB will start to publish aggregate time series data on the so-called minimum requirements for own funds and eligible liabilities (MREL). These requirements are determined by the SRB individually for each large European bank and dictate how much bail-inable debt the banks must hold on their balance sheets to ensure their resolvability. So far, data on the build-up of both MREL requirements and actual MREL levels over time have not been systematically available. A video of my question and Ms König’s commitment can be found here. I am convinced that trust in institutions can only be built on transparency. European authorities should be committed to this to the maximum extent possible. My success is a small step in the right direction.
During the hearing, I could also obtain some clarity on the SRB’s supervisory practices regarding MREL during the current crisis. From 2021, MREL requirements will be calculated according to an updated methodology, but until the end of the year requirements set by the SRB based on an older methodology are still in place – and legally binding. Since the beginning of the crisis, the SRB has repeatedly stated that it uses the flexibility in the resolution framework and adopted a “forward-looking approach” towards banks that face short-term difficulties in meeting the existing targets. I have asked Ms König how exactly this approach looks like. Surprisingly, she replied that the SRB decided not to assess the existing targets and instead focus on setting the new targets applicable from 2021 onwards. In other words: Seemingly, Europe’s single resolution authority currently simply ignores when banks fail to meet their legally binding MREL targets. Such a lenient approach severely threatens to undermine the credibility of financial supervision. Moreover, it is highly problematic that this practice has not been made more transparent before. Transparency is key for the effective parliamentary control of European authorities.
It is questionable whether the SRB would have been in a position to enforce its own requirements. This became clear when I asked Ms König about the SRB’s progress regarding the identification of so-called substantive impediments. According to the Single Resolution Mechanism Regulation, the SRB has to assess banks’ resolutions plans and determine if there are substantive impediments to the resolvability of the institutions. Where such impediments are identified and the institution fails to subsequently remediate them to the satisfaction of the supervisors, the SRB may apply far-reaching measures to restore resolvability. This substantive impediments procedure is the only mechanism available to the SRB to enforce the legal requirements. Despite that, Ms König confirmed that until today, the SRB has not completed a single substantive impediments assessment. Hence, more than five years since the inception of the Single Supervisory Mechanism, the SRB still has not operationalised its full supervisory powers and instead continues to rely on communicating expectations towards the supervised banks. The slow progress on the topic had already been criticised by the European Court of Auditors in a report from 2017. Since the absence of substantive impediments is a prerequisite to resolvability, this implies at the same time that in the sixth year of its existence the SRB has still not declared a single European bank resolvable. More than ten years after the great financial crisis, the Single Resolution Mechanism is still not fully functional and many of the risks to financial stability persist. The SRB must deliver on its mandate and move towards exercising its full competences without further delay.
More transparency is urgently needed. As long as the SRB cannot provide full assessments of substantive impediments and resolvability, it should publish more detailed statistical information on the progress made. The public must be given the possibility to assess how far European banks have progressed on their path towards resolvability. I will make proposals for further disclosures in an upcoming letter to the SRB.
With green European greetings,
Video of Ms König’s hearing before the ECON Committee on 27 October 2020 (my question at 17:26):
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