The Chair of the Single Resolution Board is the former BaFin President, Dr Elke König. In this interview, she talks about resolution plans and the minimum ratios for liabilities eligible for bail-in, the resolution of central counterparties, the possible consequences of Brexit – and about the challenges setting up an authority from scratch.

Dr König, when you started working at the Single Resolution Board in 2015 you were faced with the challenge of first of all setting up the authority. Do you believe this has turned out well?

It is still a work in progress. I moved at the time from an authority with over 100 years of supervisory practice to a "start-up" which was just about 100 days old and had fewer than 25 employees. These included, by the way, several German employees, who had come from BaFin and from the FMSA. Germany therefore played, and continues to play, an important role in the establishment of the SRB. Now the SRB has 177 employees, which is about halfway to the target level. We aim to have around 300 employees, perhaps a little more. Moreover, our goal is to transition from the start-up phase to become a really stable organisation.

Since the beginning of the year, the SRB has the powers to resolve large banks that are failing. Thankfully, such a worst-case scenario has not unfolded to date. What, does the SRB do instead?

Our core task is to draw up resolution plans. I sincerely hope that this will remain our long-term task – instead of actually resolving banks. Prevention is far better than cure – this adage applies to us just as it does to the supervisory authorities. That is why banks have to draw up recovery plans and have these examined, and that is why resolution plans are required. The aim is to guide banks to find private-sector solutions, if need be. So we don't just sit here and wait for customers to come to us so that we can give them a wonderful "burial".

How far along are you with the drawing up of the resolution plans?

It is definitely a challenge to draw up resolution plans for so many banking groups, some of which are very large, by the end of this year. Part of the task is also the setting of MREL, the minimum ratios regarding liabilities eligible for bail-in. The complexity of the coordination processes in Europe alone is not to be underestimated.

Will you still be able to keep to the timetable?

A change to the timetable is currently not envisaged. Even though the work schedule is ambitious, I am confident that we can manage it. Whether or not January will be eventually declared “the end of the year” – in Brussels it often happens that Christmas is celebrated at the end of January – remains to be seen.

The main problem is ultimately the availability of data, which we simply need in order to develop a specific resolution strategy for an institution. We work closely with the national supervisory authorities and with the ECB here: we of course do not request data from the institutions which the national supervisory authorities or the ECB have already collected. However, while the supervisory authorities have a very good overview of the assets side of the banks, the degree of detail in the information on the banks' liabilities is rather low, since these data are simply not included in the supervisory reporting system. Since we need this data to inform our work, we launched a survey on the liability structure across all banks in our remit this February. We are currently evaluating the results. From now on, we will carry out this survey on an annual basis in order to make our decisions based on up-to-date data.

What course will the MREL implementation process take?

My colleague Dominique Laboureix, also a Member of the Single Resolution Board, once put it like this: "MREL is a journey", i.e. it is a process rather than just one individual step. The ratios which we are currently setting will just be an indication at group level. A detailed determination for individual entities will not be made until next year, when we will also define exactly how much of MREL must be subordinated – what matters here is therefore the quality of the liabilities – and its location in a particular banking group.

Under the BRRD, MREL has actually been in force since the beginning of this year.

Yes, that is correct. The law states that, since 1 January, if a bank gets into difficulty, shareholders and creditors have to absorb losses totalling at least 8% of the bank's total liabilities before the Single Resolution Fund can be used. The Legislator has thus assumed that MREL is immediately available. The European Banking Authority (EBA) is a little more realistic in this regard, implicitly assuming an implementation period of four years. The Financial Stability Board (FSB) has, incidentally, a similar view of the global requirements with regard to the Total Loss-Absorbing Capacity (TLAC) . These requirements will come into force in 2019 but do not have to be implemented in full until 2022.

We ourselves have deliberately not named any specific deadline, because, ultimately, MREL depends on the individual case: there will be a few banks which will be able to meet MREL in full next year, while there will be others which will not achieve the requirement until three or even four years down the line, because they have issued debt securities which they will not be able to replace until these have matured. We therefore have to determine, on an individual basis, by what deadline each institution has to implement MREL. We will proceed here with sound judgement but it must be clear where the journey leads to.

That sounds almost as if the individual implementation period depends on what a bank can achieve and not on how healthy it is or how important it is for the financial system.

