ECB published its response to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU. In its response, ECB welcomed the targeted consultation that addresses three EU legislative texts: Bank Recovery and Resolution Directive (BRRD), Single Resolution Mechanism Regulation (SRMR), and Deposit Guarantee Schemes Directive (DGSD). ECB also highlighted that improvements to the crisis management framework should cover all stages of a crisis and that the tools and powers available to authorities must be adequate and effective for dealing with a crisis before a bank is deemed failing or likely to fail.
These tools and powers include early intervention, precautionary recapitalization, preventive action by the deposit guarantee scheme, reduction of the residual risk of “limbo” once failing or likely to fail has been declared, and task of ensuring that failed banks not subject to resolution are dealt with consistently and effectively by introducing an EU administrative liquidation framework. ECB highlights the following key points in its response to the EC consultation:
- The early intervention framework should be clarified to make practical implementation easier. This includes removing early intervention measures already available in the Capital Requirements Directive (CRD) and the Single Supervisory Mechanism Regulation (SSMR) from BRRD, and amending SRMR to provide a direct legal basis for ECB to act. Aligning the conditions for making an early intervention with those for imposing supervisory measures would make it easier to apply the early intervention framework.
- Precautionary recapitalization provides an element of flexibility in the current crisis management framework and should be maintained. Deposit guarantee scheme preventive measures have proven to be a useful crisis management tool which should be kept and extended across the EU in a harmonized way.
- Broader application of the resolution framework would enhance the level playing field and access to best-practice resolution tools, but this does not remove the need to revisit the liquidation framework. Widening its scope to smaller and mid-sized banks which are heavily reliant on deposits as a funding source can be challenging from a financial stability perspective. Even with broader application, resolution would still not be available for all banks. The EU resolution framework and national procedures for failing banks should be revisited, with a view to enhancing the effectiveness of both in dealing with all types of bank failures.
- ECB supports the creation of a European administrative liquidation framework supported by European Deposit Insurance Scheme (EDIS) to harmonize and improve the effectiveness of the crisis management framework for banks where there is no public interest in resolution and which therefore go into liquidation. SRB should be granted administrative liquidation powers for banks under its remit, giving it the ability to start and manage the liquidation of the assets of banks not subject to resolution, in a way that allows their exit from the banking market.
- For banks currently outside the SRB remit and, therefore, under national liquidation frameworks, these administrative liquidation powers should be harmonized and granted to the respective national resolution authorities. A two-step governance process could be considered for use of national deposit guarantee scheme funds during the transition to EDIS which would enable adequate funding to support use of the SRB’s transfer tools in liquidation.
- Work should be done to investigate whether conditions for accessing resolution funds and liquidation aid need to be revised, while still maintaining current options for addressing financial stability risks.
- Introduction of a common European Deposit Insurance Scheme (EDIS) is a key priority for ECB. This would not only ensure uniform depositor protection regardless of location, it would also bring benefits in risk diversification and the ability to withstand shocks. During the transition to a full-fledged EDIS, existing DGSs should be further harmonized and use of irrevocable payment commitments to fund safety nets should be reconsidered.
- Progress on facilitating cross-border banking within EU should remain a priority. Small-scale amendments to the current framework could encourage use of existing legal possibilities and allow for incremental progress on cross-border integration. Finally, modification of the BRRD should be considered to clearly establish that supervisors can enforce support obligations included in a recovery plan by imposing early intervention measures or supervisory measures on the parent to activate support in line with the agreed terms.
Keywords: Europe, EU, Banking, Deposit Insurance, Resolution Framework, Crisis Management Framework, Banking Union, BRRD, SRMR, DGSD, CRD, EDIS, ECB
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