Europe: Progress in bank  resolution and banking union
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Europe: Progress in bank resolution and banking union

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1. The EZ needs a fully fledged banking union (SRM as a counterparty for the SSM) ...

1. The EZ needs a fully fledged banking union (SRM as a counterparty for the SSM)

2. Dealing with legacy problems is key: comprehensive assessment including (i) Supervisory Risk Assessment; (ii) Asset Quality Review and (iii) Stress Test.

3. Backstops: private, public (national), public with ESM support (but no direct
recapitalization before SSM)

4. Bail in will contribute to separate the sovereign and banking risk

5. Negotiations on SRM are at stalemate. Fiscal union by backdoor? Reform of the Treaty? Uncertainty on the German stance

6. Keep making progress. Both authorities and the industry have to work on the design of the transition

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Europe: Progress in bank  resolution and banking union Europe: Progress in bank resolution and banking union Presentation Transcript

  • Europe: Progress in bank resolution and banking union Shaping the New Framework for Global Financial Regulation LACEA & LAMES 2013 Annual Meetings Mexico City, 31 October 2013 Santiago Fernández de Lis
  • Index Section 1 Overall European regulatory initiatives Section 2 Banking resolution Section 3 Banking union Page 2
  • Section 1 Overall European regulatory initiatives Capital/ Leverage ESRB CRD IV Liquidity Macroprudential OTC derivatives EMIR MiFID II/ MiFIR Financial markets Systemic Risk CRAs regulation ESAs: • • • EBA EIOPA ESMA Banking Union Structural reforms Supervision SSM SRM Bank Resolution DGSD Liikanen report BRRD Page 3
  • Section 1 CRD IV: Transposition of Basel III Capital requirements & capital buffers Systemic risk (“flexibility package”) • • In line with Basel III: 4,5% CET1 + 2,5% conservation buffer Countercyclical buffer: up to 2,5% (under national authorities responsability) Members States have discretionary powers in its implementation: • Systemic risk buffer (financial sector): 1 – 3% • SIFI Buffer (insititutions): G-SIFI (1-3,5%); Other-SIFI (0-2%) Leverage Minimum ratio of 3% (compliance since 01/2019, a year later than in US) Liquidity • • Pending LCR definition Reach 100% in 2018 (BIS: 2019). MS could request earlier implementation! Remunerations • • From 2015 bonuses capped to fix salary (1:1) May be doubled (with shareholders approval) Implementation date: 01/01/2014 Page 4
  • Index Section 1 Overall European regulatory initiatives Section 2 Banking resolution Section 3 Banking union Page 5
  • Section 2 Resolution: main elements Objetive • Avoiding that bank resolution has a cost for taxpayers • Based on FSB Key Attributes • In Europe fixing bank resolution is not only about Too Big To Fail Tools • Sale of business • Bridge institution • Asset separation • Bail-in Main aspects under discussion (Trialogue) Bail-in Competition policies (State aid) • Harmonized hierarchy of creditors • No Creditor Worse Off liquidation principle • Minimum internal loss-absorption • Discretionary exclusion of certain liabilities • State aid temporary rules • Government stabilization tools • Resolution fund/deposit guarantee schemes: joint or separate Resolution fund • Target level of 0.8 % of covered deposits if separated (if joint 1.3%) • Access to alternative financing arrangements (i.e. ESM) Page 6
  • Section 2 Resolution: creditor hierarchy and constrained discretion 8% of internal loss absorption Financing of RF Alternative financing sources After 8%: RF could be used to absorb losses or recapitalize the bank. This contribution is capped at 5% total liabilities. • • • Ex-ante contributions of banks Ex-post contributions of banks If the two previous options are insufficient, alternative financing sources ( private or public) Under extraordinary circumstances, only after 5% of RF has been reached and all unsecured and non-preferred liabilities other than eligible deposits have been bailed in DGS (covered deposits) Households & SME Eligible deposits (> EUR 100,000) Senior Debt & Corporate deposits >EUR 100,000 LOSS ABSORPTION More bail-in or eventually alternative financing sources (private, public/ESM) Resolution Fund 5% liabilities Subordinated debt RF could absorb losses Use of Resolution Fund (RF) 8% of total liabilities to be absorbed by shareholders & creditors before RF can be used Depositor preference HIERARCHY AT1 and AT2 Internal absorption 8 % liabilities (hierarchy order) CET1 Page 7
