Reinforcing crisis readiness with transfer tools
The SRB’s role is to develop resolution plans that are ready for action at very short notice, for the banks under our remit. If a bank should fail, our goal is to make sure that happens in an organised and orderly way. We make sure that any critical roles it plays in the economy continue, that the failure doesn’t bring down other banks or businesses, and, importantly, that we don’t reach into taxpayers’ pockets to cover losses.
This is the theory, but we have to be ready and able to quickly put the theory into practice. If we decide that it’s in the public interest for a bank to be resolved, rather than liquidated, we can use a number of tools to do that. The bail-in tool is, of course, key. This means that shareholder and creditor debt can be bail-in to cover losses. But we have other tools at our disposal including selling the business, setting up a bridge institution or, coupled with any other resolution tool, using an asset separation company to deal with impaired assets.
These tools, known as transfer tools, can be a solution for mid-sized banks, which pose particular challenges for resolution, as well as being part of the plan for larger banks, especially as a variant strategy or as part of a business reorganisation after resolution. Transfer tools are an essential component of the resolution powers granted to the SRB, allowing for a failing bank to exit the market in an orderly way without liquidation aid granted by the state. The costs are foremost borne by shareholders and creditors and, if the access requirements are met, financing by the Single Resolution Fund will be available. So, the SRB must make sure that transfer tools are possible to implement successfully.
That’s why the SRB is working on operational implementation manuals for executing the sale of business tool (both share and asset deal), the asset separation tool, the bridge institution tool, and the use of the Single Resolution Fund for providing collateralised loans or guarantees on the performance of assets to third parties, under specific conditions. These include a set of supporting tools and templates that follow market standards and best practice. This will be framed within a universal resolution process of a modular nature, with the possibility to implement certain tools or elements, depending on the characteristics of a particular crisis case. This provides for the flexibility that is needed to react to new information (e.g. investor feedback, change in market conditions, increased liquidity outflows from the (f)ailing bank), as it becomes available.
Our operational enhancements fit seamlessly into the SRB’s existing extensive crisis preparation. They will facilitate engagement, communication, and negotiation with professional investors, a crucial aspect in the short amount of time available to complete a bank resolution. Enabling professional investor due diligence and a marketing process is of the essence for successfully implementing the resolution transfer tools.
Planning for resolution stands at the core of our mission. Empirical evidence shows that a bank crisis can escalate fast and market conditions can vary and change rapidly. The operationalisation of transfer tools also allows us to quickly put into action, in a flexible way, the main or variant resolution plan, if conditions or new information arising during the resolution process dictate.
Being able to use transfer tools means that the SRB can put resolution into action – and quickly. This provides us with a firm but flexible way to carry out our work in resolution, in order to ensure we protect taxpayers’ money and that the economy continues to benefit from financial stability.
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About the author
Pedro Machado has worked in financial regulation and supervision for close to 20 years. He was the Director of Legal Services and Chief Legal Counsel at Banco de Portugal, where he has also previously served as Deputy Director of the Prudential Supervision Department. A Portuguese national, he was the Minister of Finance’s Chief of Staff between 2011 and 2013, and has worked in the European Central Bank and PwC. From...