Report of the 6th Conference on the Banking Union
On 21 May 2019, the sixth annual conference on the Banking Union organised by Freshfields Bruckhaus Deringer, the Institute of Law and Finance (ILF) and, for the first time, the Center for Financial Studies, both part of the Goethe University of Frankfurt, once again brought together European and national supervisors and regulators, participants from the financial industry, legal advisers and members of academia to discuss current (regulatory) issues in the banking sector and to discuss what the future might bring. More than 150 attendees joined the event at the University of Frankfurt alongside Freshfields partners Markus Benzing and Alexander Glos and high-calibre speakers from supervisory and resolution authorities, as well as the banking industry.
After Andreas Cahn, Executive Director of the ILF, welcomed the participants on behalf of the organisers, the speakers in the morning session addressed mainly the topic of overlapping responsibilities of authorities within the Banking Union. The first keynote by Pentti Hakkarainen, member of the SSM Supervisory Board of the European Central Bank (ECB) presented the ECB’s views on this issue. He noted that overlapping supervisory coverage by different authorities in the Banking Union should be no reason for concern and that cooperation between authorities ensures that supervision is aligned. Pentti also discussed the benefits and risks of new technologies especially focusing on the vulnerability of information and communication technology (ICT Systems) systems and risks resulting from outsourcing to cloud service providers and explaining current initiatives of the SSM to address these risks.
The second speaker, Elke König, Chair of the Single Resolution Board (SRB), explained current policy priorities of the SRB. She stressed that the single resolution mechanism (SRM) has been established as the valid framework for large banks in the Banking Union, and the SRB is now focussing on implementing this framework further. While resolution plans for all banks under the SRB’s remit have been developed, Elke highlighted that refining such plans is an ongoing task. Work on resolvability included setting Minimum Requirements for Own Funds and Eligible Liabilities (MREL) and further assessing impediments to resolvability. As to MREL, the SRB is in the process of setting MREL not just on the consolidated, but also on the individual banking level. On further measures ensuring resolvability, Elke emphasized the preference of the SRB to develop solutions jointly with the institutions concerned. She closed her speech by pointing out the need for further harmonisation and integration in the Banking Union by stating "only European solutions get us far". She highlighted that the European Deposit Insurance Scheme (EDIS) is an essential element of the Banking Union.
Saumya Bhavsar, Global Head of Regulatory Affairs at Credit Suisse, presented the perspective of globally operating bank and its approach of dealing with regulatory overlaps. From her perspective those regulatory overlaps often lead to a challenge for institutions regarding appropriate communication and information exchange. She noted the increase of measures that effectively resulted in ring-fencing, also referring to studies that ring-fencing could ultimately contribute to a financial crisis. She suggested increased cooperation and transparency between competent authorities and banks with home authorities leading such dialogue.
Elke Gurlit, Professor of Public Law, Comparative Law and European Law, University of Mainz, and Markus Benzing joined the speakers for a panel discussion moderated by Christos Gortsos, Professor of Public Economic Law, University of Athens. In the discussion, Elke König explained her views on liquidity in resolution and on the SRB’s experiences in recent resolution cases. She stressed that the issue of liquidity in resolution was a pressing issue that would need to be addressed mainly by the institutions themselves. While both the single resolution framework (SRF) and the common backstop could play a role in providing liquidity, these instruments were mainly earmarked for recapitalisation. Ultimately, a credible solution would need to involve the ECB as a lender of last resort. The panel also discussed the recent changes to the supervisory set-up in AML supervision and case law of the European Court of Justice on the Banking Union.
The afternoon sessions dealt with the digital revolution in the banking sector and related supervisory issues. Joachim Wuermeling, member of the Executive Board of Deutsche Bundesbank, focused on the impact of digitalization on the banking sector. While he welcomed the emergence of new business models such as platforms and crowdfunding, he also drew attention to the supervisory challenges associated with them. He explained that the new business models may lead to a fragmentation in the value chain where unregulated activities that were traditionally performed by banks were now carried out by unregulated service providers, not subject to the scrutiny of the supervisor. Going forward, those developments may result in enhanced supervisory scrutiny of outsourcing and the providers of outsourced services. He compared those challenges to the challenges caused by the financial crisis, and identified an efficient knowledge management within the authority as key for dealing with digitalisation.
Alexander Glos, partner at Freshfields, gave a presentation on regulatory requirements for banks in the context of digitalisation. In particular, to ensure a stable and independent ICT environment, supervisory requirements relating to ICT security are constantly increasing in scale and granularity, also making the further build-up of internal ICT knowhow in banks necessary. He also highlighted impending changes to the regulatory development as a result of the banking package, in particular new rules limiting the deduction from own funds of software as an intangible asset.
The second panel was moderated by Henning Soller, Partner, McKinsey & Company. Tamaz Georgadze, CEO, Raisin GmbH and Sandra Kumhofer, Director Regulatory, FinLeap GmbH joined the two speakers of the afternoon session. Sandra Kumhofer provided the perspective of FinTechs on working with regulators. She identified room for improvement in the communication with the supervisory authorities, arguing that the electronic submission of documents and communication in English should be made possible and that the duration of administrative proceedings should be reduced. Joachim Wuermeling confirmed the interest of the banking supervisors in maintaining a dialogue with the FinTech sector. Tamaz Georgadze urged German regulators to take the lead in shaping the FinTech sector and the supervisory framework instead of merely adopting a reactive stance to new developments.