SRB Chair Discusses Centralized Liquidation Regime for EU
The SRB Chair Elke König recently published two articles in The Eurofi Magazine: one article discusses the importance of creation of a centralized administrative liquidation tool while the other article examines the pros and cons of following either a single point of entry (SPE) or a multiple point of entry (MPE) approach to resolution of banking groups. The SRB Chair proclaims that a centralized liquidation regime in EU would address the current gap in the framework for medium-size banks and improve the overall system.
Centralized liquidation regime
The SRB experience to date has showed the need to find a solution for those medium-size banks that are too “small” to meet the public interest assessment, but possibly too “large” to be placed in insolvency. In the article, Ms. König highlights that a centralized liquidation regime in the EU would address the current gap in the framework for medium-size banks. SRB has been clear that the harmonization of insolvency regimes for banks is a necessary end-goal. However, it is unlikely to be achieved in the short term. The creation of a centralized administrative liquidation tool, therefore, may be more feasible in the short-medium term and would address many of the issues identified for medium-size banks, with insolvency tools remaining available for smaller banks.
Such a liquidation tool could be created by amending the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation, and the Deposit Guarantee Schemes Directive and could provide for the powers to transfer (some) assets and liabilities in an orderly liquidation, much in line with the current resolution tools. In the Banking Union, this could be entrusted to a central authority. FDIC in the United States is a useful comparison, as it highlights the advantages of the purchase and assumption tool (P&A) for liquidation, which was used for the majority of US bank failures in the last decade. The FDIC experience also shows the benefits of having a centralized authority with harmonized resolution and insolvency procedures, P&A tools, and Deposit Guarantee competences.
Resolution strategies and approaches for banking groups
Ms. König states that resolution strategies for banking groups with subsidiaries in several countries can follow either SPE or MPE approach. For groups with centralized structures, resolution authorities will likely opt for an SPE approach and apply resolution tools at the parent level, while groups with a sufficiently decentralized structure may be subject to an MPE strategy. The Banking Package strengthens the feasibility and credibility of implementing SPE, by requiring resolution authorities to set internal Minimum Requirement for own funds and Eligible Liabilities (MREL) and Total Loss Absorbing Capital (TLAC) requirements, which should facilitate loss absorption within a group. However, the new provisions also provide for a high level of pre-positioning of internal MREL, potentially leading to locked-in capital.
It is too early to judge the consequences, but SRB is concerned that this de facto ring-fencing within EU might substantially reduce the needed financial flexibility at parent level. Policymakers are encouraged to take forward the concrete work on a legally enforceable group insolvency support mechanism for banking groups. These measures should apply to banking groups in Europe, but concrete solutions are also needed at the FSB level. In the meantime, SRB has made “bail-in playbooks” a priority of its work since 2018 and is focusing on credible and executable plans to upstream losses and downstream capital within a group, if need be.
Related Links
Keywords: Europe, EU, Banking, Centralized Liquidation Regime, Resolution Framework, Crisis Management Framework, SPE Approach, MPE Approach, SRB
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