February 26, 2018

Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, spoke at the European School for Management and Technology about the future of Europe and of the euro area in particular. He highlighted that the euro area is witnessing a full-fledged economic upswing. However, banks in several member states are still saddled with huge volumes of non-performing loans while some member states are still vulnerable due to high levels of public debt. He emphasized the need to overcome such weaknesses in the financial architecture in the euro area.

Mr. Dombret stated that the financial architecture in the euro area still has weaknesses, even after years of recovery and various far-reaching reforms. As far as the Banking Union is concerned, the debate has centered on the European Deposit Insurance Scheme (EDIS), which should be the third and final pillar of Banking Union. In this regard, the milestones concern realigning the European resolution framework and its national counterparts, and banks building up bail-in-able capital to meet their Minimum Requirement for own funds and Eligible Liabilities (MRELtargets. He said: "Maintaining reform pressure and reducing risks before establishing a common safety net certainly extends beyond eliminating the current privileges for sovereign bonds in banking regulation. It pertains to all excessive risks currently identified in national banking systems. These remarks do not mean that I am dead set against a reform of deposit insurance. I am talking about putting the reforms in the right sequence. So my first point is that if we want to improve the structural design of the euro area, we need to address the sovereign-bank nexus—amongst other things—before we create a European deposit insurance scheme." Therefore, addressing sovereign concentration risks on banks' balance sheets should be a top priority in further reforming the euro area financial architecture. He proposed to rectify an imperfect financial architecture, which he believes is not an easy task. 

Mr. Dombret believes that European supervisors should not hesitate to vigorously pursue the issue of non-performing loans, or NPLs. He acknowledged the considerable progress being made by banks in cleaning up their balance sheets in 2017—not only because mounting supervisory pressure forced them to do so, but also because the improvement in asset quality creates long-term value for their stakeholders. He added that "... let us not dwell on supposed European conflicts of interest surrounding the treatment of NPLs. I propose that we see this as a conflict between short-term and long-term regional interests. Therefore, I strongly support the take of European supervisors on this matter." He then highlighted that resilience is not a state, but a process. From the viewpoint of a banking supervisor, even though a lot of the daily work is centered on capital requirements, cyber risks and other IT-related risks are quite special; this is because even adequate capitalization in banking systems does not prevent IT-related financial stability issues from occurring (such as downtimes in payment systems). Thus, financial supervisors need to target those risks in a direct way, pushing the financial sector to make incidents less likely and emergency responses as effective as possible. He concluded by highlighting the advantages of European cooperation and providing citizens with the tools they need to understand and classify issues around Europe.

 

Related Link: Speech

Keywords: Europe, Banking, NPL, MREL, EDIS, Financial Architecture, Financial Stability, Bundesbank, BCBS

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