ecb representative banking union · 2018-06-19 · • once the banking union is complete, the euro...

Banking union: Prospects for integration and further consolidation SAFE Policy Center Lecture Frankfurt, 19 June 2018

PENTTI HAKKARAINEN ECB Representative SSM Supervisory Board ECB-PUBLIC

Rubric

www.bankingsupervision.europa.eu © 2

1

2

3

Achievements of ECB Banking Supervision to date

State of progress – a strengthened euro area banking system

European banking supervision

Outline

SAFE lecture – Europe’s banking union: achievements and prospects

The coming consolidation – a boost for financial integration 4

Conclusions 5

Rubric


Single Supervisory Mechanism

Single Resolution Mechanism

EBA Single Rulebook

Banking Union

European deposit

insurance scheme

ECB

National competent authorities

SRB NRAs

SRF NRFs

Bridge financing

Complete the banking union

European deposit insurance fund

Backstop

BRRD transposition

DGSD transposition

National deposit insurance funds

1. European banking supervision

Rubric

www.bankingsupervision.europa.eu ©


4

Key objectives

“This Regulation confers on the ECB specific tasks […] relating to the prudential supervision of credit institutions, with a view to contributing to the safety and soundness of credit institutions and the stability of the financial system within the Union and each Member State, with full regard and duty of care for the unity and integrity of the internal market based on equal treatment of credit institutions with a view to preventing regulatory arbitrage.”

1. Financial stability, i.e. tough and forward-looking supervision of credit institutions Identification of relevant risks Fair and consistent assessment of risks Timely and tough intervention if deficiencies are

identified

2. Financial integration, i.e. creation of a supervisory level playing field Consistent application of the supervisory framework

across all participating countries Development of harmonised supervisory

methodologies and standards Quality assurance and benchmarking of supervisory

practices to identify best practices and areas for improvement

European banking supervision objectives Article 1 of the SSM Regulation

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Direct supervision

Indirect supervision oversees the system

Less-significant institutions

Significant institutions

Horizontal

divisions provide support

Joint Supervisory Teams National supervisors

ECB

Key facts Distribution of tasks

European banking supervision is an integrated system of national supervisors and the ECB

1. One of the world’s largest banking supervisors

2. Currently around 120 banking groups in 19 countries under direct ECB supervision – including eight out of 30 global systemically important banks

3. Around 3,500 smaller institutions are directly supervised by the national competent authorities (NCAs), with the ECB being responsible for the system at large

4. Banking assets under supervision amount to more than €26 trillion

5. Supervision is carried out by several thousand supervisors – most of whom work for the 26 NCAs that participate in the SSM

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Paving the way to a truly European banking sector Second pillar of banking union • Fruitful cooperation between the SRB and the ECB on bank resolution will

continue Third pillar of banking union • The European Deposit Insurance Scheme (EDIS) will gradually help share risks

more efficiently across the euro area, after a parallel risk reduction • It will also align liability and control between the national and the European level • The European Commission’s proposal for EDIS foresees an asset quality review

when moving from re-insurance to co-insurance

A truly European banking sector • Once the banking union is complete, the euro area will become even more of a

single jurisdiction • This will make it easier for banks to do business across borders, and for the

sector to consolidate


6

Outline

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Comprehensive assessment

Supervisory Manual

SREP

Harmonising options and discretions

Guide to fit and proper assessments

On-site inspection methodology

Internal capital and liquidity assessment (ICAAP and ILAAP)

Recovery planning

Involvement in EBA and global regulatory fora

NPL guidance

Source: SSM SREP Methodology Booklet, 2017 edition.

2. Achievements of ECB Banking Supervision to date

Initiatives to foster supervisory harmonisation and convergence

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www.bankingsupervision.europa.eu © 8 Notes: All averages are weighted by the denominator.

3. State of progress – a strengthened euro area banking system

102.4%

113.4%

90%

95%

100%

105%

110%

115%

Net stable funding ratio

Sources: STE data, ECB calculations.

11.3%

14.6%

10%

11%

12%

13%

14%

15%

16%

Evolution of fully loaded CET1 ratio

Source: COREP, ECB calculations.

7.6%

4.9%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

Non-Performing Loans ratio

Source: FINREP, ECB calculations.

127.2%

143.6%

110%115%120%125%130%135%140%145%150%

Liquidity coverage ratio

Source: COREP, STE data, ECB calculations.

