“We have to create a system where individual financial institutions can fail. It is not politically acceptable, nor in the spirit of the market that there is a broad range of institutions that: heads they win, tails they win.”
“Our job is to make the banking system safer, to restore confidence, not to orchestrate funerals for big banks. No more bail-outs.”
This EBF unit deals with Recovery & Resolution related topics, gathering and expressing the position of the European Banking Industry towards competent EU authorities.
Recovery and resolution in the banking union
Single Resolution Mechanism
The main purpose of the Single Resolution Mechanism is to ensure the efficient resolution of failing banks with minimal costs for taxpayers and to the real economy. A Single Resolution Board will ensure swift decision-making procedures, allowing a bank to be resolved over a weekend. As a supervisor, the ECB will have an important role in deciding whether a bank is failing or likely to fail.
Managing the gone concern of banks
The EBF supports the development of effective ways to deal with financial failure of banks in an orderly, quick and efficient manner, avoiding any spill over to other financial institutions and the wider economy. Special resolution regimes have been conceived in order to preserve the continuity of banks’ critical functions, financial stability, and to reduce the impact on taxpayers. Deposit insurance schemes for banks in the EU provide continuity of access to deposits and payments for banks’ customers, this being a crucial component of financial safety. However, banks in the first place need to plan ahead for a crisis considering recovery options, and authorities need to contemplate escalating supervision early warning indicators while, in the worst case, plan for an orderly wind down of a failing bank process.
Bank Recovery and Resolution
The 2008 financial crisis has demonstrated, in particular, the need for policy measures to plan for the possible failure of systemically important financial institutions and, consequently, to address the problem of firms that are “too big to fail”. The aim is to make it possible to resolve any financial institution in an orderly manner, without severe systemic disruption or exposing taxpayers to the risk of loss, by protecting banks’ functions that are critical to the financial market or the real economy. MREL requirements, resolution funds funded by banks and the bail-in tool, which imposes losses on shareholders and creditors of a failing bank, support the resolution process minimising the need for public financial support.
In the EU, the Bank Recovery and Resolution Directive sets out the powers and tools that national resolution authorities should have at their disposal for banks that could have a systemic impact if they fail. It also establishes the recovery and resolution planning requirements for all banks and, in addition, requires that resolution colleges of home and key host authorities are set up to coordinate group-wide resolution strategies and plans for systemic banks.
Which issues we discuss?
The European Banking Federation is committed to cooperate with EU institutions in order to ensure the appropriate level of resolvability across the banking sector.
Operational issues and strategic themes:
- Loss absorption and recapitalization capacity
- Liquidity and funding in resolution
- Operational continuity
- Access to Financial Market Infrastructure (FMI) services
- Information systems and data requirements
- Separability and Restructuring
Deposit guarantee schemes (DGS) reimburse a limited amount to compensate depositors whose bank has failed. A fundamental principle underlying DGS is that they are funded entirely by banks, and that no taxpayer funds are used. Under the EU Deposit guarantee schemes Directive, deposit guarantee schemes protect depositors’ savings by guaranteeing deposits of up to €100,000. This help prevents runs on deposits in the case of bank failure which is key feature of the European financial safety net. The directive includes a gradual reduction of the repayment times of deposit guarantees to 7 days by 2024.
EU countries are obligated to introduce laws setting up at least one DGS that all banks must join. EU countries must ensure a harmonised level of protection for depositors and produce lists of the types of deposits that are protected. DGSs set up and officially recognised in 1 EU country must cover the depositors at branches of their members in other EU countries. It also restates the principle of resolving bank failures with the use of funds provided by financial institutions, and not by taxpayers.