Featured Product

    Elke König of SRB on Remaining Work for the European Resolution Regime

    October 03, 2019

    While speaking at a supervisory conference of the Austrian Financial Market Authority (FMA) in Vienna, Elke König of SRB compared the resolution regimes for banks in Europe and the U.S. She commented on the post-crisis measures to avoid bank bailouts at the public expense and gave a brief critical assessment of the state of play in the Banking Union, while also highlighting that the U.S. system of the orderly resolution of troubled banks has not yet been tested. She also discussed the next steps needed to complete the Banking Union, while highlighting Single Supervisory Mechanism and Single Resolution Mechanism as the two pillars of the Banking Union.

    Ms. König mentioned that FDIC and SRB are "actively cooperating, especially given the eight global systemically important banks (G-SIBs) that share a common footprint in the United States and the eurozone." She highlighted that the introduction of the single bank resolution mechanism (SRM) is one of the most far-reaching innovations in Europe and SRM aims to exclude the rescue of systemic banks with taxpayer money. The most important instrument for this is the bail-in, which puts the creditor liability back in the foreground. In case of a crisis, equity and debt are written off or converted to absorb losses and recapitalize the bank with private funds. After almost five years, SRB and the national resolution authorities have achieved a lot, but there is still a long way to go. For the more complex cross-border institutions, detailed resolution strategies, including quantitative and qualitative minimum requirement for own funds and eligible liabilities (MREL) requirements, are in place to ensure that sufficient funds for recapitalization or restructuring are available in the resolution case. These requirements are already being met by some money houses.

    The SRB goal is to finalize over 100 resolution plans for SRB banks and make 450 MREL decisions next year. As a result of the SRB work, "the taxpayer has moved further out of the line of fire." If needed, costs could ultimately be borne by the Single Resolution Fund (SRF) in the settlement process. SRF, which is privately financed by bank levies, has a volume of EUR 33 billion and the target size is about EUR 65 billion. SRF, which is an important element for ensuring financial stability in the settlement context, represents a key difference from the U.S. system. The frameworks in Europe and the U.S. follow the FSB Principles and the Key Attributes of Resolution Regimes. Differences exist only in the design of the specific resolution regimes under national law. One important difference is that the U.S. is a state while EU has 28 member states (19 in Banking Union). So far, FDIC has not been put to the test in its new role, whereas SRB has already had to make decisions in some crisis situations. The Single Resolution Mechanism Regulation (BRRD/SRMR) has been applied six times since 2016, with each case providing interesting insights.

    Furthermore, the Orderly Liquidation Fund (OLF) on the American side is not pre-financed in contrast to the SRF. In the U.S., under very strict conditions, the U.S. Treasury Department jumps through emergency loans and guarantees in the event of funding shortages. Losses, costs, and income are netted and then reimbursed by special contributions from banks to establish fiscal neutrality. A further important difference is the European system that processing concepts are created primarily by banks. The living wills (Title 1 of the Dodd-Frank Acts) describe winding-up scenarios under U.S. bankruptcy law, are approved by the regulator, and are in part publicly available. However, it is difficult to imagine an orderly execution of a G-SIB with implications for financial market stability in the courtroom. Thus, FDIC also creates contingency plans (according to Title 2). If Chapter Eleven is not an option, FDIC takes control of the bank, executes bail-in using TLAC (the equivalent of MREL), transfers all business activities and critical functions to a bridge institution, and so on. Nevertheless, Ms. König emphasized that further action is needed in the following six areas to ensure that the European resolution regime can reach its full potential:

