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    EP Compares Regimes for Providing Liquidity Funding in Bank Resolution

    July 16, 2019

    EP published a briefing in context of the design of the new arrangements for provision of liquidity funding in bank resolution in the Banking Union. The report describes the existing arrangements in the Banking Union, compares those arrangements with the U.S. and the UK regimes, and echoes ongoing reflections on possible new arrangements with a view to completing the Banking Union.

    In EU, the Single Resolution Mechanism (SRM) Regulation has entrusted the Single Resolution Fund (SRF) with the task of providing liquidity in resolution. The SRF is designed as financing arrangements under the Bank Recovery and Resolution Directive (BRRD). While not designated as financing arrangements for resolution under BRRD, other public sources of liquidity exist: Emergency Liquidity Assistance (ELA) provided by national central banks and State Aid support authorized by EC, where feasible and appropriate. While the SRF has not been used so far, the recent cases involved ELA and State Aid support. The resolution of Banco Popular has, in particular, raised questions on whether existing public financing arrangements during bank resolution are sufficiently robust to finance banks under resolution.

    The report highlights that, in keeping with the FSB principles for effective resolution, the U.S. and UK have equipped their resolution toolkit with a special facility intended to provide funding to banks under resolution, where short-term liquidity from the private sector is not immediately available. The Banking Union framework has been qualified as “being geared towards addressing solvency issues more than liquidity.” For example, if a bank that is short of sufficient collateral be resolved on a Friday, bail-in would not provide on Monday additional collateral that would allow the bank to have access to central bank money. That is why there is a need for central banks to step in and to provide liquidity in resolution. Additionally, the analysis highlights that unlike the UK and U.S. regimes, financing in resolution in the Banking Union is provided by different bodies, which may raise coordination challenges, as different sources of liquidity (ELA, SRF, and the backstop, once in place, and State support) may be available depending on the circumstances of each case and the availability of the SRF fund (and its backstop). While the funding provided by the SRF is capped by the size of the SRF, its backstop, and the amount of ex post contributions that the SRF may raise, liquidity in resolution in the UK is designed to be provided “in the necessary scale.”

    The recent case of Banco Popular has shown the importance of liquidity funding in the context of bank resolution. The Eurogroup report endorsed by the December 2018 Euro Summit noted the “broad support for the assessment of the institutions that there are limitations in the current framework (for liquidity provision in resolution), which may hamper its effectiveness. The June 2019 Euro summit has not yet reached any conclusions on the design of that liquidity facility, as planned. The Eurogroup is expected to report back to the Euro-Summit regarding this in December 2019. 

     

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    Keywords: Europe, EU, UK, US, Banking, Banking Union, SRMR, BRRD, SRF, Bank Resolution, Liquidity Risk, EP

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