SRB responded to the targeted EC consultation on the review of the bank crisis management and deposit insurance framework in EU. SRB responded to the 10 questions, with an emphasis on the completion of the Banking Union and establishment of the European deposit insurance scheme (EDIS). The EC consultation included questions on use of the tools and powers in BRRD, scope of depositor protection in the future framework, and potential reform of the use of Deposit Guarantee Scheme funds in the future framework. The consultation addressed three EU legislative texts: Bank Recovery and Resolution Directive (BRRD), Single Resolution Mechanism Regulation (SRMR), and Deposit Guarantee Schemes Directive (DGSD). In addition, in an article, the SRB Chair Elke König has outlined key components of the Single Point of Entry (SPE) strategy and the ways in which the SRB approach could be strengthened.
In principle, the SPE approach relies on the upstreaming of losses to the parent and the down streaming of capital to an ailing subsidiary. In the Banking Union, the prepositioning of internal minimum requirements for own funds and eligible liabilities (MREL) instruments is a key mechanism for facilitating this. BRRD and SRMR set a very prudent internal MREL requirement, which comes at a price and was the subject of debate, as it may lead to the fragmentation of the financial resources of internationally active groups by “locking-in” resources that could otherwise have been freely used. Prepositioned internal MREL clearly provides a safeguard for the subsidiaries and thus the "host states." However, it is not the only solution and it might not even be enough in some cases. As the aim is for the subsidiary to stay out of resolution, there is a need to avoid the possibility that management may be prevented from providing funding to subsidiaries for fiduciary reasons, leading to the failure of the subsidiary.
An effective means of providing for this, over and above prepositioned capital and internal MREL, may be insolvency-proof, cross-border guarantees under which the parent is legally obliged to cover the subsidiary’s losses, thus keeping the subsidiary in going concern as intended by the SPE strategy. Requiring subsidiaries to preposition high levels of internal MREL instruments can be viewed as a safeguard, ensuring that the capital position of subsidiaries can be maintained. At the same time, excessive “ring fencing” of capital at subsidiary level leads to fragmentation of financial resources and risks leaving insufficient resources at parent level, potentially meaning resources would not be available for transfer to any stressed subsidiaries. SRB is working to enhance the SPE approach, in the first place through the tools already provided for under the SRMR. Making banks resolvable means diligently implementing resolution plans to enable the use of the preferred resolution strategy, if and when needed. This includes MREL and internal MREL but also appropriate arrangements that ensure the resolution entity will “take care” of a subsidiary located in a different EU Member State in the event of a crisis.
Keywords: Europe, EU, Banking, Deposit Insurance, Resolution Framework, Crisis Management Framework, Banking Union, BRRD, SRMR, DGSD, SPE Approach, Internal MREL, Ring Fencing, SRB
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