Banking stability in the euro zone: the role of the SRB and its plans for the future

Last Updated on Sunday, 8 October, 2023 at 9:54 am by Andre Camilleri

The banking sector is a vital part of the economy, but what happens when a bank fails? The Single Resolution Board’s (SRB) mission is to ensure financial stability and protect taxpayers amid evolving challenges in the banking industry. During his recent visit to Malta, The Malta Business Weekly met with DOMINIQUE LABOUREIX, chair of the SRB, and discussed the Board’s significance to Malta and the euro zone as well as its plans for the future.

As the chair of the SRB could you please elaborate on the Board’s role and its significance for the banking sector in Malta?

The Single Resolution Board (SRB) is the central resolution authority within the Banking Union, which at present is all the EU countries that use the euro as well as Bulgaria. Together with the national resolution authorities, such as the MFSA here in Malta, we form what is called the Single Resolution Mechanism. Our mission is a simple one: to ensure that if a bank gets into difficulty, we have a plan in place to deal with that particular institution, thereby preventing any adverse impacts on the rest of the economy. Our goal is to achieve financial stability without using public funds.

Why is the collapse of banks different to say the failure of a local factory, shop or bakery, for example?

Banks have a central role in the free market economy. They provide credit lines to businesses. They give you loans to buy a home. They also provide payments systems, such as ATMs and bank card terminals in shops. In short, the functions that medium- to large-sized banks provide are very important for the economy. If a bank collapses, the ripple effects are going to be far greater than of the closure of any other type of business. While many banks are important, the question arises – should we allow them to become too important to fail? The answer is clearly no. We must instead have plans in place for each banking institution, so as to ensure financial stability while protecting the taxpayer. At the SRB, we are responsible, together with the MFSA, for ensuring that all major banks in Malta have a plan in case of difficulties. These are called resolution plans and putting them in place is one of our core tasks at the SRB.

How do you go about drawing up these plans and how ready are Maltese banks for a crisis?

We work closely with the industry when preparing these plans. It is the responsibility of each bank to ensure that they become resolvable. The SRB, as part of the Single Resolution Mechanism, has to work to develop plans that can be put into action at very short notice. Of course, the ever-evolving nature of banks’ business models, driven by organic growth or acquisitions, means that the SRB has to ensure plans are updated regularly and that they are practical and operational. In terms of Malta, we have a long-standing rule never to comment in detail on specific countries or banks, but if you look at the data in the Banking Union overall, you’ll see the level of resolvability of eurozone banks has continued to improve since the SRB was set up. I am pleased with the progress made, but this is just one stage in an ongoing journey. Challenges persist. It is important to be aware of the evolving risks facing the global banking sector. Cyber risks, digital finance, climate change and the current macroeconomic outlook are all among the new challenges being faced by the banking industry across Europe.

You assumed the role of chair of the SRB at the start of this year. What would you say has been the main area of focus during your tenure so far?  Could you outline the main priorities that will shape your mandate in the next four years?

The SRB, which was set up back in 2015 to manage failing lenders, is moving into a new phase. We will focus more on testing banks’ resolution plans, including on-site inspections. So far, in what you might call the first phase of banking resolution in Europe, the SRB together with the MFSA has laid solid foundations for financial stability.

In the upcoming phase of the SRB – phase two if you like – we will also press banks to make sure that they can absorb losses, have readily available data and be able to handle a crisis, for instance on liquidity and collateral or on the value of assets and liabilities. Going forward, I want to further strengthen the level of confidence in the SRM as a transparent and trusted resolution framework. One of the things I want to do is to consult more with banks on developments and rules than we have in the past, while being careful not to put the industry in the driving seat. Instead, I want to give them a greater opportunity to explain potential concerns.

You’ve touched upon regulatory reforms since the financial crisis. Are there other reforms you believe should be put in place?

Let me begin by addressing a somewhat disheartening aspect: there is no political momentum behind efforts to complete a banking union by establishing a eurozone deposit insurance scheme. That is a pity, but it is not something the SRB has control over. However, I am sure the European co-legislators will finally come back to this topic and will find an appropriate solution.

Finally, the Crisis Management and Deposit Insurance are proposed reforms by the European Commission to the financial stability framework. The proposals contain many elements that the SRB supports, and I do hope that some, if not all, of the CMDI’s proposals are adopted in the interest of protecting the taxpayer and improving financial stability here in Malta and across Europe.  

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