Featured Product

    SRB Chair Discusses Centralized Liquidation Regime for EU

    April 24, 2020

    The SRB Chair Elke König recently published two articles in The Eurofi Magazine: one article discusses the importance of creation of a centralized administrative liquidation tool while the other article examines the pros and cons of following either a single point of entry (SPE) or a multiple point of entry (MPE) approach to resolution of banking groups. The SRB Chair proclaims that a centralized liquidation regime in EU would address the current gap in the framework for medium-size banks and improve the overall system.

    Centralized liquidation regime

    The SRB experience to date has showed the need to find a solution for those medium-size banks that are too “small” to meet the public interest assessment, but possibly too “large” to be placed in insolvency. In the article, Ms. König highlights that a centralized liquidation regime in the EU would address the current gap in the framework for medium-size banks. SRB has been clear that the harmonization of insolvency regimes for banks is a necessary end-goal. However, it is unlikely to be achieved in the short term. The creation of a centralized administrative liquidation tool, therefore, may be more feasible in the short-medium term and would address many of the issues identified for medium-size banks, with insolvency tools remaining available for smaller banks. 

    Such a liquidation tool could be created by amending the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation, and the Deposit Guarantee Schemes Directive and could provide for the powers to transfer (some) assets and liabilities in an orderly liquidation, much in line with the current resolution tools. In the Banking Union, this could be entrusted to a central authority. FDIC in the United States is a useful comparison, as it highlights the advantages of the purchase and assumption tool (P&A) for liquidation, which was used for the majority of US bank failures in the last decade. The FDIC experience also shows the benefits of having a centralized authority with harmonized resolution and insolvency procedures, P&A tools, and Deposit Guarantee competences.

    Resolution strategies and approaches for banking groups

    Ms. König states that resolution strategies for banking groups with subsidiaries in several countries can follow either SPE or MPE approach. For groups with centralized structures, resolution authorities will likely opt for an SPE approach and apply resolution tools at the parent level, while groups with a sufficiently decentralized structure may be subject to an MPE strategy. The Banking Package strengthens the feasibility and credibility of implementing SPE, by requiring resolution authorities to set internal Minimum Requirement for own funds and Eligible Liabilities (MREL) and Total Loss Absorbing Capital (TLAC) requirements, which should facilitate loss absorption within a group. However, the new provisions also provide for a high level of pre-positioning of internal MREL, potentially leading to locked-in capital. 

    It is too early to judge the consequences, but SRB is concerned that this de facto ring-fencing within EU might substantially reduce the needed financial flexibility at parent level. Policymakers are encouraged to take forward the concrete work on a legally enforceable group insolvency support mechanism for banking groups. These measures should apply to banking groups in Europe, but concrete solutions are also needed at the FSB level. In the meantime, SRB has made “bail-in playbooks” a priority of its work since 2018 and is focusing on credible and executable plans to upstream losses and downstream capital within a group, if need be.

     

    Related Links

    Keywords: Europe, EU, Banking, Centralized Liquidation Regime, Resolution Framework, Crisis Management Framework, SPE Approach, MPE Approach, SRB

    Related Articles
    News

    EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    MAS Amends Notice on Related Party Transactions of Banks

    MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.

    April 08, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Euro Short-Term Rate

    ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.

    April 07, 2021 WebPage Regulatory News
    News

    EBA Consults on Standards Related to FRTB-SA

    EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).

    April 07, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules Related to IRB Approach for Credit Risk

    PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.

    April 07, 2021 WebPage Regulatory News
    News

    BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK

    The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks

    FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks

    OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.

    April 06, 2021 WebPage Regulatory News
    News

    EU Amends CRR and Securitization Regulation in Response to Pandemic

    To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).

    April 06, 2021 WebPage Regulatory News
    News

    HM Treasury Announces G7 Agreement on Green Agenda Ahead of COP26

    HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.

    April 06, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6821