To resolve or not to resolve: a public interest assessment fit for purpose

The Single Resolution Board (SRB) plans for and manages bank failures in such a way that the public interest is safeguarded. The bank resolution framework was put in place for banks whose collapse might shake other parts of the economy. In these cases, the SRB can use its resolution tools to manage their failure effectively. For most small banks, however, failure means going into normal insolvency, as we have seen in recent cases. Let me say from the outset that the plan for most, if not almost all, banks under the SRB’s remit is resolution: I will return to this later.

We base the decision between resolution and normal insolvency on the so-called public interest assessment (PIA). In effect, we must determine if it is in the public interest to apply the SRB’s resolution tools to a failing bank. We make this assessment in our resolution plans, which set out a preferred strategy for each bank – resolution or insolvency. However, we revisit this assessment annually and in particular when a bank is declared failing or likely to fail, taking into account the circumstances at that point. The SRB’s Executive Session, the governing body that decides on the approach, makes the final determination as to whether the bank should be resolved. The assessment, in essence, looks at whether resolution can achieve one or more of the five resolution objectives better than normal insolvency proceedings.

The five resolution objectives are:

1. To ensure the continuity of critical functions to the economy, such as lending to small- and medium-sized businesses;
2. To avoid significant adverse effects on financial stability in one or more countries;
3. To protect public funds by minimising reliance on extraordinary public financial support;
4. To protect depositors covered by the Deposit Guarantee Scheme Directive, which protects deposits of up to 100,000 euros, and investors covered by the Investor Compensation Scheme Directive;
5. To protect client’s funds and assets.

Last year, we published our methodology for how we do this. However, measuring some of these objectives is more complex than others, and the SRB is working to further deepen the analysis that underpins the overall assessment. 

As I noted above, the plan for most banks under the SRB remit is resolution and not insolvency. I have said in the past that resolution is for the few and not for the many. This is correct in the context of the more than 3,000 banks across the Banking Union. The SRB is the resolution authority for 128 banks/banking groups, the largest and most systemic banks operating in the Banking Union and certain cross-border groups. For these banks, in general, we expect and plan for the use of resolution tools. We should recall that resolution tools enable the SRB to manage the failure of a bank in an orderly way and rapidly restructure its balance sheet, or to take other resolution measures to preserve financial stability. At the same time, resolution will not offer resurrection to banks with failed or unsustainable business models.

My second point is that the public interest assessment takes into account the circumstances present at the time when the bank is failing. The PIA carried out during resolution planning provides an annual static snapshot; while the assessment is run again when the bank is declared to be failing or likely to fail. This is because we need to be able to analyse the latest situation of the bank, which will obviously have deteriorated compared to the resolution-planning phase. We must also consider the economic environment and assess the impact of resolution versus insolvency at that specific point in time, re-assessing the impact of the bank’s failure on the resolution objectives. Both the bank itself may have changed since our original assessment (e.g. discontinued or acquired critical functions), but also the economic environment in which we find ourselves. Of course, even given that the eventual decision will have to account for the circumstances at the time of failure, the careful assessment made during the resolution-planning phase is the foundation. Resolution planning is driven by the need to ensure that banks can be resolved, if necessary. Our core task is to ensure that the banks under our remit meet all the conditions to be resolvable, including MREL issuance.

A public interest assessment may well give different results if the bank fails while the sun is shining or under storm clouds. The public interest assessment enables and requires us to take into account the macro-economic and market circumstances that surround a bank’s failure, particularly when assessing against the objectives of preventing financial instability, and of preserving continuity of functions that are critical to the real economy. This holds true in general, but might be specifically important at a time where we prepare for the potential unfolding of the Covid-19 impact on the economy and banks.

To conclude let me recap my main messages. First, to stress that the main plan for most SRB banks is resolution in order to safeguard the public interest. Therefore, these banks need to be resolvable and build the necessary MREL according to the SRB’s preferred resolution strategy. Second, when deciding upon resolution or insolvency for a failing bank, the SRB takes into account the idiosyncratic and systemic circumstances at the point of failure of a bank, which gives us the flexibility to properly account for the economic circumstances at that point in time.