December 18, 2017

François Villeroy de Galhau, the Governor of the Bank of France and Chairman of the ACPR, spoke about bank resolution at the ACPR Academic Conference in Paris. He also highlighted that the Banking Union is now operational and is based on a single rulebook and the two pillars of the Single Supervisory Mechanism (SSM) since the end of 2014 and the Single Resolution Mechanism (SRM) since the beginning of 2016. The two pillars should be supplemented by a third pillar, that of the Deposit Insurance. He also focused on two cross-cutting challenges that are less often discussed—consistency and consolidation—and involve resolution.

Mr. Galhau stated that the first challenge is to achieve better consistency between regulation, supervision, and resolution, at three levels. First level is consistency in the concrete mechanisms: finalizing and simplifying the resolution pillar should be a priority. Second level is consistency in the legal framework and requirements: faced with the accumulation of new and separate requirements, it is required to adopt a holistic and consistent approach in order to avoid a prudential overload. In particular, the Total Loss-Absorbing Capacity (TLAC) requirement, resulting from the new international framework, requires a consistent adaptation of the European minimum requirement for own funds and eligible liabilities (MREL). Therefore, the MREL targets should be set on the basis of updated prudential requirements—Pillar 2 and buffers—and the most up-to-date financial position of the banks concerned. Similarly, the consequences of the Basel III reforms package should be carefully taken into account, as it may lead to increased risk-weighted assets, which could in turn impact the MREL. The third level is the consistency in the interaction between authorities: the case of Banco Popular in Spain, although it was resolved satisfactorily, also demonstrated the importance of swift and close cooperation between supervisory and resolution authorities, both at the European and the national levels.

The second challenge, as per Mr. Galhau, is to encourage consolidation within the Banking Union: "Consolidation must be the result of consistency, and consistency is considering the Banking Union as a unique jurisdiction. We must therefore stop hindering cross-border bank consolidations in the euro area." He highlighted that it must be ensured that the implementation of new regulations does not give rise to new barriers. The development of cross-border banking activities is essential to reinforcing the single market, facilitating the allocation of savings and financing investment. From a resolution point of view, internal MREL requirements should be a tool to facilitate the resolution of institutions, but they would become meaningless if calculated on a national basis. They must be calculated at the level of the Banking Union, considered as a unique jurisdiction. He also stated, "Indeed, compartmentalising an internal MREL within national borders would be an obstacle to the single market and European banking cross-border mergers. As a first concrete step, I suggest that the European Banking Authority publish a comprehensive stock-taking of all the regulatory and supervisory obstacles to cross-border activities and mergers." He concluded that banks must be prepared for these extreme situations because there is no such thing as zero risk, despite the improvements to prudential regulations and the reinforcement of banks' financial capacity. The failure of a single participant, even one considered to be secondary, can have systemic effects, as even the largest groups are now no longer immune. 

 

Related Link: Speech

Keywords: International, Banking, Bank Resolution, SSM, SRM, MREL, TLAC, Consistency and Consolidation, ACPR, BIS

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