Why not have one, neutral and integrated safety net system for resolution and deposit guarantee?

From the Finnish national resolution authority’s viewpoint, the BRRD offers us strong yet flexible tools to prepare for crisis management in our local banking market. Thanks to the Banking Union (BU), the SRB provides us with skilled professionals and financial firepower to deal with possible failures of our national and Nordic champions.

We also have a financially strong national deposit guarantee fund and a deposit guarantee scheme which is operationally capable for the seven working day payout. Yet there is always room for improvement, so the question remains, how would we – based on our six-year experience – tune up the regime for the resolution and deposit guarantee systems at the EU level?

A more integrated system adds value

The Finnish resolution authority also acts as the national deposit guarantee authority. So, we can easily look at the crisis management of a failing bank from both perspectives. The tools provided by the resolution and deposit guarantee frameworks are seen as one group from which we choose the best tools for each case.  

However, the legal triggers for using the two frameworks and the related funds differ, which results in overlap on one hand and gaps on the other. This can lead to situations in which it is not possible to use the most appropriate and effective tools. Depositors and financial stability could be protected more effectively if, based on a coherent framework, one authority is made responsible for the measures to be taken on a bank that is failing or likely to fail, irrespective of whether that means reimbursing or transferring deposits or continuing the banks operations in some form, based on a public interest assessment.  

We view that the effective use of such a regime would require that the same authority could also use a single fund for crisis management. The division, for historic reasons, of banks' contributions to the deposit guarantee fund and the Single Resolution Fund (SRF) should therefore be removed. We should move to using one credible fund that would cover all the crisis management measures of banks that are failing or likely to fail. Following the same logic, if and when EDIS is implemented, it should merge with the SRF to form a single fund. The combined fund would benefit from synergies and it might even bring down the financial burden for the banking sector.

More flexibility increases the credibility of operationalisation 

Whereas the MREL regime is already established and improving resolvability in the BU, the operationalisation of transfer tools is far from complete. While the bail-in tool may be suitable for some less significant banks, for many a transfer strategy would be a more realistic option. This remaining need to operationalise transfer tools already provided for under the European framework leads to less significant banks across the Member States being treated differently by national resolution authorities (NRAs) and national DGSs.

This important work on transfer tools recently started in several fora. From the Finnish point of view, this work should be completed and put into operation to make transfer tools genuinely available for the resolution of smaller banks.

Flexibility is also needed in the deposit guarantee regime. Digitalisation and fintech are reshaping business models and banks can provide services remotely across borders without establishing branches. While increasing the options available for depositors, such passporting services seriously challenge the current cooperation framework for cross-border payouts between DGSs that make the seven working day payout possible also for foreign depositors. A mandate for the passporting-host DGS, a relevant cooperation framework and a uniform payout instruction changing system should be established in cases where a certain amount of passporting depositors is exceeded, to ensure that the DGSs can still respect the seven working day payout deadline. Larger or more complicated cases should be handled via resolution.

The deposit guarantee regime also needs to consider the new products and players emerging in the market. Customers may be puzzled as to whether an upcoming institution is or is not a deposit bank (i.e. banks within the scope of the national DGS) and whether a new product is or is not a deposit, let alone if it is somehow protected. Furthermore, the services of new players, such as deposit brokers, can lead to large and rapid movements of deposits. Against this background, the concepts “deposit”, “account” and “depositor” should be clarified.

More cooperation is a necessity  

Cooperation is at the heart of the BU. Working within and for the Union, we have been able to learn a lot from our colleagues at the SRB and at other NRAs and DGSs. For Finland, the Single Resolution Mechanism has turned out to be a notable venture boosting our crisis capabilities, preparedness and deepened cooperation between authorities and banks. At the same time, we should not forget that we can also learn from those outside the BU.  

Working within the Nordic context has brought us new insights on the ways of operating outside of the BU framework. While in the BU, rules are common for all, for cross-border banks cooperation and information sharing with non-BU authorities remains highly complex. Therefore, active participation in the colleges of Nordic banks and crisis preparedness work at the Nordic Baltic level is, for us, the only way of ensuring an efficient cross-border crisis management. This Nordic Baltic collaboration has been made concrete through recommendations and guidelines for sharing information between authorities cross-border.

We see an urgent need also inside the BU for prioritising the development of systems for secure and efficient data exchange, communication and collaboration between banks and authorities, as well as between authorities.

To sum up, tuning up the current regime would ideally mean introducing an integrated resolution and deposit guarantee system, taking care of operational capabilities of authorities and, above all, investing in cooperation and technical info-sharing issues as much as possible.

Remarkable progress has been made in six years. There is no reason to believe that fixing the shortfalls would be too great a challenge to overcome but, of course, some changes require a lot of courage and, most of all, a common will to look forward.