As President of the Eurogroup, I work closely with the Chair of the Single Resolution Board, Elke Koenig, in our efforts to strengthen Banking Union and deepen our Economic and Monetary Union. Our cooperation has been especially relevant this year in setting up the common backstop to the Single Resolution Fund and its early introduction in early 2022.
As SRB Chair, Elke attends the Eurogroup bi-annually to update Finance Ministers on the SRB’s activities, which gives Ministers a good sense of developments in our banking system.
Well-functioning financial markets within the Banking Union and the Capital Markets Union are key to our monetary union - so that they continue to act as a shock absorber, and to support the recovery, by providing financing to households and businesses.
Eurogroup role 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 policies that will deliver a robust, inclusive, and sustainable recovery. Strengthening the euro area economy is essential for the recovery and the return to a sustainable growth path.
In responding to COVID-19, the Eurogroup has demonstrated a unity of purpose and we built consensus on the appropriate policies within the euro area.
We also have a good story to tell on our Banking Union work. The progress achieved over the last decade to strengthen supervision and regulation in the EU banking sector has ensured the resilience of the banking and financial sector and served us well during the pandemic.
Put simply, if you look at this crisis compared to the last one, our banking system has proven to be extraordinarily resilient. It has been a source of strength, not an underlying source of vulnerability.
The combined efforts after the global financial crisis have strengthened the position of banks, allowing them to extend forbearance and assistance to their customers in their time of need. This, combined with Government supports, has been vital in protecting millions of European livelihoods.
But there is no time for complacency. Over the longer term and for a sustained economic recovery, we need to continue our efforts to build a stronger and more competitive banking system, one that provides the capital and liquidity that in turn fuels the economy.
One of the key achievements during my first year in the job of President of the Eurogroup was the unanimous support of the Eurogroup to proceed with the reform of the ESM Treaty - which sets up a common backstop to the Single Resolution Fund - and its introduction, two years ahead of schedule.
While the ESM Treaty ratification process is ongoing in many Member States - including here in Ireland, where I will present the legislation to our parliament in a couple of hours’ time - I remain confident that we will have completed the technical, legal and implementation steps in time for entry into force in January 2022.
This common backstop to the SRF is one of a number safety nets which the Eurogroup provided for - along with the EIB Pan European Guarantee Fund, the SURE facility to mitigate unemployment risks and the ESM Pandemic crisis support instrument. These safety nets were key to the confidence built in a recovery.
But this resilience in the banking sector is hard-earned. It must be carefully monitored for new or emerging risks. Europe must be prepared for future shocks and exposures around the corner.
And there are other parts of the Eurogroup’s work where consensus has proved elusive. This morning, I will reflect on what we have achieved, and where I plan to focus my efforts in the coming months to make more progress.
Risk Reduction and the common backstop
Across Europe, we have continued to reduce risk in the banking sector. This includes a clear trajectory for key indicators such as a reduction of Non-Performing Loans in the system as well as continuous build-up of MREL-related capacity.
By the beginning of 2022 we are aiming to have set up the Common Backstop to the Single Resolution Fund, and other ESM Treaty Amendments. This will provide a financial safety net for bank resolution in the Banking Union, doubling the firepower capacity of the SRF, to help strengthen the crisis resolution tools of the euro area and protect financial stability.
These changes will strengthen the resilience and crisis resolution capacities of the euro area.
Resolution and crisis management
On resolution and crisis management, substantial progress has been achieved to make banks resolvable by 2023. I want to thank the SRB, together with the National Resolution authorities, for their valuable work.
We have more work to do on the architecture of Banking Union - to better fund the 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 ensure that we continue to work to break the link between banks and sovereigns.
We are looking into how we treat sovereign exposures in our banking systems.
There is obviously more work to be done on cross border integration, to ensure our banks serve all European economies and are competitive on the global stage.
We need to review some parts of the crisis management framework - so that it can handle banks of all sizes and business models when in crisis.
We are working to make sure there is consistent treatment and a level playing field across the Banking Union.
The crisis management framework must preserve financial stability and protect depositors while instilling market discipline, limiting moral hazard and minimising recourse to taxpayers’ money.
I also want to emphasise the work on Liquidity in resolution to address possible liquidity shortfalls for all those banks that despite being recapitalised after resolution, still face a shortage of liquidity. Progress in this field will be key to strengthen the resolution and crisis management framework in the Banking Union.
The updates on MREL are positive - the shortfall has reduced by one third since Q4 2019. We have evidence of a positive market environment and all banks under the remit of the SRB should meet their 2022 intermediate targets according to the latest reports.
We look forward to a more detailed report on risk reduction in the European banking systems from our institutions at the November Eurogroup.
The resilience of our banking system cannot be taken for granted. We need to continue our work to ensure consistency of outcomes between resolution and liquidity and a level playing field when banks exit the market. And we need to do it now.
Finally, while not within the strict remit of Eurogroup, I must also flag the implementation of Basel III as a key challenge in the coming months. The pandemic has shown the importance of ensuring that banks are prudently managed and have sufficient ability to absorb shocks and continue to support the economy during times of stress.
The Basel Three finalisation measures will further improve on banks’ ability to do so.
To conclude, a few words on the role of the Eurogroup, now that I have been its President for over a year.
I have worked closely with colleagues from all over Europe as we faced the waves of this terrible disease over the course of the last year. In the Euro Area, our policy action has been strong, supportive, swift and coordinated.
I have invested a huge amount of time and energy into our Eurogroup meetings, to ensure that we are spending our time productively and usefully, on matters that are important to the shared future of our currency and which are also politically relevant.
To my mind, there are few other areas as politically relevant, sensitive and urgent to the future of our Economic and Monetary Union as the stability and capacity of our banking system.
In order to fully embrace the economic recovery from COVID-19, we need to ensure that our financial sector is fit for purpose and that we are prepared for the future.
I am determined to make further progress to achieve those goals, and I hope that in your reflections for the rest of the day, you could also consider how best the European banking system can play its part to ensure a solid economic recovery for business and citizens.