Vitas Vasiliauskas. Improving the resilience of the financial sector to foster EU economic recovery

The EUROFI Financial Forum 2013
Organised in association with the Lithuanian Presidency of the Council of the EU
“Improving the resilience of the financial sector to foster EU economic recovery”

12–13 September 2013, Vilnius

Good morning, dear colleagues,

Welcome to Vilnius, everyone. And thank you, Jacques, for organising the discussion on key financial sector reforms in the EU. The EUROFI is an effective format for such a discussion. It brings together policy makers and those subject to regulation. It is important that both sides hear each other. I have no doubt that EUROFI helps achieve that.

Jacques also has a very special relationship with Lithuania. As the Governor of the Banque de France he played a historic role in returning Lithuania’s pre-occupation gold holdings to the Bank of Lithuania. One quarter of Lithuania’s gold holdings were stored in France. The Soviet Gosbank tried to convince the Banque de France that it had ownership rights to the assets of Lithuania. However, the French lawyers concluded that Gosbank is not a legitimate successor and rejected the request. Not all jurisdictions followed similar prudence. The assets were returned to Lithuania in 1992 during Jacques’ term as Governor.

Turning to today’s agenda, allow me to share several insights on the current state of affairs in the EU financial sector policy.

The crisis revealed gaps in financial sector regulation and that has to be corrected. When designing new rules we need to be mindful of the regulatory burden and avoid replacing under-regulation with overregulation. That is key for the overall competitiveness of the economy.

We shall aim for better and more integrated rules. We need to be determined in implementing a complete framework that strengthens resilience to systemic shocks, sets the right incentives for market discipline and takes due regard of the implications for the economy, society, and the state. A well-functioning single market requires a more integrated and aligned supervisory framework that would provide efficient tools for early intervention and crisis resolution. In this respect, measurable progress on the banking union is of utmost importance.

The banking union has been started under very complicated circumstances. High expectations have been formed that it will help fix fractions in the foundation of our economy.

The banking union cannot be half-finished and certain things need to happen at a certain time. Otherwise we risk having serious complications. That does not mean that when we do it is more important than how we do it. But a rule of good housekeeping is to finish what has been started. I believe that could be motto of our Presidency.

The political agreement on the first pillar of the banking union — the Single Supervisory Mechanism (SSM) — has proved the EU’s ability to deliver. It has been reached three times faster than a typical legislative agreement in the EU. The legislative process will be completed after the final endorsement by the European Parliament and the official publication. The European Parliament reached an agreement with the ECB on the accountability issues and I hope it opens doors for a successful vote this afternoon. After that, sound implementation of the SSM will be in the hands of the ECB and national supervisors. This is a major responsibility and proper accountability will be key.

Good progress has been made on the SSM so far. The next major task for the ECB, before assuming its supervisory powers in the second half of 2014, will be a comprehensive assessment of around 130 banks that will come under its direct supervision. This broad confidence-building exercise will consist of risk assessment, balance sheet review, and forward-looking stress tests. A credible assessment of banks capital position should also provide clarity on how the potential shortfalls will be addressed.

However, having a single supervisor in place will not be sufficient unless there is a matching harmonised framework for dealing with failing banks.

In June, the ECOFIN reached a compromise on the Bank Recovery and Resolution Directive. The Directive determines key tools for dealing with bank problems, such as the bail-in tool and allocation of losses. The proposal is currently being examined with the European Parliament. The discussions primarily relate to the flexibility and scope of the bail-in, balance between home-host countries, and other issues. The objective is to reach a final agreement by the end of year.

However, without a centralised decision-making body the national differences will remain in implementing harmonised rules and the effective functioning of the single supervisor will be constrained. We need a consistent European approach to resolution. In this regard, the European Commission has recently drafted a proposal on the Single Resolution Mechanism, consisting of a Single Resolution Authority (SRA) and a Single Resolution Fund, established to operate in tandem with the SSM. The Commission based its proposal on Article 114 of the Treaty that refers to the functioning of the single market.

The current proposal targets banks of the SSM participating states and consists of 3 elements:

1)      A centralised resolution body — Single Resolution Authority — that should prepare, propose and ensure the effective enforcement of resolution decisions taken by the Commission. Other ways of organising resolution are possible, but the key of the SRA is to achieve a sufficient degree of centralisation in order to avoid fragmentation of the financial sector along national borders.

2)      A clear process for starting resolution:

-          The ECB, as bank supervisor, (directly or via the national bank supervisor) shall notify the concerned authorities;

-          The central body assesses the situation and, if necessary, recommends to the Commission to trigger resolution with proper funding measures.

-          The Commission decides to trigger resolution and instructs the central body to execute the resolution.

3)      The Resolution Fund is based on contributions from the private sector, limiting the cost of resolving banks to the taxpayers. Since resources to the fund can be accumulated only over time, credible backstop arrangements will be needed in the transition phase.

The Member States have expressed their initial views on the proposal and during the upcoming ECOFIN we expect to hear further clarifications from the Council’s Legal Service on the appropriateness of the legal basis. The policy-makers will have further discussions on the proposed centralisation of powers and the need for public backstops. The Presidency intends to have a next round of discussions on these sensitive issues in early autumn and to produce the first compromise text on the SRM in October.

We are still some steps away from reaching a compromise and the divergence of views makes reaching an agreement difficult. But we should focus on our main target — to avoid misalignment between the levels on which financial institutions will be supervised and resolved. Lithuania has set an ambitious objective to reach a general approach on the SRM in the Council by the end of the year. Progress in this area could be one of the benchmarks for measuring the success of the Presidency, though there are certain dependencies.

The first two pillars of the banking union — SSM and SRM — will establish a common institutional framework for application of single rules in the participating Member States. It will encompass codification of supervisory practices and harmonisation for national recovery and resolution regimes with a view to safeguarding taxpayers from the need of future bail outs. The recently published new capital and liquidity requirements for banks (CRD IV/CRR) lay the basis for the functioning of the SSM. Meanwhile, the final agreement on the Bank Recovery and Resolution Directive is necessary to establish a toolkit for the functioning of the SRM.

Parallel to this work, efforts need to continue on harmonising deposit insurance frameworks as proposed by the Deposit Guarantee Schemes Directive. We should focus our discussions on all necessary building blocks of a fully functional and credible European architecture of financial regulation and oversight.

I will conclude by once again repeating that a functional banking union is key for addressing the challenges we face today. “One third” of the banking union is not a complete construction. A cannon without gunpowder and cannonballs is only good for the museum. We need to secure a full set.

It is important to live up to expectations, stick to the agreed process and avoid setbacks. Only then the benefits of European integration will be fully utilized and we will be able to foster EU economic recovery and growth. This should be seen as a collective effort.