No, not at all. All the institutions where we see particular risks were, from the beginning, part of the group for which we already drew up preliminary resolution plans last year. The same applies to the banks which the FSB has categorised as being of global systemic importance, including Deutsche Bank. I am of the view, by the way, that it makes sense to cover at least one institution from each country and at least one institution from each bank type with a plan as a matter of priority. If a worst-case scenario really arises, we then have something to refer to. This is also how we proceeded last year with regard to the resolution plans. Regarding MREL, the implementation of course depends on how quickly something is realistically possible and how much needs to be done. But it is also true that if something is especially difficult, one just has to make the extra effort.

Will the MREL ratios for global systemically important institutions already take TLAC into account, even though the latter is not intended to be applied until 2019?

That is an issue which is being hotly debated. The fact of the matter is that the banks in the Eurozone are very diverse. That is why we set MREL individually for each institution. When doing so, we take into account the resolvability of the institution and of the fact that the Single Resolution Fund cannot be availed of until losses of at least 8% of the bank’s liabilities have been borne by creditors. Presumably, those banks subject to our authority will have to make available at least 8% of their total liabilities and own funds as MREL. In the case of an extremely complex institution, however, this figure may be much higher. When determining MREL, we will of course consider TLAC. The main TLAC requirements, especially subordination and distribution in the group, will play a role in our MREL decisions, and not just for global systemically important institutions.

The debate currently revolves mainly around two issues. For one thing, the EU Commission recently passed its delegated act on MREL. The 8% ratio originally suggested by the EBA is no longer contained therein. This triggered strong reactions in some Member States. However, the reason for this is simple: the Commission simply wanted to avoid overreaching the explicit primary legislation. This legislative act will therefore not lead to any change in our MREL policy.

And the second issue?

The second issue being discussed is that of the implementation of TLAC in Europe. The Commission has already presented a first draft, then a second and then a third, and I expect there will be a fourth and a fifth text as well. In addition, as is usual in Brussels, various non-papers (i.e. unofficial documents) are also circulating, wherein different parties are trying to advance their interests in the process. This of course leads to a situation where old battles are constantly being restarted, such as the call for an upper limit of 8%. We cannot comment on all of these non-papers. However, the SRB does take part in these discussions. There, we intend to stick to our position, which is that MREL is the key tool which we have to ensure that banks can actually be resolved.

Which European set of rules figure in this discussion?

This, too, still has to be clarified. One could implement TLAC in the BRRD or one could consider using the CRD IV and the CRR for this purpose. It is going to be some time before we have a specific recommendation on this.

But irrespective of the outcome and at what point in time which resolution plan becomes final, I would like to urgently appeal to the banks to deal now with the crucial issues. What is important here is information technology and the availability of data, as well as the question of the complexity of an organisation – ultimately the same topics which I was constantly addressing in my role as President of BaFin. A bank needs transparent structures in order to be resolvable. It also needs to be examined whether or not capital issued via special-purpose entities, for example, is available at all for the parent company for the purpose of a bail-in. There is therefore no reason for banks to wait for a letter from the SRB – the relevant issues are already well-known.

Independently of this, the review of the BRRD and thereby of the current MREL provisions is coming up. Is it intended that MREL basically apply in future to all institutions or that it only apply to global systemically important institutions, like TLAC does?

For me, MREL is definitely an issue for all institutions which should potentially be resolvable because they are of systemic relevance. And not just at a global level but also within individual countries. This applies to almost all institutions subject to the supervision of the ECB, and potentially others as well. Take Germany, for example: there, there are 21 institutions under the supervision of the ECB. This of course does not automatically mean that institution number 22 is completely irrelevant from a systemic point of view. Assessing this, however, is a matter for the national resolution authorities.

There should be no myth created, however, that the SRB demands MREL of 8% from every savings bank and cooperative bank – not at all. As I said earlier, we make our decisions on a case-by-case basis and with sound judgement. And for the large number of smaller institutions, the following will still apply in future: if they get into trouble, the deposit guarantee schemes will be called upon, and in cases of doubt there will be regular insolvency proceedings just as in every other sector. Resolution is not the answer for all failing banks; it is ultimately just a special kind of insolvency proceedings for certain institutions.

Do you believe it makes sense to introduce a general subordination requirement for MREL, analogous to TLAC?

One should be cautious in saying that the entire MREL necessarily has to be subordinated. With subordination, the aim is to ensure during the resolution of an institution and therefore also during the bail-in that no creditor fares worse than they would in normal insolvency proceedings. In the industry jargon, this principle is called "no creditor worse-off". Under national insolvency law, senior bonds are ranked at the same level as liabilities arising from suppliers, derivative contracts and many other kinds of contracts which, for good reason, one would rather not use during resolution. In order to avoid discussions about creditor hierarchy, the FSB has stipulated across the board that TLAC must be subordinated. In the case of MREL, I would say in general: the more subordination, the better. There may well, however, be individual cases where the entire 8% does not have to be subordinated.