  • Index Section 1 Overall European regulatory initiatives Section 2 Banking resolution Section 3 Banking union Page 8
  • Section 3 Eurozone needs a banking union To stop fragmentation and separate sovereign and banking risk European Banks: Average exposures to banks located in other EU members USD (dollars). Use of cross-border collateral in Eurosystem monetary policy operations (% total) Source: BIS Source: ECB 800.000 80% 700.000 70% 600.000 60% 500.000 50% -42% 400.000 300.000 40% 30% 200.000 -55% 100.000 20% Core to core Core to periphery Distressed countries Non-distressed countries Re-nationalization of the financial system fuelled by (i) market-driven segmentation, (ii) rating agencies and (iii) regulation (mostly moral suasion) Dec-12 Sep-12 Dec-11 Mar-12 Jun-12 Sep-11 Dec-10 Mar-11 Jun-11 Sep-10 Dec-09 Mar-10 Jun-10 Sep-09 Dec-08 Mar-09 Jun-09 0% Sep-08 Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-10 Jun-10 Dec-09 Jun-09 Dec-08 Jun-08 Dec-07 Jun-07 Dec-06 Jun-06 Dec-05 0 Dec-07 Mar-08 Jun-08 10%
  • Section 3 The banking union project Single Deposit Guarantee Scheme Single Resolution Single Supervision Single Rulebook • Single Supervisory • Capital Requirements 1. European Central Bank 2. National supervisory authorities Directive (CRD IV) Mechanism: • Not in the roadmap yet Single Resolution Mechanism: 1. reform of the Treaty Single Resolution Authority 2. • Possibly requires a Single Resolution Fund • First of all, a comprehensive asset review (AQR) ? Under implementation Under implementation Under negotiation To be negotiated Page 10
  • Section 3 Single Supervision On 12/09 the European Parliament approved the Single Supervision Mechanism legislative package and is expected to be fully operational in November 2014 Why? Restore confidence in the euro currency by stopping financial market fragmentation How? Two tier system: • Mandate: Eurozone-wide financial stability • Authority: ECB legally responsible for all banks in the eurozone • ECB direct supervision (130 significant banks) • Indirect supervision through national supervisors (the rest: 6,000 entities) • Scope: Eurozone + open for no euro countries willing to join • Governance: Separate Board inside the ECB  Why the ECB? Prestige, independence, know-how + legally suitable  Risk: Necessary separation between supervision and monetary policy Prerequisite? Deal with legacy issues  Asset Quality Review (during 2014) Page 11
  • Section 3 Single Supervision: ECB Vs NSAs ECB • Banking license • Assess acquisitions and disposals of holdings in banks • Ensure compliance with prudential ratios • Set higher prudential requirements under Union law • Set additional capital buffers (countercyclical buffer or other macroprudential tools) • On-site investigation • Ensure robustness of banks governance agreements • Individual supervisory stress tests • Early intervention powers • Coordinate & defend common position of EU17 before EBA • Participate in Supervisory Colleges and Crisis Management Groups National Supervisory Authorities • Receive requests for provision of banking services • Supervision of payment systems • Assist ECB and day to day verification linked to supervision • Consumer protection • Fight against money laundering and terrorist financing • Supervise 3rd country branches Page 12
  • Section 3 Banking union: Final remarks 1. The EZ needs a fully fledged banking union (SRM as a counterparty for the SSM) 2. Dealing with legacy problems is key: comprehensive assessment including (i) Supervisory Risk Assessment; (ii) Asset Quality Review and (iii) Stress Test. 3. Backstops: private, public (national), public with ESM support (but no direct recapitalization before SSM) 4. Bail in will contribute to separate the sovereign and banking risk 5. Negotiations on SRM are at stalemate. Fiscal union by backdoor? Reform of the Treaty? Uncertainty on the German stance 6. Keep making progress. Both authorities and the industry have to work on the design of the transition Page 13
  • Thanks! sfernandezdelis@bbva.com