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14.11.19 11 INTERVIEW ensure European banks can be resolved At European level a decision was taken for derivatives to go on stock exchange platforms, she adds but the risk of conta- gion remains if a bank fails. "ere is an all-round feeling that banks are the lifeline of an economy so one bank failure can trigger a market fear, which could see people withdrawing funds from their bank even though there is no valid reason to do so. is is why acting fast to restore stability is important," König says. However, she cautions against using financial stability as an ex- cuse to say that a bank cannot fail. "Banks fail, like any other busi- ness, and they should be able to withdraw from the market if that happens but in an orderly fashion," König says. Politicians sometimes speak of stability as a threat to jobs and growth but König disagrees. "e two are inseparable, oth- erwise you are building your house on sand if one comes without the other," she insists. She explains that the SRB has a number of tools at its dispos- al when intervening to resolve banks. In cases involving big banks, the most likely tool is a "bail into", where equity is written down and liabilities are convert- ed into equity, she says. "If this cannot be done by the bank's own funds, we can use the Single Resolution Fund. e idea is to create stability imme- diately," König explains. Another tool is the outright sale of the institution, similar to what happened with Banco Popular. "is is the best option but you need to find a buyer within the same country in- terested in acquiring the name or the brand. is is ideal for a mid-sized bank," she says. A third option is creating a bridge bank wherein the good business is carved out and transferred to a new company that is well capitalised. e new, 'good bank' will try to be sold over the following two years. König is, however, realistic in her outlook and insists solu- tions are not miracle cures. "Before we came into place in 2014, Banco Espirito Santo, a Portuguese bank, had its good portfolio carved out to save it but the 'good bank' still lost money," she says, adding that failure is also a fact of life. "When a bank fails it inevita- bly always causes losses but we want to ensure that stability is preserved and countries are not burdened with the problems witnessed in 2008," she says. Malta has three systemic banks – HSBC, Bank of Valletta, and MeDirect (formerly Mediterra- nean Bank) – which means they are directly supervised by the European Central Bank. e SRB has a broad frame- work that has to be translated into a working document for the individual banks supervised by the ECB. Criticism has often been lev- elled towards European insti- tutions for applying a one-size- fits-all approach in the banking sector that puts the likes of Bank of Valletta in the same boat as German giant, Deutsche Bank. König acknowledges the criti- cism but insists the underlying principle is that irrespective of the bank's size, it should be re- solvable. "Where it differs is the way this is conducted, which is different for small and big banks." She says that the fact that BOV is so much smaller than Deutsche Bank should not mean that European institu- tions ignore it. "My concern is the country more than the bank. A bank may be small within a European context but very big in a coun- try context, and our job is to safeguard the country, irrespec- tive of whether that is Germany or Malta," she adds. In the aftermath of 2008, has the financial services industry learnt its lessons? She pauses for a second and replies: "Does industry applaud all the lessons learnt, or do its homework? Well, some need more support than others but industry believes that 2008 should not happen again." I leave König with one final thought on the strength of the banking sector in Europe as in- stitutions grapple with muted profits in a low interest environ- ment and increased regulatory burdens. "European banks are post- ing average profits and are not where we would like them to be," she says. König attributes this to the low interest environment, the lega- cy of clearing up problematic balance sheets and the trans- formation of the sector as inno- vative technologies disrupt the market. "Banks have to find the bal- ance between their traditional business and new technology. ey need to adapt but if I were to look at where we are now in terms of supervision, we are in a far better situation than 10 years ago," she says. e grey clouds have not abat- ed but the rain holds. König looks outside and with a smile adds: "e sun does not always shine and we need to fix the roof but we are not in a situation where the roof is falling down." "Banks fail, like any other business, and they should be able to withdraw from the market if that happens but in an orderly fashion"

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