Keynote address by the President of the Eurogroup, Paschal Donohoe, at the annual conference of the Single Resolution Committee on the subject of “Bank Resolution: Ensuring Financial Stability”
As President of the Eurogroup, I work closely with the Chair of the Single Resolution Committee, Elke Koenig, to strengthen the banking union and deepen our economic and monetary union. Our cooperation this year was of particular importance in setting up the common backstop for the single resolution fund and introducing it early in early 2022.
As chairman of the SRB, Elke participates in the Eurogroup every six months to inform the finance ministers about the activities of the SRB, which gives the ministers a good feel for developments in our banking system.
Well-functioning financial markets within the banking union and the capital markets union are the key to our monetary union – so that they continue to act as shock absorbers and support the recovery by financing households and companies.
Role of the Eurogroup in the response to Covid-19
The Eurogroup has been at the forefront of the economic policy response to COVID-19. It will continue to play a key role in the euro area in identifying, coordinating and implementing the measures that will lead to a robust, inclusive and sustainable recovery. Strengthening the euro area economy is essential to recover and return to a sustainable growth path.
In responding to COVID-19, the Eurogroup has demonstrated a common goal and we have reached a consensus on what to do within the euro area.
We also have a good story to tell about our work in the banking union. The progress made in strengthening supervision and regulation in the EU banking sector over the past decade has ensured the resilience of the banking and financial sectors and served us well during the pandemic.
Simply put, if you compare this crisis to the last, our banking system has proven to be extremely resilient. It was a source of strength, not an underlying source of vulnerability.
The joint efforts in the aftermath of the global financial crisis have strengthened the banks’ position and enabled them to offer indulgence and support to their customers in times of need. This, coupled with government support to protect millions of European livelihoods, was vital.
But there is no time for complacency. In the longer term and for sustained economic recovery, we must continue our efforts to build a stronger and more competitive banking system that will provide the capital and liquidity that drive the economy.
One of the most important achievements in my first year as President of the Eurogroup was the unanimous support of the Eurogroup, the reform of the ESM Treaty – which establishes a common backstop for the Single Resolution Fund – and its introduction two years ahead of schedule.
While the ratification process of the ESM Treaty is ongoing in many Member States – including here in Ireland, where I will be presenting the legislation to our Parliament in a few hours – I remain confident that we have completed the technical, legal and implementation steps in time for it to come into force in January 2022.
This common backstop for the SRF is one of several safety nets that the Eurogroup has provided – together with the Pan-European Guarantee Fund of the EIB, the SURE facility for the reduction of unemployment risks and the ESM Pandemic crisis aid instrument. These safety nets were key to the confidence built in a recovery.
But that resilience in the banking sector is hard earned. It must be carefully monitored for new or emerging risks. Europe must prepare for future shocks and risks around the corner.
And there are other parts of the Eurogroup’s work where consensus has proven elusive. This morning I will reflect on what we have achieved and where I want to focus my efforts in the months ahead to make further progress.
Risk reduction and the common backstop
We have further reduced the risk in the banking sector across Europe. This includes a clear history for key indicators such as the reduction of non-performing loans in the system as well as the continuous build-up of MREL-related capacities.
We aim to set up the common backstop for the single resolution fund and other changes to the ESM Treaty by early 2022. This will create a financial safety net for bank resolution in the Banking Union and double the SRF’s firepower to strengthen euro area crisis management tools and protect financial stability.
These changes will strengthen the resilience and crisis management capacity of the euro area.
Processing and crisis management
Significant progress has been made in resolution and crisis management to make banks resolvable by 2023. I would like to thank the SRB along with the national resolution authorities for their valuable work.
We still have more to do on the architecture of the Banking Union – to better finance recovery, strengthen financial stability, protect taxpayers and depositors, and support European competitiveness and strategic autonomy.
We need a common deposit insurance fund in a banking union.
We need to make sure that we continue to work to break the ties between banks and sovereigns.
We examine how we deal with government bonds in our banking systems.
With cross-border integration, obviously more needs to be done to ensure that our banks serve all European economies and are competitive on a global scale.
We need to review some parts of the crisis management framework – so that it can handle banks of all sizes and business models in crisis situations.
We are working to ensure uniform treatment and a level playing field across the Banking Union.
The crisis management framework must maintain financial stability and protect depositors while instilling market discipline, limiting moral hazard, and minimizing recourse to taxpayers’ money.
I would also like to highlight the work on the issue of liquidity in the resolution to resolve possible liquidity bottlenecks for all those banks that are still confronted with liquidity bottlenecks despite recapitalization after the resolution. Progress in this area will be essential to strengthen the resolution and crisis management framework in the Banking Union.
The updates on MREL are positive – the shortfall has been reduced by a third since Q4 2019. We have indications of a positive market environment and all banks under the SRB’s jurisdiction should meet their interim targets for 2022 according to the latest reports.
We look forward to a more detailed report on risk reduction in the European banking systems of our institutions at the Eurogroup in November.
The resilience of our banking system cannot be taken for granted. We need to continue our work to ensure consistency of outcomes between settlement and liquidity and a level playing field when banks exit the market. And we have to do it now.
Finally, I must also identify the implementation of Basel III as a central challenge in the coming months, although this does not fall within the strict remit of the Eurogroup. The pandemic has shown the importance of ensuring banks are run prudently and have sufficient capacity to absorb shocks and continue to support the economy during times of stress.
The closing measures of Basel Three will further improve the banks’ ability to do so.
Finally, a few words on the role of the Eurogroup, now that I have been its President for over a year.
I worked closely with colleagues from across Europe as we faced the waves of this terrible disease over the past year. In the euro area, our policies have been strong, supportive, prompt and coordinated.
I have invested a lot of time and energy in our Eurogroup meetings to ensure that we spend our time productively and meaningfully on issues that are important and politically relevant to the common future of our currency.
In my opinion, there are hardly any other areas for the future of our economic and monetary union that are as politically relevant, sensitive and urgent as the stability and efficiency of our banking system.
To take full advantage of the economic recovery from COVID-19, we need to ensure that our financial sector is doing its job and that we are ready for the future.
I am determined to make further progress towards these goals and I hope that in your reflections for the remainder of the day you may also consider how the European banking system can best contribute to a solid economic recovery for businesses and citizens to ensure.
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