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Gross non-performing exposures (percentage of total debt instruments)

Source: ECB consolidated banking data. Note: Data exclude subsidiaries and branches of foreign banks.


Common Equity Tier 1 ratio (percentages)

0

5

10

15

20

25

30

35

40

45

50

FI LU DE NL FR BE EA MT AT ES LV SK LT EE IT PT SI IE GR CY

2014Q4

2017Q3

0

5

10

15

20

25

30

LT PT IT ES FR LV MT AT EA GR CY DE NL BE IE FI SK SI EE LU

2014Q4

2017Q3

Capital adequacy and asset quality (2014 and today)

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Cost-to-income ratio (percentages)

Source: ECB consolidated banking data. Note: Data exclude subsidiaries and branches of foreign banks


Return on equity (percentages)

0

10

20

30

40

50

60

70

80

CY LT ES EE FI LV MT SK LU SI PT BE GR AT IE IT NL EA FR DE

2014Q4

2017Q3

-15

-10

-5

0

5

10

15

GR CY PT IT SI AT LT DE EA NL MT FR SK ES LU IE BE FI EE LV

2014Q4

2017Q3

Profitability and cost efficiency (2014 and today)

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Total assets (2005=100)

Aggregate profits (2005=100)

Average return on equity (2005=100)

Source: SNL Notes: Based on a sample of 37 euro area and 41 US banks. For CET1 ratios, some figures have been extrapolated due to data gaps.

Average CET1 (2005=100)

3. Benchmarking with the United States

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

United States

Euro area

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

United States

Euro area

-50

0

50

100

150

200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

United States

Euro area

50

70

90

110

130

150

170

190

210

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

United States

Euro area

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What do banks still need to do?

• Address profitability by adapting business models while increasing revenues and cutting costs

• Maintain and develop risk management and continue strengthening governance

• Clean up balance sheets, reduce the level of NPLs


12

Rubric


Competition, efficiency and stability

Competition intensifies • Cross-border M&As • Fintechs • Digitalisation • Changing customer behaviour

4. The coming consolidation – a boost for financial integration

13

Stability maintained • SSM • SRM • Help with NPLs – stronger banks

buy weaker banks

Efficiency increases • Competition • M&A • Digitalisation

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Benefits of financial integration

• Balanced transmission of monetary policy

• Financial stability (i.e. risk-sharing, payment systems)

• More opportunities for companies and entrepreneurs

• More options for savers and borrowers

• Increased competition among banks

4.The coming consolidation – a boost for financial integration

14

Rubric


4.The coming consolidation – a boost for financial integration

0.00

0.25

0.50

0.75

1.00

Q1/95 Q1/98 Q1/01 Q1/04 Q1/07 Q1/10 Q1/13 Q1/16

subprime crisis

Lehman Brothers default

sovereign crisis

After “whatever it takes”, outright monetary transactions and banking union announcement

euro introduction

quantity-based financial integration composite indicator price-based financial integration composite indicator

ECB indicators of financial integration (price and quantity-based)

Sources: ECB Financial Integration Report, various issues. Sources: ECB and ECB calculations. Notes: The price-based composite indicator aggregates ten indicators covering the period from the first quarter of 1995 to the fourth quarter of 2016, and the quantity-based composite indicator aggregates five indicators available from the first quarter of 1999 to the third quarter of 2016. The indicators are bounded between zero (full fragmentation) and one (full integration). Increases in the indicators signal greater financial integration. For a detailed description of the indicators and their input data, see the statistical annex of the Financial Integration Report.

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On the road to financial integration

Important factors in progress

• Institutional development (inc EDIS)

• Technological development: a facilitator

• Market conditions: support consolidation

This means the time has come for a period of

higher integration – good for the economy &

society

16

5. Conclusions

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Q&A

17

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Additional background slides

18

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Supervision of less-significant institutions (LSIs)

1. European banking supervision: where we started

19

Indirect ECB supervision Distribution of tasks

All LSIs

High

Res

ourc

e al

loca

tion

Nee

d fo

r inf

orm

atio

n

Inte

nsity

of s

uper

visi

on

Ex ante notification

Annual reports Ex post notification

Supplementary ad hoc information

Crisis

Gradual approach, based on priority score of LSIs Quantitative and qualitative information from NCAs is analysed

