TwoproposalstoresurrecttheBankingUnion:

TheSafePortfolioApproachandSRB+

LuisGaricanoRenewEuropeVice-presidentforEconomicAffairs

ProfessorofEconomicsandStrategy,IEBusinessSchool(onleave)

Banks

Sovereigns

× Nationalresolutions

× Stateaid

× Nationalliquidations

× Nationaldepositinsurance

× Highconcentrationinsovereigndebtholdings

Thedoomloopremainsstrong

TheBankingUnionisagonizing

SingleSupervisoryMechanism

SingleResolutionBoard

CommonDepositInsurance

BankingUnion

SingleRulebook:(1) Depositguaranteeschemes(DGSD)(2) Bankresolutionframework(BRRD)(3) Capitalrequirements(CRDIV)

Aluxurycarinourgarage

5yearsofnegotiationsandnoconsensus

Unclearrules;bail-in

circumvented

Amorefragmentedbankingmarket

References:Emter,L.,Schmitz,M.andTirpák,M.2018,‘Cross-borderbankingintheeuroareasincethecrisis:whatisdrivingthegreatretrenchment?’EuropeanCentralBankFinancialStabilityReview,Workingpapers2130(alsosourcingpreviousdraftsoftheworkingpaperbySchmitzandTirpák).

Cross-borderanddomesticlendingintheEU Grosscross-borderbankexposures

Cross-border

Domestic (Intrillionsofeuros)

Sovereigntobankcontagion

References:EuropeanBankingAuthority2019,‘EU-widetransparencyexercise’.

OwnSovereignasa%totalEU-AreaExposure

0%

25%

50%

75%

100%

Austria Cyprus Germany Ireland Netherlands Spain

2016 2017 2Q'19

SovereigntobankcontagionOwnSovereignExposureas%ofTier1

0%

50%

100%

150%

200%

Austria Cyprus Germany Ireland Netherlands Spain

2016 20172Q'19

References:EuropeanBankingAuthority2019,‘EU-widetransparencyexercise’.

Banks

Sovereigns

TwoproposalstoresurrecttheBankingUnion

2. TheSafePortfolioApproachandthepathtotheSafeAsset

Traditionalsovereignriskweightsproposals

References:BankofInternationalSettlements2017,‘Theregulatorytreatmentofsovereignexposures’.

▪ Riskweightsbasedoncountry’ssovereignrating

▪ Noisyandineffectiveduetoarbitrarinessofratingagencies

▪ Highlypro-cyclical

Inadmissiblebymostcountries

Creditriskbasedcharges

Sovereignrating AAAtoA- BBB+toBBB- BelowBBB-

Applicableriskweight 25% 50% 100%

Recentconcentration-basedproposals

References:Véron,N.2017,‘SovereignConcentrationCharges:ANewRegimeforBank’sSovereignExposures’,Bruegel,November17.Bundesfinanzministerium,2019‘Positionpaperonthegoalsofthebankingunion’.

Veron’sproposal

MinisterScholz’sproposal

▪ Riskweightsbasedonsovereigncredit

rating,butalsofactorsindegreeof

concentration

Myproposal:TheSafePortfolioApproachEurozoneCapitalKeyoftheECB

Germany Italy Netherlands Austria Portugal Ireland Lithuania Latvia Estonia Malta

0,1%0,2%0,3%0,3%0,4%0,5%0,6%1,1%1,7%1,8%2,4%2,5%2,9%3,6%5,8%

12,0%

17,0%

20,4%

26,4%

Thedistancemetric Appliedto

Myproposal:TheSafePortfolioApproach(continued)

TheSafePortfolioApproachillustrated

SafePortfolioApproach1

Complementarymeasurestoensuremarketdevelopmentofasset

3

Raiseconcentrationchargesasdesired2

Safetyintranching4

▪ Avoidusingrisk-basedcriteria

▪ DefinetheSafePortfolioastheECB’sCapitalKey

▪ ConcentrationchargesbasedondistancetoSafe

Portfolio

▪ Eliminatecapitalchargesforsovereign

securitizationswiththe“right”concentrations

(Non-neutralityprincipledoesnotapply)

▪ EuropeanDebtDistributionInstrument(EDDI)

Initiative

▪ Meaningfullyincreaseconcentrationchargesto

smoothlyleadbankingsectortowards

diversification

▪ Commitmenttotranchingrequiredfromstep1,witha

deadline(toavoidreneging):onlytheassetwithseniority

inthecommonportfolioshouldhave0%riskweight.No

implicitorexplicitguarantee(asintheSovereignBond

BackedSecuritiesParliamentposition)

ThepathtowardsaSafeAsset

SovereignBondBackedSecurities

References:Brunnermeier,M.etal.2011,‘EuropeanSafeBonds(ESBies)’,EuronomicsGroup.

