Resolution issues in Europe Statement at ILF Conference
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Ladies and gentlemen
Thank you for providing me the opportunity to comment on our resolution regime in Europe and the issues that still need to be solved. Before I will comment on concrete issues today, let me set the frame: Where do we come from?
At the grand scheme of things, the flaws in our former regulatory framework can be summarized as major inconsistencies of a market economy
The concrete symptoms were manifold: Banks that were too big to fail, public bail-outs, thus, tax payers money as the choice of least resistance to stabilize the financial system – or the only good choice at all, resulting in wrong incentives for bank managers and investors.
As a consequence, the “new” resolution regime for banks was developed to overcome these flaws, mainly the dilemma of deciding between systemically risky insolvency proceedings on the one hand and economically and politically questionable bail-outs on the other.
The new resolution regime represents a major step towards restoring the principles of the market economy: If an institution fails, its shareholders and creditors should be the first in line to absorb the risks and losses.
However, the previous resolution cases underpin that each case is different. Thus we cannot generalize easily. “Small” loopholes may suffice to maintain former fragilities. Therefore, only if all components of the new regime are working properly and are credible, we can speak of a success.
What still needs to be done?
First, we have to ensure that the goal that shareholders and creditors should bear losses instead of taxpayers remains paramount at all times, even in cases were banks are to be liquidated according to national insolvency regimes and not resolved under the resolution regime as it was the case for the Venetian banks.
Second, we have to ensure that public support is strictly exceptional and limited by sufficient and adequate burden sharing in order to prevent wrong incentives and moral hazard. In this respect, there should be no gap in respect to burden sharing between the EU resolution framework and national insolvency regimes.
One solution could be to amend the Banking Communication 2013 by way of extending the burden sharing requirements analogous to the BRRD for banks that – due to the lack of public interest – have to be liquidated in line with national insolvency rules but are in need of public support nevertheless.
The first resolution cases also underscore that it is essential to build up sufficient bail-inable loss absorbing capacity (TLAC/MREL) in order to ensure the credibility of the bail-in tool.
In the course of the ongoing review of the EU legal framework, we should therefore prevent any steps that could weaken the requirements for MREL. A general subordination requirement for MREL-eligibility is essential to ensure the effectiveness and legal reliability of bail-in. Thus, challenging tasks still lay ahead of us.
But I would like to end on a positive tone. It was predictable that a transition towards a new regime with new responsibilities, new roles for investors and a new role for society would not take place painlessly.
At the height of the financial crisis, some have even deemed that transition impossible. It is remarkable that none of the first resolution cases led to lasting spillover effects or negative repercussions in the markets.
This demonstrates that markets in principle trust Europe’s “new” resolution regime to allow for an orderly resolution of distressed banks. This should encourage us to strengthen even more our efforts to address existing loopholes rigorously.