The European Banking Authority (EBA) published an advice to the European Commission (EC) on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance (CMDI) framework. The advice is in response to an EC Call for advice to EBA on funding in resolution and insolvency. The EBA response provides a quantitative analysis on the capacity of banks to access available sources of funding under the current framework and under various creditor hierarchies and with regard to the minimum requirement for own funds and eligible liabilities (MREL).
EBA response provides a descriptive analysis on the capacity of banks to access resolution financing arrangements based on banks’ balance sheets and their business models; it also provides an analysis based on a modeling approach to simulate crisis scenario. The descriptive analysis shows change to the internal loss-absorption capacity of banks under four scenarios of depositor preferences compared to the current creditor hierarchy applicable in each member State. The analysis, whose findings are presented under several different capital depletion scenarios, draws two main conclusions:
- Preferring deposits to other ordinary unsecured claims increases the number of banks that are able to meet the requirements to access resolution financing arrangements without the bail-in of any type of depositors.
- A single-tier depositor preference comes with the highest impact on covered deposits and the highest contributions from deposit guarantee schemes compared to the other policy options and the current situation.
The modeling approach that simulates an economic scenario similar to the global financial crisis confirms the findings. The report also investigates the issue of market access for MREL instruments for small and medium-size banks. A limited number of these institutions had not yet issued a senior MREL eligible instrument or the additional tier 1/tier 2 instruments as of end-2019. The response provides a strong quantitative basis and evidence to inform the EC work while it does not provide policy advice. In light of the simplifying assumption and data sample limitation, the findings of this analysis should be read with caution.
Keywords: Europe, EU, Banking, Resolution Planning, MREL, Deposit Guarantee Schemes, Deposit Insurance, Crisis Management Framework, Resolution Funding, EBA
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