European Parliament published a briefing paper that gives an overview of the seven aspects of resolvability defined in 2019 by SRB. The seven aspects of resolvability are governance, loss absorption and recapitalization capacity, liquidity and funding in resolution, operational continuity and access to financial market infrastructures, information systems and data requirements, communication, and separability and restructuring. The briefing also assesses progress in two key areas—raising sufficient financial resources and changes in legal and operational structures of banks to facilitate resolution—based on evidence gathered from public disclosures of the 20 largest euro-area banks. The largest banks have made good progress in raising bail-in capital. However, changes to legal and operational structures of banks that will facilitate resolution will take more time.
This briefing reviews the two most important frameworks for resolvability assessments in Europe—that is, the frameworks in the UK (adopted in 2019) and in the euro area (in consultation stage). It then assesses progress in raising minimum required own funds and eligible liabilities (MREL) and the impediments that smaller banks are likely to confront in raising subordinated debt. Next, it assesses the transparency of the euro-area regime, before reviewing challenges in creating supportive governance arrangements and operational structures in the sample of 20 banks. This is examined in more detail in the following section of the paper for a subset of cross-border banks that have systematically important subsidiaries in a number of EU countries.
The briefing highlights that making banks in Europe resolvable will be a long process. So far, only the first steps have been taken. Bank Recovery and Resolution Directive (BRRD) 2 updated the earlier regime of 2014 and the draft resolvability assessment framework of SRB has clarified its expectation that banks will need to play a key role in this process. While smaller banks may be safely liquidated, numerous barriers still impede resolvability of the banks for which SRB intervention might be necessary. Several of the impediments in this process may reflect constraints in debt markets or unclear coordination between different resolution authorities. Additional loss-absorbing capital has been raised by the largest banks while mid-size banks are likely to face problems. Even where MREL targets are met, investors might question the utility of bail-in capital should significant parts need to be prepositioned in individual jurisdictions, or if there are refinancing risks. Unclear coordination between home and host countries might leave the final resolution strategy unclear for some time.
The work program of SRB to remove barriers to resolvability is likely to identify numerous bank-specific barriers in terms of inadequate governance and management information system, and legal and operational structures. Central European countries used to be dependent on cross-border parent and wholesale funding, but have now become much more reliant on local deposit funding, making them more amenable to multiple local resolution schemes and restructuring. However, the review of resolution-related disclosures by the 20 largest euro-area banks has offered very limited evidence that other operational and legal barriers to resolvability are being addressed. SRB should become more open about its own standards, the barriers it has identified, and how it goes about addressing these barriers. The U.S. experience has shown that banks can be asked to produce public versions of their crisis plans and that it might be in their interest to do so. Given the formalization of the expectations for banks and the future work program of SRB, addressing barriers to resolvability will become a central part of the agenda in EU.
Keywords: Europe, EU, Banking, BRRD2, MREL, Bail-in, Recapitalization, Resolution Framework, European Parliament
Previous ArticleESMA Publishes Market Share Figures for Credit Rating Agencies in EU
BoE published a statistical notice (Notice 2020/9) explaining the approach for treatment of payment holidays on the profit and loss return or Form PL.
BoE updated the known issues document for the statistical reporting Forms AS and FV.
FED announced individual capital requirements for 34 large banks and these requirements go into effect on October 01, 2020.
SRB published a set of documents to give operational guidance to banks on implementation of the bail-in tool.
BIS published an update on the G20 TechSprint Initiative, which was launched in April 2020 and aims to highlight the potential for technologies to resolve regulatory compliance (regtech) and supervisory (suptech) challenges.
OSFI published a letter that provides an update on the milestones for the implementation of the IFRS 17 standard on insurance contracts.
EBA updated the report on the implementation of selected COVID-19 policies.
The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.
BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.
BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.