Resolution: from basics to readiness
Welcome to our new blogging series!
Look out for our next SRB Insights in 2020, we will invite authors from other EU institutions but also from the industry and academia to blog on our latest online platform. Different voices, different opinions, all the more Insights.
Back to basics
Financial imbalances and the bankruptcy of Lehman Brothers in 2008, lead to a financial crisis of unprecedented scale. The public had to pay over a thousand billion euros to prop up failing banks. Concretely, losses between 2007 and 2010 were almost 1 trillion euros or 8% of the EU GDP (IMF) and the approved state aid measures in the form of recapitalisation and asset relief between 2008 and 2010, adding guarantees, amounted to 1.6 trillion or 13% of the EU GDP (Commission). And this was in the EU alone. Globally the sheer scale of the crisis was massive and repercussions last until today.
As the financial crisis unfolded, it became clear that deeper integration of the banking system and a response to problems, such as ring fencing and the too-big-to-fail issue was needed to make the Eurozone viable for the long term. That is why the EU institutions agreed to establish a single supervisory mechanism (SSM) and a single resolution mechanism (SRM) for banks. The banking union applies to countries in the euro area. Non-euro area countries can also join and some are actually doing so already.
Bank resolution is the orderly wind-down, restructuring, or disposal of a failing bank without financial support from the taxpayers and without significant economic repercussions at the expense of the bank’s shareholders, creditors and the banking sector itself. In other words, those that own, fund or control a bank and benefitted from it in good times should also be the ones suffering the losses in bad times. Not all banks require resolution when they fail. Like other companies, most banks should be able to be wound down under normal insolvency procedures when they fail without dragging financial stability with them.
How do we actually make resolution work?
By doing several things:
- We implement new rules on resolution planning and capital requirements
- We have to clearly communicate with and monitor banks to prepare for their potential failure and put all the necessary work in place that enables us to handle a banks’ potential failure
- And we have also to assess what is working, and what still needs fine-tuning in our framework, as this is a completely new area.
Resolution planning and the readiness to execute the resolution strategy cannot be achieved on a “one size fits all”. Diversity of banks and its beneficial effect on economies requires the definition of tailored solutions for each bank – based on regulation and policies and while preserving proportionality.
While we have one common European resolution framework, in the banking union we are faced with 19 different national insolvency laws when winding-down a (cross-border) bank. A set of common standards, practices and harmonised rules for the liquidation of banks would considerably facilitate resolution planning, increase predictability and prevent diverging outcomes in different member states.
Not only would common standards ensure centralised decision-making, but also the application of a harmonised and effective toolbox supported by a European deposit insurance.
As a further step to a fully-fledged banking union the Commission put forward a proposal for a European deposit insurance scheme (EDIS) in November 2015. This would provide stronger and more uniform insurance cover for all retail depositors in the banking union. This European deposit insurance scheme is the third, final and currently missing pillar of the banking union. It would significantly enhance and improve the framework and improve certainty for citizens across the banking union.
A steady pace marathon
All of this cannot be done overnight, at the flick of a switch. There is no silver bullet. Banks also need time to adjust to the new realities of resolution, but they must maintain a steady pace in order to reach the finish line. Regulators such as the SRB also need to advance at a steady pace. Our 2020 Work Programme feeds into precisely this.
We, at the SRB, work very closely with a whole range of partners, including industry and the other institutions. We are experts in resolution, of course. But we do not have a monopoly on wisdom, so we really value the input and feedback we receive. In this way, we can make resolution work together.
The implementation of the recently adopted Banking Package will have a direct impact on day-to-day resolution planning as it fundamentally revises the MREL framework. Now is not the time to shy away from challenges but rather to take the opportunity and complete the resolution jigsaw while economic conditions are reasonably sound.
Let’s make sure we put in place the conditions to make resolution work so that every bank, should the need arise, may be resolved or wound down in a way that maintains financial stability and averts a repeat of the 2008 crisis.
About the SRB blog: The blog is a forum, purely for informational purpose, for the views of the Single Resolution Board’s (SRB) Members , Staff (SRB) or other officials from the ECB, or EU institutions, etc. as well as of guest writers from academia, on current financial and policy issues. The views expressed are those of the author(s) and do not necessarily represent the views of the SRB. These views should not be perceived as rendering any kind of financial advice and do not imply/promote the adoption of any particular financial position/financial behaviour
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About the author
Mr Boštjan Jazbec became a Board Member of the SRB in March 2018 and was the Director of Resolution Planning and Decisions. He was responsible for the banks under the direct remit of the SRB in 6 EU Member States and for 2 GSIBs as well as for a number of resolution teams involved in resolution planning. He is also Chair of the Cross-Border Crisis Management (CBCM) Group for banks at the Financial Stability Board...