SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime. The article on liquidation regime for banks makes a case for the creation of a common deposit insurance scheme and for the harmonization of national insolvency procedures and liquidation procedures for all banks. Both the articles, which have been written by the SRB Chair Elke König, were originally published in Views, the Eurofi magazine.
A sound framework to safeguard financial stability. In context of the ongoing crisis induced by COVID-19 pandemic, the article highlights that SRB, in line with other European authorities, has focused on giving banks operational relief but simultaneously moving forward with the resolution planning process. The authorities have adopted a transparent and pragmatic approach, using the existing flexibility in the legal framework. Coordinated policy action by public authorities is supporting the banks’ capacity to absorb losses and to channel funds to the real economy, which is especially relevant in times of large revenue shortfalls. Rolling back of the recent reforms that have made the banking system more robust is not an option. Focus on making banks resolvable is the key to protecting financial stability. Looking forward, work on the completion of the Banking Union must continue, building on the progress achieved thus far. If, and when needed, there exist the appropriate tools to manage bank failures effectively and avoid financial instability. "We also firmly believe they will be up to the task. Solid resolution planning and resolvable banks are the best safeguard of financial stability," according to the SRB Chair.
Path toward a clear and predictable liquidation regime. The article highlights that SRB has a viable system in place, in the form of clear rules on using resolution tools, performing public interest assessment, and allocating losses in case of a bank failure. However, Europe lacks key legal elements to enhance the consistency of a bank failure, when the resolution of a bank is not in the public interest. In this case, the failing bank must be wound down in line with national insolvency procedures, the outcomes of which are varied. The article discusses a couple of challenges posed by the lack of a harmonized liquidation regime and the ways to address these challenges:
- The outcome of national insolvency procedures can vary considerably depending on factors such as the national insolvency system and national handling, including discretions, of the respective deposit guarantee scheme. Equally, important practical aspects such as the license withdrawal from a failed bank are unharmonized legally and thus different from country to country. Thus, SRB has repeatedly stressed on the urgent need for legislators to introduce measures that would harmonize national insolvency procedures and liquidation procedures for all banks and increase robustness, predictability, and trust in the resolution and insolvency regime for banks.
- Another challenge is the one faced by certain deposit-funded medium-size banks, without easy access to wholesale funding markets, which might be too small to be resolved, while being too big to be liquidated. The current framework does not seem to provide a suitable set of tools for these situations, which could lead to an inefficient piecemeal liquidation process for those banks. There is currently no easy solution available, as losses must be allocated and these banks have to become resolvable too. The creation of a common deposit insurance scheme remains an essential component of any solution in the long term. SRB welcomes the efforts by the German Council Presidency to try to break the political deadlock with further technical work on the so-called hybrid model. However, in the article, the SRB Chair emphasizes that SRB should work toward a European framework for bank liquidation with a fully mutualized European Deposit Insurance scheme and, thus, finalize the Banking Union by erecting and completing its third pillar.
Keywords: Europe, EU, Banking, COVID-19, Liquidation Regime, Resolution Framework, Resolution Planning, Regulatory Capital, Public Interest Assessment, Deposit Insurance, Banking Union, SRB
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