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.
Keywords: Europe, EU, Banking, Centralized Liquidation Regime, Resolution Framework, Crisis Management Framework, SPE Approach, MPE Approach, SRB
Previous ArticleBCBS Publishes Additional FAQs on International Basel Framework
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).
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.
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.
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.
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
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.
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.
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.
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
The Swiss Federal Council recently decided to further develop the Swiss Climate Scores, which it had first launched in June 2022.