Diversifiedportfolioofsovereignbonds

Seniorbond(ESBies)

JuniorBond(EJBies)

Assets Liabilities

Poolingbringsdiversification

Tranchingbringsseniority

UndermyproposalonlytheSeniorBondwouldhavea0%riskweightafteracertainperiod

Banks

Sovereigns

✓ Diversifiedsovereigndebtholdings

SafePortfolioApproach SRB+

Endingsovereigntobankcontagion

× Nationalresolutions

× Stateaid

× Nationalliquidations

× Nationaldepositinsurance

Banks

Sovereigns

2. SRB+:

TwoproposalstoresurrecttheBankingUnion

TowardsaEuropeanFDIC

1) TransactionannulledbyCommission.2) ConsidersconversionofCoCos(945mm)andtransferofParcaixashares(500mm).3) Estimatedsubordinateddebtatthetimeofliquidation,netof200mmincompensationto

investorsaffectedbymis-selling.

4) Considersbail-inonlyofsubordinatedandconvertiblesecurities.5) DoesnotincludepurchasesofstakesincomplementarybusinessesbytheLowerStateof

Saxony(100mm)northefuturecapitalinvestmentstobeprovided(approximately341mm).6) ConsiderscapitalguaranteesfromMediocreditoCentrale.

ControversialcasessinceimplementationofBRRD

Date Bank Transaction Bailin Capitalinjection

AssetGuarantees

Other Totalbailout

Dec-15 BancaTercas RecapitalizationbyDGS(StateAid) 295 35 330

Aug-16 CaixaGeral Recapitalizationonmarketterms 2.500 1.445 2.500

Dec-16 MontedeiPaschi Precautionaryrecapitalization 4.300 3.900 1.500 5.400

Jun-17 VenetoBanca/Vicenza Liquidation 1.100 4.800 12.000 16.800

Jun-17 BancoPopular Resolution 2.000 0

Feb-18 ABLV Liquidation 0

Sep-19 BancaCarige GuaranteesonT2issuances 3.000 3.000

Jan-19 NordLB Restructuringaidonmarketterms 2.835 800 3.635

Dec-19 BancaPopolarediBari State-ownedbankinjection 710 500 710

Total 7.400 15.040 17.335 1.945 34.320

(2)

(6)

(5)

(1)

(3)

(4)

Resolutionforthemany,notthefewKeylessonsfromcases ToensureResolutionfortheMany

NordLB:SupervisoryForbearance

VenetoBanks:PublicInterestAssessment

▪ BankallowedtooperatebelowCET1

requirementsforalmostayear

▪ SSMandSRBdidnotmakeFOLTF

determination

▪ NegativePIAdespite+60bninassets

and1.5mmdepositors

▪ RatioofpositivePIA/FOLTF

▪ EuroArea:7.7%

▪ NonEuro:40%

References:Buckingham,S.;Atanasova,S.;Frazzani,S.&Véron,N.2019,‘FinalReport:Studyonthedifferencesbetweenbankinsolvencylawsandontheirpotentialharmonisation’,EuropeanCommission,DGFisma.

▪ Timelimits

▪ FDICPromptCorrectiveAction

▪ Rules-basedPIA.Positivefor:

▪ AllSSMbanks

▪ Crossbordergroups

▪ Objectivethresholds(assetsor

depositors)

StreamliningdecisionmakinginSRB+

▪ CoordinationpowerstoNRAs

▪ TransitiontoanSRBwithan

“outpost”model

▪ NRAtobecomelocalbranchesof

SRB+

NationalResolutionAuthorities(NRAs) NationalDepositGuaranteeSchemes(DGSs)

▪ Co-decisionpowersonDGSfunds

▪ Ensureconsistencyintheuseof

DGSfunds

▪ DepoliticizeuseofDGSfunds

VisualizingSRB+SingleResolutionBoard+

Country1

NRA

DGS(0.6%)

Country2

NRA DGS(0.3%)

Country3

NRA

DGS(0.8%)

Country4

NRADGS(0.4%)

SingleResolutionFund EuropeanDepositInsurance

Acommondepositinsurance

▪ Hybridmodel

▪ CoexistenceofEuropeanFundandnationalDGSs

▪ EuropeanFundonlyusedwhennationalcompartmentisdepleted

▪ Twophased-implementation

▪ Phase1:BuildofEuropeanFund,liquiditycoverageonly

▪ Phase2:Fulllosscoverage

Payout:

▪ Risk-basedcontributions

▪ DeterminedatBankingUnionlevel

▪ Variabledepositcoveragetargetsinthetransition

▪ Dependingonrisksandfeaturesofnationalsystem

Funding:

VisualizingSRB+SingleResolutionBoard+

Country1

NRA

DGS(0.6%)

Country2

NRA DGS(0.3%)

Country3

NRA

DGS(0.8%)

Country4

NRADGS(0.4%)

SingleResolutionFund EuropeanDepositInsurance

Banks

Sovereigns

✓ SRBleadingresolutions

✓ LimitpotentialStateaid

✓ Minimizepotentialliquidations

✓ Europeandepositinsurance

✓ Diversifiedsovereigndebtholdings

SafePortfolioApproach SRB+

TheBankingUnionResurrected

Thankyou

LuisGaricanoRenewEuropeVice-presidentandECONCoordinator