The Single Resolution Board (SRB) Chair, Elke König, published an article on improving the resolution framework for medium-size banks. SRB is working to better adapt its resolution framework to these banks, using the proportionality principle, but without undermining the end-goal of resolvability. This work relies on three main pillars: transfer strategies, tailored minimum requirements for own funds and eligible liabilities (MREL) calibration, and access to funding. On the first two, SRB is in the driving seat, but legislative changes are required for the third.
In the article, Elke König notes the following about these three pillars:
- Transfer strategies seem to be the best tools for medium-size banks. SRB is working to enhance its preparation for using these strategies. For instance, in the first half of 2021, SRB has made substantial progress in making transfer tools fully operational. SRB will also prepare additional policies and guidance on separability.
- MREL needs proper calibration for transfer strategies. In 2022, SRB will work on MREL policy for the banks that have transfer tools as the preferred resolution strategy. This could, under certain conditions, lower the MREL requirement for banks compared to the status quo. For banks with a credible transfer strategy, there might not be a real need to set MREL at a level that allows the full recapitalization of the bank. As a result, MREL requirements could be lower, based on the likelihood of transfer strategies being reliably implementable.
- Banks facing resolution may have access to the Single Resolution Fund (SRF) and/or the deposit guarantee schemes (DGSs) under certain conditions. However, these conditions severely restrict the use of DGS funds in resolution, potentially jeopardizing the success of resolution. This may create incentives for decision-makers to look for ways to circumvent the resolution framework. Access to the SRF and its combined use with DGS could be further explored, to act as funding to support those resolution tools other than bail-in that ensure the exit of resolved entities from the market through transfer strategies.
To overcome the legal framework’s restrictions on the use of DGS in resolution, SRB recommends replacing DGS-super priority by adopting a general depositor preference. The DGS could then contribute to resolutions in a way comparable to other creditors, in accordance with the creditor hierarchy. While this would likely be a limited contribution, given that the DGS would continue to rank above most creditors, it aligns to the broader responsibilities of the DGS in subrogating to the rights of the covered depositors. This would help to achieve all the resolution objectives, including minimizing the use of public funds and avoiding further value destruction. Notwithstanding the above, given the limited size of national DGSs and the existing uneven playing field, another important missing piece to solve the problem of medium-sized banks is to put in place a European Deposit Insurance Scheme (EDIS). A centralization of tools and funding at EU level would reduce fragmentation and increase the credibility of the overall Banking Union, thereby further enhancing financial stability.
Related Link: Article
Keywords: Europe, EU, Banking, Resolution Framework, MREL, DGS, SRF, Medium-Sized Banks, Proportionality, MREL Calibrations, EDIS, Banking Union, SRB
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