Report

Key decision-makers from supervisory and regulatory authorities (the European Central Bank (ECB), the European Banking Authority (EBA) and Bundesbank) as well as academics and practitioners from all over Europe considered topical banking union questions in outstanding presentations, talked about matters generating controversy during two panel discussions and answered numerous questions from the audience. Some 150 participants from supervisory authorities, banks, academic circles and the legal sector played an active part in the discussions.
The Single Supervisory Mechanism (SSM) directed by the ECB has become firmly established since the launch of the banking union in 2014. The Single Resolution Mechanism (SRM), the second pillar of the banking union, became fully operational on 1 January 2016. At the same time, the international framework is continually evolving, with European legislators recently presenting a proposal for the reform of the cornerstones of banking supervision, recovery and resolution (CRR II, CRD V, revision of the SRM Regulation and the BRRD). The Commission report on the implementation of the SSM Regulation is being eagerly awaited, as well as any legislative proposals concerning the further evolution of the SSM that may be prompted by it.

Banking supervision in the fourth year of the banking union

European legislators cannot regulate all the details themselves.
Following the welcoming address delivered by Rolf Friedewald, managing director of the Institute for Law and Finance, Adam Farkas, the executive director of the EBA, spoke vividly about the practical challenges facing European legislators, the EBA and supervisory authorities in striking an appropriate balance between detailed regulation and the need for flexibility in applying the law. In his opinion, the room for manoeuvre granted to national legislators in implementing European rules and the interests that some member states have in bolstering national champions could be an obstacle to achieving the goal of uniform supervision. At the same time, he spoke out against a deterministic approach to regulation. He said that European legislators cannot regulate all the details themselves. At the same time, he observed that the process for the adoption of Level 2 measures is lengthy and inflexible. Farkas said he therefore favoured the EBA being given greater independence in setting detailed technical standards so that new developments can be responded to faster.    
SSM was in no way a hierarchical organisation.
Andreas Dombret, a member of the Deutsche Bundesbank Executive Board, stressed the network structure of the SSM. He said that the SSM was in no way a hierarchical organisation. In the area of the direct supervision of important institutions, national supervisory authorities continue to play an important role as, for example, a part of the JST, but also through the ECB Supervisory Board. He noted that the SSM was virtually dependent on strong support being provided by national supervisory authorities in the form of, for example, the supply of qualified personnel. That is why national supervisory authorities have to fulfil their personnel commitments. He said the Bundesbank would do so in any event. In addition, Dombret called for a reappraisal of the view that sovereign bonds are ‘risk free’. He observed that this resulted in misallocations, especially in view of capital requirements.
There are many crossroads along the way from global standards to actual law.
To round off the morning presentations, Danièle Nouy, chair of the SSM Supervisory Board, began by providing an overview of international developments concerning financial market regulation in recent years. She then discussed the problems resulting from the fact that international standards are not always transposed into national law in a uniform manner: ‘There are many crossroads along the way from global standards to actual law. And states can take a slightly different course at each crossroads.’ She said that in Europe, too, member states still had many options and scope for exercising discretion. Nouy emphasised that from the ECB’s perspective there was a need to introduce improvements into the EU Commission’s current CRR/CRD IV reform proposal, which continues to give member states a certain degree of room for manoeuvre. What is needed is a further harmonisation of rules complemented by scope for action on the part of supervisory authorities. Finally, she pointed out in connection with Brexit that, following the departure of the UK, the activities of British banks in the EU would also have to be subject to European rather than member state supervision. In contrast to the current legal situation, this would also be the case even if British banks only maintained branches in the eurozone or organised subsidiaries as broker-dealers. Nouy noted that this required a response from legislators.
National rules frequently imposed conflicting requirements on banks.
A panel discussion was then opened by Sylvie Matherat, Chief Regulatory Officer and member of the Management of Deutsche Bank. She stressed the importance of the international harmonisation of supervision rules for banks operating internationally. This is not only the case with regard to prudential regulations but also particularly required with respect to rules governing conduct in, for example, the field of combating money laundering. Matherat said that national rules frequently imposed conflicting requirements on banks. Thus, in the United States, communications frequently have to be precisely documented and kept for long periods, which, by contrast, would cause problems in Germany, for example, with respect to data protection legislation. Responding to critical questions from the audience concerning the preventative recapitalisation of Italian banks, Ms Nouy explained that this was possible under the BRRD and that the role of the ECB was limited in this regard.
Then the panel, with the participation of the audience, discussed recovery and resolution planning and initial practical experience. A recurring issue during the debate was the burden imposed by regulation on small banks in particular.

Bank resolution in theory and practice

The second part of the conference, which was devoted to the subject of bank recovery and resolution, opened with a presentation delivered by Raffaele Lener, a partner at Freshfields Bruckhaus Deringer in Rome. He described the first cases that have entailed the application of Italy’s new resolution regime. The Italian authorities had already performed a bail-in in respect of four smaller, regional Italian banks in 2015. In the following year, Italy granted Banca Monte dei Paschi di Siena financial support by way of preventative recapitalisation under the BRRD. Lener said that this example illustrated that there was a need to strike an appropriate balance between the bail-out prohibition and the public interest in financial stability on a case-by-case basis.
TLAC and MREL regimes are functionally equivalent, but not technically equivalent.
Christos Hadjiemmanuil from the University of Piraeus and the London School of Economics delivered a presentation in which he examined the current European Commission reform proposal concerning the amending of the SRM Regulation and the BRRD. A key issue in this context is the implementation of the new technical loss-absorbing capacity (TLAC) standard. This could conflict with the current European standard concerning minimum own funds and eligible liabilities (MREL), because they are ‘functionally equivalent, but not technically equivalent’. He said that European legislators had sound reasons for deciding to integrate TLAC into the existing MREL regime, because an independent TLAC regime would have made bail-in regulations even more complex.
Alexander Glos, a partner in the Frankfurt office of Freshfields Bruckhaus Deringer, then outlined the possible impact of Brexit on SRM resolution planning. As the UK, like any other third country, will no longer be subject to European law following Brexit, this raises the critical question of the mutual recognition of resolution measures in the case of banks with cross-border operations.
The afternoon’s speakers then answered questions from the audience during a panel session moderated by Helmut Siekmann from Frankfurt’s Goethe University. One of the focal points of the discussion was the controversial issue of the proportionality of regulation, which places a burden on smaller institutions in particular.
Summing up the conference, Alexander Glos expressed his delight at the lively interest displayed by the expert audience and the many stimulating contributions:
‘The banking union is a complex structure that continues to have a pressing need for professional debate among its participants,’ he said. ‘That is why we will continue to follow the successful conference format next year too.’