    • The precautionary recapitalization made in the case of Banca Monte dei Paschi di Siena is and should remain part of the toolbox provided in the SRMR. Important prerequisite remains the strict conditionality. From the perspective of SRB, the operationalization of these conditions must be promoted. These include timely asset quality reviews and stress tests to rule out bail-out or aftertaste or past loss relief. She reiterated that the precautionary recapitalization is temporarily limited and must be repaid.
    • "European Commission banking communication" allows state aid to banks in times of crisis. This communication dates back to 2013 and has to be revised in the light of the introduction of the uniform resolution regime in 2015. That should be a priority task of the new Commission. The existence of two parallel systems, which concern the restructuring of endangered banks and have different load bearing implications, is in her view questionable and carries the risk of maladministration.
    • In terms of liquidity in resolution, the liquidity needs of very large banks, especially G-SIBs, may outweigh the resources of the SRF and the backstop of the European Stability Mechanism. Currently, various solution options are being discussed in which the SRB works constructively. 
    • Uniform bank deposit insurance, must now be tackled. Risks in the financial system have diminished, but the Banking Union system is not yet weatherproof. If Europe does not find an answer to the question of EDIS, the project "Banking Union" may have only limited ability to act in terms of its ultimate goal (to be able to settle banks without government funds).
    • The harmonization of the bankruptcy law for banks, or a uniform procedure for the liquidation of banks, is central in this context. Before any settlement decision, the question arises on whether SRMR settlement is a better option than the national insolvency law. Since a speedy standardization of bankruptcy law is probably wishful thinking, the American system and the powers of FDIC could be an important step in the right direction. FDIC has extensive expertise to manage banks administratively and centrally in all states. This has led to countless sales transactions in recent years, always maintaining cost efficiency. A "central administrative liquidation tool" could be added to the existing SRMR instrument case and would have the advantage that banks failing the "public test" will still be liquidated by SRB. The focus should be mainly on small SRB banks as well as larger "less significant credit institutions"—an issue that the new Commission hopefully picks up, not least as a lesson from the experience of SRB.
    • Compared to the U.S., capital market financing continues to play a subordinate role in Europe, as European companies are primarily bank-financed. Diversified sources of finance offer prospects for companies and investors alike and could reduce dependence on the banking sector. A unified capital market would also benefit banks, not least because banks benefit from facilitated securities trading, especially when issuing their own securities and setting up MREL with cross-border access to investors. The Capital Markets Union was a key topic of the outgoing Commission and will remain on the agenda. Issues such as a harmonized insolvency law will also have to be addressed here.

    She concluded that, in recent years, far-reaching measures have been taken in Europe and the U.S. to ensure the orderly resolution of troubled banks and to avoid the use of public funds. Settlement regimes in the U.S. and Europe are based on the same global standards, but differ in their design according to national law. In contrast to SRB, FDIC has not yet been used in its new role, but its far-reaching competencies provide sufficient inspiration to increase the ability of the European resolution regime to act.

     

    Related Link: Speech (in German)

     

    Keywords: Europe, Americas, EU, US, Banking, Resolution Framework, Resolution Planning, TLAC, MREL, SRF, SRMR, BRRD, Orderly Resolution, FDIC, SRB

    Featured Experts
    Related Articles
    News

    BIS Examines Use of Big Data and Machine Learning at Central Banks

    BIS published a paper that provides an overview on the use of big data and machine learning in the central bank community.

    March 04, 2021 WebPage Regulatory News
    News

    APRA Finalizes Reporting Standard for Operational Risk Requirements

    APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.

    March 03, 2021 WebPage Regulatory News
    News

    ECB Publishes Guide for Determining Penalties for Regulatory Breaches

    ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks.

    March 02, 2021 WebPage Regulatory News
    News

    MAS Sets Out Good Practices to Manage Operational Risks Amid COVID

    MAS and The Association of Banks in Singapore (ABS) jointly issued a paper that sets out good practices for the management of operational and other risks stemming from new work arrangements adopted by financial institutions amid the COVID-19 pandemic.

    March 02, 2021 WebPage Regulatory News
    News

    ACPR Announces New Data Collection Application for Banks and Insurers

    ACPR announced that a new data collection application, called DLPP (Datalake for Prudential), for collecting banking and insurance prudential data will go into production on April 12, 2021.

    March 02, 2021 WebPage Regulatory News
    News

    BCB Maintains CCyB at 0%, Initiates First Cycle of Regulatory Sandbox

    BCB announced that the Financial Stability Committee decided to maintain the countercyclical capital buffer (CCyB) for Brazil at 0%, at least until the end of 2021.

    March 02, 2021 WebPage Regulatory News
    News

    EIOPA Launches Study on Non-Life Underwriting Risk in Internal Models

    EIOPA has launched a European-wide comparative study on non-life underwriting risk in internal models, also kicking-off of the data collection phase.

    March 01, 2021 WebPage Regulatory News
    News

    SRB Publishes Overview of Resolution Tools Available in Banking Union

    SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution.

    March 01, 2021 WebPage Regulatory News
    News

    EBA Consults on Pillar 3 Disclosure Standards for ESG Risks Under CRR

    EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).

    March 01, 2021 WebPage Regulatory News
    News

    ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting

    ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting

    March 01, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6655