Bank resolution made simple: mission impossible?

Preparing for banks’ failure is no simple feat, and it is not cheap. But not doing so costs more. 

The lesson from the great financial crisis is clear. Between 2008 and 2017, the EU saw public aid to financial firms of more than 1.4 trillion euro (capital support) and 3.6 trillion (liquidity aid)[1], with catastrophic long-term impact on the EU economic growth[2].

The resolution framework was set up to avoid this happening again. 

To make banks resolvable[3] is a complex and costly endeavour, yet it is a vital one for the EU economy. There is simply no resilient growth, nor competitiveness, without financial stability. We have also seen recently in the US and Switzerland that bank failure is not a thing of the past.

With this in mind, we in the Single Resolution Mechanism do not shy away from delivering our mandate of financial stability, which helps to support growth and a strong EU. With 10 years’ experience, we believe that we can do this in a simpler and more efficient way and we have already taken steps in this direction with the SRM Vision 2028[4].

So, what are we doing to simplify and avoid undue burden for the industry?

• We have simplified one of our core activities, resolution planning, which is now streamlined and more targeted. One practical result for banks is that some key deliverables, such as playbooks, the communication plan and other reports will no longer need to be updated every year, as these are already mature documents. 

• We work – also with other authorities such as the ECB and the EBA – to coordinate our engagement with banks, avoid duplicated requests, and to further harmonise reporting standards[5]. We have delivered on this and more is in the pipeline[6].  

• We enhanced stakeholder engagement and increased the transparency and predictability of our policies, including through public consultations and industry hearings. 

• We are also committed to delivering stability in SRB policies, starting with MREL, the minimum requirement for own funds and eligible liabilities.

This simplification has its limits: we cannot support any attempt of deregulating our recent framework, nor undermining its credibility. 

Our capacity to simplify is also defined by the legal framework. This is why we are analysing, as practitioners who implement the rules and fully subscribe to their aim, if some rules can be simplified. We have identified some areas for legislators and regulators to explore:

• Less frequent review and update of resolution plans, moving to a two- or three-year cycle, to further reduce burden for banks and to allow us to focus on riskier elements. 

• Further to our work on making the authorisations for banks’ early redemptions of MREL instruments more agile, the prior permission regime would benefit from a legislative review. 

• The scope and requirements of the simplified obligations methodology for smaller banks, as well as banks’ MREL disclosures, could be made more proportionate.     

• Enabling the waiver of some SRF data collection and some reports (e.g., on FMIs) would make reporting less burdensome. 

• The impracticability framework (BRRD Article 55) is already being reviewed as part of CMDI[7] and is expected to deliver welcome simplifications.  

   

We stand available to support legislators and regulators on these and other areas, which are quite technical, yet have the potential to reduce compliance costs without impinging on resolvability. 

A hotly debated topic is whether, and in which respect, the regulatory capital stacks (own funds and MREL[8]) should be simplified. This is a complex debate that will need to be tackled, ideally, in a holistic way. The SRB is ready to be part of this work.

Coming to a conclusion, banking resolution will perhaps never be a piece of cake, however it is possible to make it simpler, with the right ingredients of caution, pragmatism, and political will.