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    Elke König of SRB on Liquidation Rules for Small and Medium-Size Banks

    September 23, 2019

    SRB published an article that advocates developing a common set of rules for liquidation of small and medium-size banks in EU. The article was written by the SRB Chair Elke König and was originally published in Views, the magazine of the Eurofi Forum held in Helsinki in September 2019. The article notes that building the capital buffers may be challenging for smaller fully deposit-funded banks. Therefore, a common set of rules for winding down such banks—for some SRB banks and all less significant banks—could be beneficial.

    The article highlights that the decision to put a failing institution into resolution depends on the outcome of a “public interest assessment,” determining if the preservation of a bank’s critical functions is required to maintain financial stability. If outcome of the public interest assessment is negative, a failing bank will be sent into national insolvency. To increase transparency, SRB recently published a paper on public interest assessment, presenting the methodology and how SRB assesses the criteria set out by the EU law.

    In due consideration of proportionality in resolution planning, the loss-absorption requirements for each institution are carefully adjusted to the choice of resolution tools. The banks, for which (in case of failure) no resolution is foreseen, do not have to build the Minimum Requirement for own funds and Eligible Liabilities (MREL) on top of their supervisory capital requirements for going concern. In contrast, for banks, whose preferred strategy is resolution, the MREL policy of SRB and its expectations for resolvability provide for certain adjustments to allow for proportionality as well. SRB can also grant transitional periods for banks to allow for a gradual build-up of MREL requirements. SRB must strike a careful balance between feasibility of the build-up of MREL and the credibility of the resolution strategy.

    While there is one common European resolution scheme in the Banking Union, there are 19 national insolvency laws when winding-down a (cross-border) bank. A set of common standards, practices, and harmonized rules for the liquidation of banks would considerably facilitate resolution planning, increase predictability, and prevent diverging outcomes in different member states. Needless to say that administrative procedures might be preferable to judicial procedures. At the end of this process might stand the creation of a European bank liquidation regime—a European FDIC. Not only would this ensure centralized decision-making but also the application of a harmonized and effective toolbox supported by a European deposit insurance. 


    Related Link: Article


    Keywords: Europe, EU, Banking Union, MREL, Resolution Planning, Proportionality, Capital Buffers, Deposit Insurance, Capital Requirements, SRB

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