28 May 2013

Bundesbank/Lautenschläger: Regulation and institution-building in Europe - Where do we stand and what still needs to be done?

Speaking at the Bundesbank symposium, Lautenschläger said that a European-directed resolution mechanism with burden-sharing and a clear set of rules was exactly what was needed to reduce the problem of "too big to fail" or "too complex to fail".

We have to tackle the problem of “too big to fail” and “too complex to fail” in the best way possible. Today’s symposium addresses a key aspect of this – the structure of recovery and resolution planning.

We will have to work hard to create and implement the best framework possible for banking union. Although the timeframe for setting up a European single supervisory mechanism is very ambitious, we have already made quite a bit of progress. Equally important, and yet even more difficult in terms of decision-making, it seems, is the subject of bank resolution – be it the European resolution regime with a bail-in liability hierarchy or the single resolution mechanism, a European resolution authority and a central fund.

There are two key aspects to look at when dealing with this subject. First of all, we need a mechanism that would allow a large bank to be restructured and resolved without seriously jeopardising financial stability. Secondly, any losses incurred should be fairly distributed according to source and responsibility. However, this means that, more often than not, investors will have to bear the costs of risks for which they receive a risk premium if these risks materialise. Where possible, taxpayers should be left out of the equation altogether. A discussion on the topic of a bank “bail-in”, i.e. which losses will be imposed on creditors and shareholders when a bank is wound up, is long overdue. Consequently, we must quickly move to develop a well-thought out, unambiguous, rule-based European concept which allocates liability according to hierarchy and which shall pertain to all creditors of a bank. This will not only ensure legal clarity and market confidence but will also help creditors to assess risks appropriately.

The restructuring and winding up of banks under European supervision is ultimately about whether the future costs of restructuring measures will also be borne at European level, i.e. whether there will be direct access to the European restructuring fund. Without doubt, we need a European resolution mechanism because supervision and liability must be synchronised. It does not make sense to oversee banks at the European level while leaving their resolution to national authorities. A European-directed resolution mechanism with burden-sharing and a clear set of rules is exactly what is needed to reduce the problem of “too big to fail” or “too complex to fail”. I therefore fundamentally advocate the establishment of a European resolution authority. However, this must be established on a solid foundation, and this calls for an amendment to primary law.

But as I see it, the assumption of risk by the European resolution mechanism or even by a new authority should not lead to a “communitisation” of legacy risks at European level. The financial risks of national banking systems, which arose on the watch of national supervisors, should be borne by those responsible.

However, how can we ascertain what burdens or risks lie dormant in the banks that will be monitored by the European supervisory authority? To determine this, the ECB will examine banks’ balance sheets. The details of this balance sheet assessment have yet to be determined. Indeed, in carrying out this first task, the supervisory authority will have to prioritise attention to detail over speed. Only then can we achieve the goals of these examinations and uphold the reputation of the new supervisory authority.

Legacy risks should thus be borne by those who are responsible for them.And what about future risks that arise on the watch of the new European supervisory authority? Should the individual member state be completely left out of the equation? This would only be logical if the supervisory authority were the only factor influencing the weals and woes of a bank. However, this is not the case.  As a rule, banks’ balance sheets reflect the health of their respective national economy. The effects of national policy tools such as taxes and economic policy measures are therefore evident in the risk profiles of the banks concerned. Thus, it might make sense for liability risks to be divided between the national and European levels as long as economic and fiscal policies are not coordinated in the euro area. As you can see, there are more questions than answers on the issue of resolution.

Full speech 

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