What do you think of statutory subordination solutions, such as those in Germany?

I can only welcome the German Resolution Mechanism Act (Abwicklungsmechanismusgesetz) which has reregulated insolvency law for bank bonds with effect from 1 January 2017. The French are currently developing a similar arrangement, albeit only for newly issued bonds. Both solutions are helpful, even if the French law will show effect only in some years.

Could this be a European model?

We are very much in favour of clarifying the hierarchy of creditors across Europe. This would not only make life easier for us; it would also create more transparency for investors. Some EU member states – including Germany – share our view. In this respect, I am fairly hopeful that the European harmonisation of bank insolvency law, which the Council of the European Union recently called for, will lead to a uniform arrangement regarding subordination, amongst other things.

You are Chair of the FSB Resolution Steering Group. Amongst other issues, you deal there with the resolution of central counterparties. What insights have you gained to date?

This is a very important topic for me. Not because I believe that the CCPs are particularly vulnerable. On the contrary: they are an important element of the reform agenda in the wake of the financial crisis, an infrastructure via which transactions can be settled in a transparent manner. However, when one has such infrastructures and they are – for good reasons – large, one must also make provisions for the event that something might go wrong, however unlikely that may seem. According to their recovery plans, the central counterparties can bear the failure of at least one – or actually two – large clearing members. Nevertheless, we need rules in place for when the worst comes to the worst. In this context, we presented a policy paper in the FSB in mid-August which addresses the main questions.

What questions are those?

First of all the question: when must a resolution authority intervene? For the banks, it is clearly defined when resolution is triggered: namely if they fail or are likely to fail. Ultimately, this is linked to the bank's capital. There is still no such provision in place for the CCPs. The second issue that needs to be clarified is that of which tools the resolution authority must have at its disposal and what powers it must have. And of course cross-border provisions must also be made.

What is the next step?

We will further develop the policy paper and hope to be able to present results by the next G20 summit in July in Hamburg. Not least because, parallel to this, the European Commission is also working on a proposal and would therefore like to know what lies ahead internationally. From the SRB's point of view, too, the topic is of major interest: the central counterparties involve global systemically important banks. If we are dealing with the resolution plan for such a bank, we must be able to take account of all significant risks.

The SRB finances itself from contributions paid by the institutions subject to supervision. You announced before that you would provide the institutions with more information regarding the calculation of contributions. Are you already implementing this plan?

Yes. In July, we published more information on the calculation of contributions on our website. Transparency in this area is very important to us.

How will Brexit, the United Kingdom's exit from the EU, impact upon the SRB?

To begin with, nothing will change. Even if the United Kingdom invokes Article 50 of the EU Treaty, it will remain an EU member state for the time being, with all the rights and obligations that this entails. But even after the UK leaves the EU, I expect that we will be able to work just as well with them as we do with our partners in other third countries, such as Switzerland or the United States.

To what extent do you benefit at the SRB from your experience as President of BaFin?

BaFin is a well-structured authority with functioning process and pragmatic approaches. At the SRB, however, we have to first of all set up our administrative structures. Having moved from a large authority to a "start-up", I am now suddenly dealing with things which I have never thought about before. My BaFin experience has been very useful in this regard.

Of course I also benefit from my good contacts with BaFin, with the Federal Ministry of Finance and with the FMSA, in particular when it comes to finding qualified staff. BaFin is very cooperative in this respect. Seventeen German nationals are currently employed at the SRB – and our need for qualified employees remains high.

What do you like about Brussels?

Brussels is a tremendously international city. I find the fact that there are so many different nationalities living here to be an enrichment, even though I still struggle a little with the French language. In terms of culture, Brussels also has a lot to offer: there is a great opera here, as well as good concerts, and in the area around the city there are other cultural attractions and plenty of beautiful countryside.

And one more thing: I feel very safe here – even after the terrorist attacks in March. Of course one needs a few days to digest something like that. But it would not be any reason for me to no longer travel on the underground or even, as friends suggested, to leave Belgium altogether.

So that means you will be staying in the city for the long term?

I have a three-year contract, which can be extended. A decision does not have to be made at the moment but I can only say that I feel very happy here.

Dr König, thank you for your time.