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    SRB Chair Explains Basis for Public Interest Review of Failing Banks

    July 24, 2020

    The SRB Chair Elke König discusses the rationale, process, and considerations for conducting a public interest assessment for failing banks. She explains that SRB bases the decision between resolution and normal insolvency on the public interest assessment to determine whether it is in the public interest to apply the resolution tools of SRB to a failing bank. This assessment is made in the resolution plans, which set out a preferred strategy for each bank—resolution or insolvency. However, this assessment is revisited annually and specifically when a bank is declared failing or likely to fail, taking into account the circumstances at that point. The Executive Session of SRB, the governing body that decides on the approach, makes the final determination on whether a bank should be resolved.

    The assessment looks at whether resolution can achieve one or more of the five resolution objectives better than the normal insolvency proceedings:

    • To ensure the continuity of critical functions to the economy, such as lending to small- and medium-sized businesses
    • To avoid significant adverse effects on financial stability in one or more countries
    • To protect public funds by minimizing reliance on extraordinary public financial support
    • To protect depositors covered by the Deposit Guarantee Scheme Directive, which protects deposits of up to EUR 100,000 euros, and investors covered by the Investor Compensation Scheme Directive
    • To protect funds and assets of clients

    However, she highlights that measuring some of these objectives is more complex than others and SRB is working to further deepen the analysis that underpins the overall assessment. The main plan for most banks under the SRB remit is not insolvency but rather it is resolution to safeguard the public interest. Therefore, these banks need to be resolvable and build the necessary Minimum Requirement for own funds and Eligible Liabilities (MRELaccording to the preferred resolution strategy of SRB. For banks under the SRB remit, SRB expects and plans for the use of resolution tools, as these tools enable SRB to manage the failure of a bank in an orderly way and rapidly restructure its balance sheet, or to take other resolution measures to preserve financial stability. Regardless, resolution will not offer resurrection to banks with failed or unsustainable business models. The SRB Chair points out that the public interest assessment takes into account the circumstances at the time when the bank is failing. This is done to analyze the latest economic environment as well as the situation of the bank, which will obviously have deteriorated compared to the resolution-planning phase. 

    The core task of SRB is to ensure that the banks under its remit meet all the conditions to be resolvable, including MREL issuance. SRB takes into account the idiosyncratic and systemic circumstances at the point of failure of a bank, which gives it the flexibility to properly account for the economic circumstances at that point in time. A public interest assessment may well give different results if the bank fails while the sun is shining or under storm clouds. The public interest assessment enables and requires SRB to take into account the macroeconomic and market circumstances that surround a bank’s failure, particularly when assessing against the objectives of preventing financial instability and of preserving continuity of functions that are critical to the real economy. This holds true in general, but might be specifically important when we are preparing for the potential unfolding of the COVID-19 impact on the economy and banks. 

     

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    Keywords: Europe, EU, Banking, Resolution Framework, Basel, Public Interest Assessment, Resolution Planning, MREL, Regulatory Capital, COVID-19, SRB

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