National supervisors (NCAs)

ECB intermediate structures (GDs)

The ECB: • has overall responsibility • makes comparisons at the SSM

level and between sectors • provides expert support • promotes best practices • grants or withdraws banking

licenses and assesses acquisitions of qualifying holdings

• NCAs bear primary responsibility for supervision

• No duplication of national tasks at ECB level

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Administrative Board of Review

Mediation Panel

Governing Council Adoption

Supervisory Board Submits

draft decisions

a) Does not object

b) Objects Objection Sends back to SB for sub-mission of new draft decision

Mediation Resolves differences of views expressed by NCAs regarding an objection

Review Submits non-binding opinion to SB for submission of new draft decision

Legal or natural persons concerned may request review by Administrative

Board of Review


Functioning principles

1. Supervisory Board (SB) Plans and carries out supervisory

tasks Proposes draft decisions for

adoption by the ECB’s Governing Council (GovC)

Decision-making process is based on “non-objection” procedure

2. Mediation Panel Resolves differences of views

expressed by NCAs regarding GovC objections to SB draft decisions

3. Administrative Board of Review Carries out internal reviews of

decisions taken by the ECB in the exercise of its supervisory powers

European banking supervision decision-making processes

Rubric


European banking supervision is also subject to rigorous external and internal audits: • ECB audited by external audit firm (up until now, EY) • European Court of Auditors audits operational efficiency (not policies) – first report

on general “SSM setup”; second report on crisis management • GovC and SB also consist of representatives of national central banks and

supervisory authorities, i.e. accountability towards “owners” is continuous • Internal audit function via DG Internal Audit and the Internal Auditors Committee • Further internal scrutiny provided by supervisory quality assurance

21

Channels of accountability

Hearings and exchanges of views with European Parliament

SB Chair attends regular hearings and exchanges of views in the European Parliament and Eurogroup

Written questions MEPs and Eurogroup address written questions to the SB Chair

Annual report ECB submits annual report on its supervisory work to the European Parliament, EU Council, Eurogroup, European Commission and national parliaments


Robust accountability framework

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Determination of failing or likely to fail (FOLTF) and resolution

1. European banking supervision: where we started )

22

ECB

• ECB consults formally with SRB on FOLTF draft. Then SSM Supervisory Board and Governing Council determine that a bank is FOLTF and notify SRB.

SRB • SRB determines whether any alternative private sector or

supervisory actions, or a write-down of capital instruments, would prevent the failure within a reasonable timeframe.

SRB • SRB determines whether resolution action is necessary in the

public interest.

SRB • SRB decides to take resolution action (or to let the bank go

into liquidation) • In order to take resolution action, the SRB has to perform a

valuation 1 (based on accounting rules), a valuation 2 (based on economic assumptions), and (after resolution) a valuation 3 (based on liquidation values).

The SRB might approach the ECB during resolution, for example on the determination of capital of the new entity, licensing a bridge bank, etc.

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2. Achievements of ECB Banking Supervision to date

Common European supervisory culture

• 26 national authorities from 19 different countries, speaking different languages, with different national supervisory cultures and traditions

• Structure to manage diversity: • Strong Joint Supervisory Teams for supervising

banks • Several networks of experts for “horizontal” issues • Constant dialogue and improvement

• Enhanced transparency, for example via bank workshops, publication of supervisory statistics, quarterly supervisory newsletter

• SSM training curriculum, offering 64 system-wide training courses – more to come

• Streamlined decision-making through the implementation of a legal framework for delegation

Rubric


Euro area banking sector had a declining M&A trend

– Trend visible in both number and value of transactions – Dominance of domestic over cross-border euro area transactions – Severe decrease in 2016 in total value of cross-border M&A

4. The coming consolidation – a boost for financial integration

24

Bank M&As in the euro area – value of transactions

(EUR Billions)

Source: Dealogic.

0

20

40

60

2000 2002 2004 2006 2008 2010 2012 2014 2016

domesticcross-borderoutward EU

inward EUoutward non-EUinward non-EU

0

60

120

180

2007

Bank M&As in the euro area – number of transactions

Source: Dealogic.

0

50

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

domesticcross-borderoutward EU

inward EUoutward non-EUinward non-EU

ecb representative banking union · 2018-06-19 · • once the banking union is complete, the euro...

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