Developments and Challenges in EU Financial Market Regulation

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1 Alfred Lejsek, Director, Ministry of Finance, Austria Developments and Challenges in EU Financial Market Regulation 19 April 2017, World Bank Group, Workshop Resolution Regimes in Europe

2 Resolution targets A stable financial system requires: Financial institutions must be able to fail in an orderly manner without taxpayers losses as consequence of bank-support without disruption of the bank s critical economic functions. Bank restructuring and resolution has a long history:

3 History (1)

4

5 History (2) 1931

6 History (3) 2006

7 History? 2007

8 Bank Crises NPL Bank Crises State crises Full information available? - NPL-ratio - Collateral - Provisioning - Economic terms of NPL Strategies to solve the problem? Non Performing Loans

9 Reactions to Financial Crises (1) (State) Bank Support Measures: Capital injections (CET1 capital, but also hybrid capital) Asset guarantees Liquidity provisions and guarantees Nationalisation of failing banks AMC good bank bad bank solutions State aid driven compensatory measures (bail-in and contributions by equity holders)

10 Reactions to Financial Crises (2) Actions taken by (Member) States Bilateral Financial Support (as a first step taken in Greece) Voluntary agreements with private creditors (haircut 2011) EFSF (European Financial Stability Facility) ESM EU + IMF balance of payments loans ECB monetary policy since 2012

11 Reactions to Financial Crises (3) Legislative and Supervisory measures: CRD IV, CRR, Single Rulebook Transitional arrangements for state capital as part of the CRR European Supervisory Authorities + ESRB SSM Banking Union Resolution Mechanism, BRRD DGS - Directive..

12 Financial Crises Challenges (1) Challenges Individual factors of a failing bank: In a lot of cases bank failures had individual components does the European framework take these factors into account? Examples: Deficiency guarantees by the state, Local funding from a small number of domestic banks, Strong retail business In most cases the bank s planing and budgeting was rather optimistic can we trust in restructuring and resolution plans?

13 Financial Crises Challenges (2) Challenges - NPL: Current discussion at EU-level in the broader context of resolution dealing with two aspects: Making resolution operational (implementation of TLAC, harmonisation of MREL, creditor hierarchy, resolution colleges) topics of the seminar Avoiding resolution: making banks more resilient ( risk reducing measures, addressing NPLproblem)

14 Financial Crises Challenges (3) NPL: one of the main non-legislative topics in EU (informal ECOFIN): High level in EU, but unevenly spread among countries and banks, Serious problems for some countries and specific banks, Problem is not solved by wait and see -strategy, High stock on NPL hampers profitability of banks and financing of real economy, Assessing a bank by looking at its NPL-ratio: Do we know the full picture of the NPLs?

15 Financial Crises Challenges (4) NPLs must be addressed in several ways: proactive NPL management strategies focus on NPL by supervisors (ECB guidelines!) (national) Asset Management Companies for bridging the time gap and to increase recovery rates improvement in insolvency law and national procedures No public money state aid, tax relief

16 Financial Crises Challenges (5) Challenges who contributes to resolution: Who contributes in the case of a crisis? equity holders, the state, depositors, investors (bond holders) or the industry (i.e. private banks acting as competitors of the failing bank)? In some EU-cases: private banks contributed to resolution we don t have such an experience in Austria. The main question - why should a bank support its (former) competitors?

17 Financial Crises Challenges (6) Challenges Support schemes: We detect different types of support schemes: Guarantee / solidarity schemes within the co-operative / saving banks sector, Institutional Protection Schemes (organized according the provisions of Art. 113 (6) and (7) CRR), Art. 10 CRR groups encouraged by a supervisory waiver, consolidated groups of credit institutions; Challenges: Most of these groups are competitors in the same markets!

18 Financial Crises Challenges (7) Challenges DGS: What financial capacity does a DGS have? How to organize a DGS to be robust to cover deposits of large banks? European DGS? Home / centralized supervision versus national DGS. What is the task of a DGS also bank restructuring? National experience: It is a long way to establish an Austrian-wide DGS, moving from a mutual liability to a funded system the transitional arrangements are ongoing.

19 Financial Crises Challenges (8) Challenges Making Bank Resolution operational: Sufficient MREL TLAC available? SPE versus MPE approach (issues have already been discussed in the seminar) Political awareness that banks may fail? Which business model should be chosen within the economic environment (see next slide)

20 Financial Crises Challenges (9) Economic Challenges which business model? Low interest rates High NPL-ratios Low Bank profitability high operational costs Lack of incentives to invest in bank equity Contributions to national / European resolution and DGS funds Consumer-friendly jurisdictions High penalties for misconduct

21 Conclusions Concluding remarks: There is no absolute certainty that resolution strategies will work efficiently in a crises situtation. Likely behaviour of involved parties: How to avoid resolution or insolvency procedures. Effective supervision is needed to minmize the risk that a bank becomes likely to fail. A (broad) acceptance of supervision is needed - by the public, by the supervised entities, in political discussion