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The challenges of resolving mid-sized banks - Pedro Machado at the FRS


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We have an interesting topic for discussion this morning - what do with the mid-sized banks?

I suppose they are comparable to a teenager – too big to be treated like a small child, but not quite big enough to be treated as a fully grown adult. One thing we do know is that we ignore the needs of our teenagers at our peril. The same can be said for mid-sized banks.

Tailor-made solutions to meet the needs of this specific cohort of banks are required, but this is perhaps easier said than done. 

First of all, a brief reminder of the SRB’s role, because I think I should be clear on what exactly our mandate is. Our job is to promote financial stability and protect the taxpayer from future bailouts, but we only cover the largest banks across the Banking Union. For SRB banks, in general, we expect and plan for the use of resolution tools.

Our work on resolvability of the larger institutions promotes financial stability right across the financial sector, because of the trickledown effect.

[Is the current framework good enough?]

So, that is the current framework. But, is it enough? What if a larger mid-sized bank gets into trouble? What concretely is the problem with these banks? In the absence of a credible insolvency legal framework, the problem tends to be rooted in the liability structure of these banks, which tends to be composed of equity and deposits without any appropriate MREL eligible debt layers. This makes their loss-absorption capacity in resolution rather thin and hampers ultimately the very implementation of their resolution strategy.  With this central concern in mind, I am pleased that we have an excellent panel to discuss the issue, in which we can tease out some of the challenges and some of the potential solutions. I want to look at those challenges now.

[Challenges: Defining the mid-size]

For our discussion here today, I think we can say that a mid-sized bank is a bank of small to medium-size in relation to the market it operates in, heavily reliant on deposit funding. No matter what the size of the bank, and what tier we might have it categorised in, to ensure financial stability there is a need for an implementable solution should that bank get into difficulty. And if Europe is serious about ending publicly-funded bail-outs, then it must ensure that the solution for this cohort of banks is one that is fiscally neutral.

Within the ‘mid-size’ sector, we have SIs and LSIs. Naturally, it is the SIs in this ‘mid-size’ sector that pose the most challenges, albeit some LSIs raise similar issues considering their relevance in some Member States. We talk about ending ‘too-big to fail’ – but is this the case for the largest of the middle size banks? Can we let these banks collapse under normal insolvency?

There is no easy way out: we have to get to a situation where all Sis, meeting a positive PIA, become operationally resolvable and need to build the necessary MREL to allow a resolution scheme to be executable.

However, we can see the following:

  • Mid-sized banks, for the proxied by total assets between 10 billion and 100 billion and corresponding to 38 banks,  continue to build-up their MREL capacitiy profiting from favourable market conditions.
  • In Year-2020 mid-sized banks issued 23 billion euro (14% less than the 2019 issuances), but given the exceptional year, this is not bad.
  • For comparison, banks above 10 billion euro (excluding G-SIBs) issued 127 billion of MREL instruments in 2020; while issuances from G-SIBs amounted to 108 billion.  

[Challenges: Applying resolution tools]

Resolution tools vary, and in particular ‘Sale of Business’ and Asset Separation tools might be best suited for mid-sized banks. However, they come at a cost, as they also need to be funded and made implementable.

MREL in these banks might often mean own funds only. This provides an added challenge, because we are faced with the risk that this might have been substantially, or rather most likely has been, depleted at the point of failing-or-likely-to-fail, leaving little room for resolution.

At the same time, it is absolutely clear that we cannot have a layer of banks that is considered too big for one of the national insolvency procedures, while resolvability is considered unfeasible. A limbo situation could mean these banks get a free ride in ‘going concern’ and possible manage to distort competition, and in a ‘gone concern’ situation they end up with the taxpayer footing the bill.

[Challenges: Delivering on depositor protection]

The completion of EDIS with sufficient powers, in particular transfer tools, is a major part of the solution in order to address the challenges around the failures of the middle tier of banks.

We have a situation today where all depositors are theoretically protected in the same way, even if we know that some depositors are in deposit guarantee schemes that have the backing of much more secure sovereigns than others, whilst in some Member States voluntary schemes cater for full protection of deposits, including uncovered ones.  

It is time to tackle this one head-on for once and for all, and a central European institution should take up the role of protecting the ordinary depositor in a consistent fashion right across Europe.

Meanwhile, many see in the recent Tercas judgement, which has brought clarity as to the possibilities of DGS alternative interventions without qualifying as State aid, as an intermediate step to support crisis management strategies of mid-sized banks, both on a preventive basis as well as in resolution or liquidation. The prospect of enlarging the possibilities of DGS alternative interventions triggers discussions around the revision of the DGS super-priority rule and the computation of the least cost principle but also of overreliance on national backstops against the potential risks of amplifying the sovereign-banks nexus.   

[Challenges: Delivering on EU liquidation regime]

The lack of a harmonised EU liquidation regime is a major obstacle towards a fully-fledged Banking Union. When we are looking at whether or not to resolve a bank, the SRB’s assessment of the no-creditor-worse-off principle seeks to ensure that the treatment of creditors in resolution is not worse than the one they would have received under normal insolvency proceedings. This is difficult to assess at present.

[Challenges: Delivering on harmonised insolvency regime]

Currently, with twenty-one-plus different insolvency frameworks in the Banking Union, the analysis of the insolvency counterfactual for a cross-border bank in resolution is a challenge; and results in diverging outcomes depending on the home country of the institution. Moreover, the ‘failing-or-likely-to-fail’ assessment is not always aligned to the criteria for liquidation at national level and may similarly lead to different conclusions.

Bank insolvency procedures should be subject to common standards and practices at EU level. This would solve the problem when larger banks are not to be resolved, but it would also solve problems when dealing with smaller banks. 

The best solution would be EU-wide administrative rules on insolvency proceedings for the banking sector ensuring an orderly liquidation strategy underpinned by a common set of transfer tools.

A level playing field and investor certainty could be achieved through the harmonisation of procedural rules for transferring assets and liabilities of failing mid-sized banks through competitive sale processes under share deal or asset deal modalities with potential carve-out strategies and with the bridge bank acting as a fallback solution hence safeguarding the level playing field and providing legal certainty.

[CMDI / Way forward]

These ideas are not new. Way back in 2010, the European Commission’s Communication on an EU Framework for Crisis Management called for “further harmonisation of bank insolvency regimes, with the aim of resolving and liquidating banks under the same procedural and substantive insolvency rules”. Although not much has changed, I do hold out hope for the European Commission’s review on the whole crisis management framework which is ongoing at present.

In the interim, the SRB has developed National Handbooks to define how to implement resolution schemes in each country, as well as national implementation steps for a decision not to adopt resolution. This was a step in the right direction, but is only a ‘second best’ option and not comparable to a harmonisation of bank insolvency procedures – something only legislators can deliver, not the SRB.

Proposals for harmonisation across the board will inevitably be fraught with political perils and resistance. An incremental approach – such as the one we saw in the harmonisation of the ranking of unsecured debt instruments in insolvency – may be a more pragmatic solution. The ultimate goal, however, must be to put in place an EU liquidation regime alongside an EU resolution regime, something akin to a European FDIC.


Ladies and gentlemen, dear fellow-panellists, these are some ideas, but I certainly do not have a monopoly on wisdom, so now I would like to cede the floor. I look forward to our discussions and to hearing your views and ideas this morning. Thank you.

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