Featured Product

    SRB Chair Discusses Centralized Liquidation Regime for EU

    April 24, 2020

    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

    Related Articles

    US Regulators Release Stress Test Scenarios for Banks

    The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).

    February 28, 2024 WebPage Regulatory News

    Asian Governments Aim for Interoperability in AI Governance Frameworks

    The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.

    February 28, 2024 WebPage Regulatory News

    EBA Proposes Operational Risk Standards Under Final Basel III Package

    The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.

    February 26, 2024 WebPage Regulatory News

    EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS

    The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.

    February 23, 2024 WebPage Regulatory News

    ECB to Expand Climate Change Work in 2024-2025

    Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.

    February 23, 2024 WebPage Regulatory News

    BIS Bulletin Examines Cognitive Limits of Large Language Models

    The use cases of generative AI in the banking sector are evolving fast, with many institutions adopting the technology to enhance customer service and operational efficiency.

    January 25, 2024 WebPage Regulatory News

    ECB is Conducting First Cyber Risk Stress Test for Banks

    As part of the increasing regulatory focus on operational resilience, cyber risk stress testing is also becoming a crucial aspect of ensuring bank resilience in the face of cyber threats.

    January 24, 2024 WebPage Regulatory News

    EBA Continues Momentum Toward Strengthening Prudential Rules for Banks

    A few years down the road from the last global financial crisis, regulators are still issuing rules and monitoring banks to ensure that they comply with the regulations.

    January 24, 2024 WebPage Regulatory News

    EU and UK Agencies Issue Updates on Final Basel III Rules

    The European Commission (EC) recently issued an update informing that the European Council and the Parliament have endorsed the Banking Package implementing the final elements of Basel III standards

    December 19, 2023 WebPage Regulatory News

    Industry Agency Expects Considerable Uptake for Swiss Climate Scores

    The Swiss Federal Council recently decided to further develop the Swiss Climate Scores, which it had first launched in June 2022.

    December 18, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8952