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17 March 2014

ECB publishes letter from supervisory board chair Nouy to ECON/Bowles

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Prior to her hearing at the ECON Committee, Nouy answered questions relating i.a. to the implementation of the Interinstitutional Agreement, the AQR/balance sheet assessment, micro-prudential supervision and systemic risk.

Asset quality review/balance sheet assessment

How much time will be given to banks to raise capital if they failed in the asset quality review? Will that period be equal for all banks or will you decide individually?

The time frame within which the strengthening of capital positions must take place will depend on the respective outcomes. A shortfall relative to the AQR or the baseline scenario of the stress test will require the capital to be raised in the short term, while a shortfall arising from the adverse scenario of the stress test will require capital to be raised over a somewhat more extended period, on the basis of an agreed capital plan.

Micro-prudential supervision

Will the ECB stick to the principle of proportionality and not apply IFRS on banks which are not obliged yet to use IFRS? Will the ECB refrain from introducing IFRS for those banks by establishing reporting obligations or by using its powers under Article 24(2) CRR?

Currently it is not foreseen that the ECB will make use of its power (laid down in Article 24(2) CRR) to impose the use of IFRS for the compliance with prudential requirements (including regular supervisory reporting); this approach, shall, however, not prevent NCAs to exercise this discretion in accordance with the aforementioned article.

The EBA Implementing Technical Standards (ITS) include a FINREP version for reporters under IFRS and another compatible version for reporters under National GAAPs. Against this background, the FINREP data to be collected by the ECB, as described in the answers to Question 9, should be elaborated under IFRS or National GAAPs as employed by credit institutions.

Systemic risk

Do you agree that the creation of the SRM and the introduction of "living wills" will solve the "too big to fail" problem or do you feel that supervisors will not be able to take the right technical decisions because they will have to avoid harmful market reactions?

First, to enhance resilience three important measures have been agreed: (i) to have systemic banks hold higher buffers of capital of higher quality at all times; (ii) to have systemic banks draw up and competent authorities assess recovery plans in which they formulate the measures that they themselves can take to avoid the risk of failure; and (iii) to intensify prudential supervision of systemic banks. These important measures are provided for in the CRD IV/CRR and the SSM Regulation.

Second, to enhance resolvability of all banks (including systemically important banks), two important measures have in principle been agreed: (i) the development of a resolution regime instead of normal corporate insolvency procedure and (ii) the mandatory drawing up of resolution plans that set out the strategy to be applied for the resolution, which requires both identifying and addressing any impediments specific to the institution concerned in order to make efficient and orderly resolution possible. The BRRD will establish this regime and procedures to implement these two important measures.

A strong Single Resolution Mechanism (SRM), once adopted, will provide for a more integrated framework to apply these common rules and procedures across participating Member States, where systemically important banks operate.

Taken together, a credible regime for recovering or resolving distressed firms will reduce the risk of panicky liquidity runs. It will ensure that supervisors can and will take the right decisions, including – when applicable – determining that a bank, regardless of its size, is failing and should be handed over to the resolution authority.

How would you deal with a situation in which textbook supervision and resolution activities could cause market reactions with potentially irresponsible systemic effects?

First of all, clear and transparent (supervisory and resolution) frameworks will increase the predictability and thus limit any systemic market reactions after supervisory or resolution measures are applied.

Second, adequate planning, as well as cooperation and coordination between authorities when actions are taken, will also limit the risk of systemic effects.

Third, as a final remark, let me add that there is a degree of discretion to take financial stability consideration duly into account on basis of the authorities’ assessments. In compliance with State Aid rules, Member States may choose a number of tools allowing the exit process to take place in an orderly manner, while limiting negative spillovers on the sector and on the economy as a whole.

Do you consider the lack of an effective resolution mechanism as a threat for the common supervision under the SSM and do you share the view that it would be better to rather not have any resolution mechanism than what the European Council proposes?

The SSM without the SRM would mean that issues relating to coordination and cooperation problems in resolution and the bank-sovereign nexus will remain, and a misalignment between supervisory and resolution responsibilities will be created. Therefore it is important that the time gap between the SSM and the SRM becoming operational is minimised.

Legislators should live up to their responsibility to create a well-functioning Banking Union. To this end, all parties involved need to show a willingness to compromise.

Could the lack of an SRM 'back-stop' result in a risk-averse ECB implementing too stern a Comprehensive Assessment?

Let me start by saying that the ECB will not, in any circumstances, compromise the rigour of the comprehensive assessment. First, I make the assumption that Member States will honour their commitment and put in place appropriate public backstops on time. Second, there is a clear pecking order of financing in case the Comprehensive Assessment exposes capital shortfalls: first private sources, then public backstops. This is entirely separate to any discussions on the SRM or Single Resolution Fund.

In case of recourse to public backstops following the Comprehensive Assessment, national resolution frameworks will be activated in the first instance. In the second instance, if national backstops are not sufficient, instruments at the euro area/EU will apply. The European Stability Mechanism (ESM) can provide, through its normal procedures, financial assistance for the recapitalisation of financial institutions in the form of a loan to a Member State. Further, following the establishment of the Single Supervisory Mechanism, ESM Direct Bank Recapitalisation can also be used once the Eurogroup have reached a final agreement on the operational framework for Direct Bank Recapitalisation.

Full letter

Letter from ECON/Bowles, 11.3.14

See also: ECON-Committee: MEPs discuss bank supervision and resolution with Daniele Nouy 

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