While speaking at a supervisory conference of the Austrian Financial Market Authority (FMA) in Vienna, Elke König of SRB compared the resolution regimes for banks in Europe and the U.S. She commented on the post-crisis measures to avoid bank bailouts at the public expense and gave a brief critical assessment of the state of play in the Banking Union, while also highlighting that the U.S. system of the orderly resolution of troubled banks has not yet been tested. She also discussed the next steps needed to complete the Banking Union, while highlighting Single Supervisory Mechanism and Single Resolution Mechanism as the two pillars of the Banking Union.
Ms. König mentioned that FDIC and SRB are "actively cooperating, especially given the eight global systemically important banks (G-SIBs) that share a common footprint in the United States and the eurozone." She highlighted that the introduction of the single bank resolution mechanism (SRM) is one of the most far-reaching innovations in Europe and SRM aims to exclude the rescue of systemic banks with taxpayer money. The most important instrument for this is the bail-in, which puts the creditor liability back in the foreground. In case of a crisis, equity and debt are written off or converted to absorb losses and recapitalize the bank with private funds. After almost five years, SRB and the national resolution authorities have achieved a lot, but there is still a long way to go. For the more complex cross-border institutions, detailed resolution strategies, including quantitative and qualitative minimum requirement for own funds and eligible liabilities (MREL) requirements, are in place to ensure that sufficient funds for recapitalization or restructuring are available in the resolution case. These requirements are already being met by some money houses.
The SRB goal is to finalize over 100 resolution plans for SRB banks and make 450 MREL decisions next year. As a result of the SRB work, "the taxpayer has moved further out of the line of fire." If needed, costs could ultimately be borne by the Single Resolution Fund (SRF) in the settlement process. SRF, which is privately financed by bank levies, has a volume of EUR 33 billion and the target size is about EUR 65 billion. SRF, which is an important element for ensuring financial stability in the settlement context, represents a key difference from the U.S. system. The frameworks in Europe and the U.S. follow the FSB Principles and the Key Attributes of Resolution Regimes. Differences exist only in the design of the specific resolution regimes under national law. One important difference is that the U.S. is a state while EU has 28 member states (19 in Banking Union). So far, FDIC has not been put to the test in its new role, whereas SRB has already had to make decisions in some crisis situations. The Single Resolution Mechanism Regulation (BRRD/SRMR) has been applied six times since 2016, with each case providing interesting insights.
Furthermore, the Orderly Liquidation Fund (OLF) on the American side is not pre-financed in contrast to the SRF. In the U.S., under very strict conditions, the U.S. Treasury Department jumps through emergency loans and guarantees in the event of funding shortages. Losses, costs, and income are netted and then reimbursed by special contributions from banks to establish fiscal neutrality. A further important difference is the European system that processing concepts are created primarily by banks. The living wills (Title 1 of the Dodd-Frank Acts) describe winding-up scenarios under U.S. bankruptcy law, are approved by the regulator, and are in part publicly available. However, it is difficult to imagine an orderly execution of a G-SIB with implications for financial market stability in the courtroom. Thus, FDIC also creates contingency plans (according to Title 2). If Chapter Eleven is not an option, FDIC takes control of the bank, executes bail-in using TLAC (the equivalent of MREL), transfers all business activities and critical functions to a bridge institution, and so on. Nevertheless, Ms. König emphasized that further action is needed in the following six areas to ensure that the European resolution regime can reach its full potential:
- The precautionary recapitalization made in the case of Banca Monte dei Paschi di Siena is and should remain part of the toolbox provided in the SRMR. Important prerequisite remains the strict conditionality. From the perspective of SRB, the operationalization of these conditions must be promoted. These include timely asset quality reviews and stress tests to rule out bail-out or aftertaste or past loss relief. She reiterated that the precautionary recapitalization is temporarily limited and must be repaid.
- "European Commission banking communication" allows state aid to banks in times of crisis. This communication dates back to 2013 and has to be revised in the light of the introduction of the uniform resolution regime in 2015. That should be a priority task of the new Commission. The existence of two parallel systems, which concern the restructuring of endangered banks and have different load bearing implications, is in her view questionable and carries the risk of maladministration.
- In terms of liquidity in resolution, the liquidity needs of very large banks, especially G-SIBs, may outweigh the resources of the SRF and the backstop of the European Stability Mechanism. Currently, various solution options are being discussed in which the SRB works constructively.
- Uniform bank deposit insurance, must now be tackled. Risks in the financial system have diminished, but the Banking Union system is not yet weatherproof. If Europe does not find an answer to the question of EDIS, the project "Banking Union" may have only limited ability to act in terms of its ultimate goal (to be able to settle banks without government funds).
- The harmonization of the bankruptcy law for banks, or a uniform procedure for the liquidation of banks, is central in this context. Before any settlement decision, the question arises on whether SRMR settlement is a better option than the national insolvency law. Since a speedy standardization of bankruptcy law is probably wishful thinking, the American system and the powers of FDIC could be an important step in the right direction. FDIC has extensive expertise to manage banks administratively and centrally in all states. This has led to countless sales transactions in recent years, always maintaining cost efficiency. A "central administrative liquidation tool" could be added to the existing SRMR instrument case and would have the advantage that banks failing the "public test" will still be liquidated by SRB. The focus should be mainly on small SRB banks as well as larger "less significant credit institutions"—an issue that the new Commission hopefully picks up, not least as a lesson from the experience of SRB.
- Compared to the U.S., capital market financing continues to play a subordinate role in Europe, as European companies are primarily bank-financed. Diversified sources of finance offer prospects for companies and investors alike and could reduce dependence on the banking sector. A unified capital market would also benefit banks, not least because banks benefit from facilitated securities trading, especially when issuing their own securities and setting up MREL with cross-border access to investors. The Capital Markets Union was a key topic of the outgoing Commission and will remain on the agenda. Issues such as a harmonized insolvency law will also have to be addressed here.
She concluded that, in recent years, far-reaching measures have been taken in Europe and the U.S. to ensure the orderly resolution of troubled banks and to avoid the use of public funds. Settlement regimes in the U.S. and Europe are based on the same global standards, but differ in their design according to national law. In contrast to SRB, FDIC has not yet been used in its new role, but its far-reaching competencies provide sufficient inspiration to increase the ability of the European resolution regime to act.
Related Link: Speech (in German)
Keywords: Europe, Americas, EU, US, Banking, Resolution Framework, Resolution Planning, TLAC, MREL, SRF, SRMR, BRRD, Orderly Resolution, FDIC, SRB
Previous ArticleEU Blockchain Observatory of EC Publishes June Newsletter
The Hong Kong Monetary Authority (HKMA) revised the Supervisory Policy Manual module CG-5 that sets out guidelines on a sound remuneration system for authorized institutions.
The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).
In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.
The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.
The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.
The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.
The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.
The European Central Bank (ECB) published a paper as well as an article in the July Macroprudential Bulletin, both of which offer insights on the assessment of the impact of Basel III finalization package on the euro area.
The International Swaps and Derivatives Association (ISDA) published a paper that explores the impact of the Fundamental Review of the Trading Book (FRTB) on the trading of carbon certificates.
The Prudential Regulation Authority (PRA) published the remuneration policy self-assessment templates and tables on strengthening accountability.