May 06, 2019

The SRB Chair Elke König published an article in The Eurofi Magazine and the article discusses the implications of bank consolidation and the challenges to be addressed by regulators toward financial integration in the Banking Union. From the perspective of SRB, whose mandate focuses on achieving resolvability of banks, having strong European banks is a natural aspiration. She highlighted that consolidation can improve diversification of risks in banking groups, increase bank access to capital markets, and decrease their funding cost, ultimately facilitating the build-up of loss absorption capacity to meet the minimum requirement of eligible liabilities (MREL).

Cross-border banks can play the important role of reducing risks through private risk-sharing in the Banking Union. Consolidation in the banking sector should not be seen as a shortcut to avoid necessary reforms. It is crucial for a resolution authority that consolidation facilitates, instead of hindering, the resolvability of a bank, in line with the resolvability expectations of SRB. In addition, the establishment of the institutional infrastructure of the Banking Union can also be seen as a favorable element. Even though the third pillar, common deposit insurance, is yet to be built, a single supervisory mechanism and a single resolution mechanism are up and running.

However, financial integration within the Banking Union is still lagging behind. There are challenges that could be addressed by policymakers and regulators. The harmonization of relevant legislation, such as insolvency proceedings, could also contribute to remove barriers for the cross-border consolidation of banks. Rule-makers and regulators should resist the temptation of ring-fencing capital and liquidity resources, as this can lead to sub-optimal location and rigidity in the deployment of such resources. Regrettably, the recently agreed banking package does not mark a step forward on this aspect. Rather, it runs the risks of, first, fragmenting decision-making in the Banking Union on external MREL, and second, ring-fencing of internal MREL. SRB already invests and will continue to invest significant resources to reach joint decisions with national authorities on resolution plans, on calibration and location of MREL, and on bail-in playbooks. 

 

Related Link: Article

 

Keywords: Europe, EU, Banking, MREL, Banking Union, Financial Integration, Consolidation of Banks, SRB, Resolution

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