Takeaways from the first application of the EU’s crisis management framework
Ten years after the outbreak of the financial crisis, the EU and its Member States (MS) today are in a far better position to manage the negative externalities banking can impose on the public. The new framework designed in response to the crisis has been put into practice at a rapid speed. Under this framework, the Single Supervisory Mechanism (SSM) is responsible for minimising the probability of a crisis ex-ante, while the SRB strives to limit the damage to the public should a failure be inevitable in spite of increased prudential measures.
The successful resolution of Banco Popular, the precautionary recapitalisation of Banca Monte dei Paschi di Siena (MPS) and the liquidation of two smaller regional banks in Italy occurred almost exactly five years after the first proposal for the Banking Union in June 2012. The solutions found for these cases varied substantially and this provides the opportunity and necessity to take stock of the crisis framework and to draw lessons to be learned.
The resolution of Banco Popular proved the new system effective, whereas the outcomes for the three Italian banks highlighted the need for further harmonisation, in particular concerning the regulation’s objective of breaking the link between public finances and bank losses. In the case of Banco Popular the SRB used the “sale-of-business-tool“and decided upon resolution within the framework of the BRRD and SRM-R. “Precautionary Recapitalisation”, the route chosen for MPS, is an option for governments to aid troubled, yet solvent, banks explicitly foreseen in the regulation. It is the exception – under tight constraints – to the rule that state aid will lead to determining a bank “failing or likely to fail”. Similarly, the liquidation of the two smaller banks under national insolvency law is the legal consequence of the SRB determining that there was no public interest in resolution. But it also shows that the public can still be exposed to the costs of bank failure at the decision of a MS.
In this context, it has to be considered that the Commission’s Banking Communication from 2013 needs to be reviewed against the progress made in the resolution framework. In addition, harmonising national insolvency laws would be needed to achieve a level playing field.
The SRB will focus on making banks resolvable through resolution planning, including setting an adequate level of MREL. This will enhance the chances for private solutions and, in case of failure, minimise taxpayers' exposures.
The resolution of Banco Popular vividly illustrated the importance of funding in resolution. Eventually, the bank’s liquidity issue was resolved by selling the entity to a buyer that had the means and willingness to provide the needed funding. To prepare for a return to markets shortly after resolution and in absence of a strong buyer, the work on identifying private and public sources of funding, including the capabilities and limits of the SRF, the Central Banks and MS will be of priority. Other important operational aspects that we were confronted with – from data availability to peculiarities of the national law – will be taken into account in the next resolution planning cycle as well.
The cases highlighted also another critical detail: Although the decisions differed, the four banks shared a common denominator that added to their precarious situations. All banks saw themselves confronted with the same legacy issue. Ten years after the start of the crisis some EU banks still suffer under the weight of NPLs. While the forecasted economic upturn in Europe will certainly contribute to the improvement of balance sheets, authorities must find ways to swiftly address this issue, remembering that seemingly similar exposures may in practice be very different, depending on the underlying and the different legal frameworks in MS that affect recovery values.
We should all be realistic: By definition, losses will emerge in the management of NPLs and portfolios cannot be whitewashed. Increased transparency and the development of a frictionless secondary market would mark steps in the correct direction. There is no time to lose.
Elke König, Chair of the Single Resolution Board
MREL – The way ahead
Adequate levels of MREL are crucial to ensure the resolvability of banks. They contribute not only to the resolvability of individual banks, but also to financial stability as a whole and are a key instrument to replace bail-outs with bail-ins and safeguard taxpayers’ money. The SRB is making good progress in refining its MREL policy and developing MREL targets for the banks under its remit.
MREL targets are individually tailored to each bank, and the SRB has taken a number of measures to inform banks about the MREL process. In 2016, the SRB organised numerous workshops with banks, including discussion of informative (non-binding) MREL targets. We also published a document setting out the approach taken to MREL in 2016 and the way forward, and more is planned and already communicated for 2017.
The SRB aims to strike the right balance between flexibility and hard requirements in setting MREL. Banks differ in their business model, operational structure, risk profile and other factors. These specificities are taken into account by the SRB when drawing up resolution plans. Rather than a “one-size-fits-all solution”, final MREL levels as part of the resolution plan will be a function of each institution’s resolvability assessment, and will be designed to support implementing the specific resolution strategy, if need be.
MREL requirements are set on the basis of the current legal framework. In 2017, the SRB has started to develop binding targets for major banking groups, which resolution colleges will discuss in the fourth quarter. The SRB aims to develop MREL requirements for these groups in late 2017/early 2018. MREL of not less than 8% - but on a case by case basis possibly well above – will generally be required for the largest banks. In case of a resolution the Single Resolution Fund requires a minimum level of burden sharing and if a bank enters resolution it is important that there are enough bail-inable liabilities to attain the required level of burden sharing.
Our policy decisions will be in line with the applicable legislation and, in this context, we of course carefully monitor the developments on the Commission’s proposed banking package from November 2016. Among other changes, the Commission has proposed to implement the TLAC standard as a Pillar 1 requirement for G-SIBs. It is important to keep in mind the differences between TLAC and MREL: TLAC sets minimum requirements for G-SIBs, while MREL is a broader concept that applies to all banks. As mentioned, MREL requirements are set on a bank-specific basis and also potentially provide for a wider set of eligible liabilities (TLAC-eligible instruments must be unsecured and subordinated, with few exceptions). It has to be noted that G-SIBs and other systemic institutions compete in the same markets and might have similar systemic footprints; therefore a level playing field needs to be ensured and cliff effects avoided. The SRB therefore favoured a Pillar 1 requirement for both. Moreover, the SRB urges finalisation of the reform of the creditor hierarchy and eligibility criteria. It is also critically important for the final proposal to maintain flexibility for the resolution authority to take timely action to address breaches of MREL where necessary and to make sure that only liabilities that can really be bailed-in count towards MREL.
Overall, MREL implementation is a multi year process that is proceeding well in spite of the regulatory uncertainty. The next years will be crucial for developing binding MREL targets and ensuring that they are met.
Elke König, Chair of the Single Resolution Board
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