He sees himself as "one of the faces of European banking union". The chairman of the Single Resolution Board, Dominique Laboureix, was on a working visit to Luxembourg at the end of November. This was part of his tour of the 21 countries participating in the European framework for the supervision and management of banking crises. Alongside his meeting with officials from the Luxembourg Financial Sector Supervisory Commission (CSSF), he spoke to Paperjam about the central - but little-known - role of the SRB.
Guillaume Meyer: What should the general public know about the SRB's mission?
Dominique Laboureix: The SRB is the central authority responsible for resolving banking crises as part of the banking union. Our main mission is to ensure the orderly management of banks in difficulty, in collaboration with the national resolution authorities, in order to minimise the impact on the real economy, the financial system and the public finances of the member states. In other words, our aim is to preserve financial stability, while avoiding the use of taxpayers' money.
A lesson from the 2008 crisis?
Our mission stems directly from it. Back then, the banking system was saved by massive government intervention, financed by public money. This revealed the lack of a structured framework in Europe for managing banking crises. In response, specific regulations were adopted in 2014, creating a genuine crisis management framework. The United States already had such a mechanism. We have drawn inspiration from this model, while adapting it to Europe's specific characteristics.
How is European banking union organised?
It is based on two pillars. The first is banking supervision, which is the responsibility of the European Central Bank. The second, which I am responsible for, is crisis management, also known as bank resolution, which relies on the SRB. These two pillars work together to guarantee financial stability.
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What is the difference between a resolution and a traditional liquidation?
In a traditional liquidation, the bank's assets are sold and creditors are repaid according to the order of priority defined by law. This can be a long and complex process, but it is suitable for small banks whose demise will not affect the economy or the financial markets.
Resolution, on the other hand, relies on specific tools that enable rapid intervention to preserve the bank's essential functions while limiting the impact on taxpayers. This may involve the sale of healthy activities to another institution, the creation of a transitional structure or internal recapitalisation measures.
When has the SRB intervened?
Two concrete cases have occurred in the banking union: in 2017, with Banco Popular in Spain, and in 2022, with Sberbank, the subsidiary of a Russian group, just after the invasion of Ukraine. In both these situations, resolution tools were activated to protect critical functions and avoid major disruptions. Otherwise, until now, the other cases of bank failure in Europe have been dealt with through the normal liquidation of companies.
A crisis of confidence can spread extremely quickly.
You have never intervened in Luxembourg, which has had a few bank failures, such as Fortuna in 2022-2023. Is this significant for a financial centre of this importance?
This illustrates the great resilience of the Luxembourg banking sector, which also reflects the resilience of banks throughout the banking union, i.e., the 21 participating countries. In recent years, we have seen a strengthening of banks' capacity in terms of solvency, liquidity and profitability. These three elements are fundamental to ensuring their resilience.
A solvent and liquid bank that manages to generate profits strengthens the confidence of customers and investors. Profits play a key role here: they protect solvency, ensure stability and enable the bank to face up to any challenges that may arise. Conversely, a bank that accumulates losses weakens its solvency, reduces confidence and can find itself in liquidity difficulties.
The 2023 European stress tests showed a resilient Luxembourg banking system, with sufficient levels of capitalisation overall. Can we rest easy?
Not me, at any rate: I'm paid to be worried! And I believe that bankers must also remain vigilant. It's not a question of being worried on principle, but of avoiding complacency. Just because banks today are solvent, liquid and profitable - which is a very good thing indeed, including in Luxembourg - does not mean that the system is immune to future difficulties.
There have been many recent examples of just how fragile stability can be. In March 2023, the collapse of Silicon Valley Bank and the woes of Credit Suisse brought banking risks sharply back into the spotlight. A crisis of confidence can spread extremely quickly and affect European banks, whether they are based in Luxembourg, France, Ireland or elsewhere. It is crucial never to let our guard down.
The risks themselves are changing...
The influence of social networks and digitalisation have changed the dynamics of crises. Today, information - whether true or false - can spread instantly. With banking applications, customers can withdraw their funds in a few clicks, without having to go to a counter. This speeds up the movement of capital in the event of a panic, making crisis management even more complex. Not to mention IT risks and cyber-attacks, which represent a growing threat to financial stability.
We are constantly analysing whether our toolbox is adequate.
What is the SRB doing to adapt to these new risks?
We recently adopted a new strategy within the Single Resolution Mechanism, which brings together the 21 national resolution authorities and the SRB. This strategy aims to better anticipate emerging risks, such as those linked to cyber attacks, the acceleration of financial crises via digital technologies and the evolution of banks' business models. We are constantly analysing whether our toolbox is adapted to respond effectively to these challenges.
Where might the next financial crisis come from?
I can't predict it. What we do know is that it could emerge from two major categories of risk. Firstly, classic crises, such as those linked to credit or market losses. A bank lends money, but the borrowers don't repay or it suffers major losses on its investments. This type of scenario is well known and was illustrated, for example, in the Credit Suisse crisis, which combined losses on risky portfolios with a loss of confidence.
Then there are emerging crises, often linked to new phenomena such as sanctions, reputational crises or cyber attacks. A bank accused of money laundering or targeted by international sanctions can find itself isolated, losing its ability to operate normally. Similarly, a cyber attack that paralyses a financial institution can create cascading contagion effects. We need to be prepared for all these scenarios, whether they are conventional or unprecedented.
The next crisis may not come from the banks?
Absolutely. The banking system, while imperfect, is today subject to strict regulation and robust crisis management mechanisms. By contrast, other players in the financial sector are much less regulated, if at all.
For example?
Take cryptocurrencies. This sector is still largely unregulated, and there is no appropriate crisis management framework for these assets. When the crypto bubble burst in 2021, several cryptocurrencies and platforms went bust. Fortunately, the interconnections between the crypto world and the traditional financial system - banks and insurance - were limited at the time, which prevented contagion to the rest of the economy.
However, if the interconnections between these two worlds become stronger in the future, a crisis in the crypto sector could have repercussions for the entire financial system. I would argue for the application of a simple principle: similar services, similar rules. Non-banks that carry out activities comparable to those of banks should also be supervised.
Non-banks need a crisis management framework.
How can these non-banks be better supervised?
Today, discussions are focusing mainly on transparency and liquidity. We are asking these players to provide more information about their activities and to maintain a certain level of liquidity to deal with potential crises. This concerns a wide variety of players: money market funds, hedge funds, family offices, crypto clearing platforms, etc.
This is not enough: in time, we will need to go further. Non-banks need a crisis management framework. In Europe, we have already made progress with some of them. For example, a directive on the resolution of insurance companies has just been adopted, and rules now exist for clearing houses (CCPs). But for other players, such as hedge funds and crypto platforms, there is still nothing.
What are the current macroeconomic challenges that are likely to influence the health of European banks?
There are many challenges and they are constantly changing. One of the most striking is geopolitical tensions, which are taking a variety of forms. We are seeing increased fragmentation on a global scale, with sometimes open conflicts, as in Ukraine. Then there are the structural challenges, particularly those linked to digitalisation - with its cyber corollary - and global warming. All these changes could lead to economic tensions that could have an impact on banking stability.
Read the original French-language version of this interview /