At a joint academic FSC Colloquium on resolution in Brussels, Sebastiano Laviola of SRB spoke about the actions needed to make the bank resolution regime work. While speaking at the event, he focused on the need to address legal loopholes, institutional implementation challenges, and impediments to practice. He discussed what banks need to do to become resolvable and the challenges they might face in building up the minimum requirement for own funds and eligible liabilities (MREL). He also informed the audience that SRB intends to publish, by the first quarter of 2020, its final SRMR2/BRRD2 MREL policy, which will form the basis for MREL-setting under the new framework.
With respect to addressing the legal loopholes, he highlighted the need for further harmonization of insolvency law in EU and for an EU administrative bank liquidation framework. The lack of a harmonized EU liquidation regime is an obstacle toward a full-fledged Banking Union. With the existence of nineteen different insolvency frameworks in the Banking Union, the analysis of the insolvency counterfactual for a cross-border bank in resolution is a challenge and it results in diverging outcomes, depending on the home country of the institution.
To address the institutional implementation challenges, Mr. Laviola emphasized the need for creating a new resolution liquidity framework for the Banking Union. The lack of a liquidity facility to finance banks in resolution is a key gap in the current resolution architecture. While the Common Backstop will cover all uses of the Single Resolution Fund, including liquidity in resolution, this would not address the liquidity needs of a large bank, he added. Improving resolvability from a financial continuity perspective is only one of the several dimensions of resolvability covered in the document on SRB Expectations for Banks. This draft document was launched for public consultation last week, with the comment period ending on December 04, 2019.
Finally, he explained that the loss-absorbing and recapitalization capacity represents the key to a successful implementation of a resolution strategy. The implementation of the recently adopted Banking Package will have a direct impact on day-to-day resolution planning, as it fundamentally revises the MREL framework. The Banking Package’s overhaul of the MREL framework brings significant changes to the quality and quantity of loss-absorbing resources. SRB intends to publish, by the first quarter of 2020, its final SRMR2/BRRD2 MREL policy, which will form the basis for MREL-setting under the new framework. He mentioned that the MREL framework is not cost-neutral for banks, as they may need to restructure themselves or their funding structure to comply with the requirements.
Building-up MREL could be challenging for banks that have no history in issuing unsecured debt in the wholesale markets. Because of these challenges, SRB has consistently pursued a gradual approach to MREL. The approach of SRB involves setting appropriate transition periods tailored on the funding ability of each bank. Overall, banks are taking opportunity of the favorable market conditions to issue MREL-eligible liabilities. The message to banks is "Do it now, while rates are favorable, because you are going to have to get in line soon anyway."
Keywords: Europe, EU, Banking, Resolution Framework, MREL Policy, BRRD2, SRMR2, SRB
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