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    ECB Considers Guarantee Framework for Banks Coming Out of Resolution

    November 20, 2020

    ECB has compared the frameworks for liquidity provision under the bank resolution framework across jurisdictions and presented lessons learned from different frameworks for liquidity provision post-resolution. In conclusion, ECB is investigating the development of a guarantee framework, in the Banking Union, to allow banks coming out of resolution with limited collateral to access Eurosystem. It is expected that such public guarantees would protect the Eurosystem against losses, foster a single market for banks in the Banking Union, reduce the bank-sovereign nexus, and make the resolution framework of the Banking Union more credible. In another development, the ECB Governing Council adopted a revised version of the agreement on emergency liquidity assistance (ELA).

    The updated version of the agreement on ELA contains a technical amendment to Section 3.2(a)(i) to clarify that solvency assessments of financial institutions are performed by the prudential supervisor in accordance with the solvency definition for ELA purposes, as laid down in Section 4. ECB also specifies that the ELA agreement will be reviewed in the course of 2023. As per the ELA agreement, a credit institution is considered solvent for ELA purposes if:

    • Its Common Equity Tier (CET)1, Tier 1, and Total Capital Ratio as reported under the Capital Requirements Regulation (CRR) on an individual (if applicable) and consolidated (if applicable) basis comply with the harmonized minimum regulatory capital levels (namely 4.5%, 6% or 8%, respectively); or
    • There is a credible prospect of recapitalization—in case the above condition is not met, by which harmonized minimum regulatory capital levels would be restored within 24 weeks after the end of the reference quarter of the data that showed that the bank does not comply with harmonized regulatory minimum standards; in duly justified, exceptional cases, the Governing Council may decide to prolong the grace period of 24 weeks.

     

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    Keywords: Europe, EU, Banking, ELA, CRR, Regulatory Capital, Basel, Resolution Framework, Guarantee Framework, ECB

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