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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
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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
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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
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1. European banking supervision
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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1. European banking supervision
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
1. European banking supervision
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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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.
3. State of progress – a strengthened euro area banking system
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
3. State of progress – a strengthened euro area banking system
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
3. State of progress – a strengthened euro area banking system
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Competition, efficiency and stability
Competition intensifies • Cross-border M&As • Fintechs • Digitalisation • Changing customer behaviour
4. The coming consolidation – a boost for financial integration
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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
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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
1. European banking supervision: where we started
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
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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
1. European banking supervision: where we started
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
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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