The Single Resolution Board (SRB) Chair, Elke König, published an article on improving the resolution framework for medium-size banks. SRB is working to better adapt its resolution framework to these banks, using the proportionality principle, but without undermining the end-goal of resolvability. This work relies on three main pillars: transfer strategies, tailored minimum requirements for own funds and eligible liabilities (MREL) calibration, and access to funding. On the first two, SRB is in the driving seat, but legislative changes are required for the third.
In the article, Elke König notes the following about these three pillars:
- Transfer strategies seem to be the best tools for medium-size banks. SRB is working to enhance its preparation for using these strategies. For instance, in the first half of 2021, SRB has made substantial progress in making transfer tools fully operational. SRB will also prepare additional policies and guidance on separability.
- MREL needs proper calibration for transfer strategies. In 2022, SRB will work on MREL policy for the banks that have transfer tools as the preferred resolution strategy. This could, under certain conditions, lower the MREL requirement for banks compared to the status quo. For banks with a credible transfer strategy, there might not be a real need to set MREL at a level that allows the full recapitalization of the bank. As a result, MREL requirements could be lower, based on the likelihood of transfer strategies being reliably implementable.
- Banks facing resolution may have access to the Single Resolution Fund (SRF) and/or the deposit guarantee schemes (DGSs) under certain conditions. However, these conditions severely restrict the use of DGS funds in resolution, potentially jeopardizing the success of resolution. This may create incentives for decision-makers to look for ways to circumvent the resolution framework. Access to the SRF and its combined use with DGS could be further explored, to act as funding to support those resolution tools other than bail-in that ensure the exit of resolved entities from the market through transfer strategies.
To overcome the legal framework’s restrictions on the use of DGS in resolution, SRB recommends replacing DGS-super priority by adopting a general depositor preference. The DGS could then contribute to resolutions in a way comparable to other creditors, in accordance with the creditor hierarchy. While this would likely be a limited contribution, given that the DGS would continue to rank above most creditors, it aligns to the broader responsibilities of the DGS in subrogating to the rights of the covered depositors. This would help to achieve all the resolution objectives, including minimizing the use of public funds and avoiding further value destruction. Notwithstanding the above, given the limited size of national DGSs and the existing uneven playing field, another important missing piece to solve the problem of medium-sized banks is to put in place a European Deposit Insurance Scheme (EDIS). A centralization of tools and funding at EU level would reduce fragmentation and increase the credibility of the overall Banking Union, thereby further enhancing financial stability.
Related Link: Article
Keywords: Europe, EU, Banking, Resolution Framework, MREL, DGS, SRF, Medium-Sized Banks, Proportionality, MREL Calibrations, EDIS, Banking Union, SRB
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.