EBF advisor: Timothy Buenker
Publication date: 20 April 2018
The Bank Recovery and Resolution Directive (BRRD) is aimed at enabling resolution authorities to restore the viability and solvency of a bank in resolution. The existing resolution tools are focused on loss absorption and recapitalisation (together with restructuring). The implicit assumption in BRRD is that once the institution’s own funds are restored, it will be possible to access funding to refinance its liabilities as they fall due. Nevertheless, as the Financial Stability Board (FSB) pointed out “potential market volatility and information asymmetry create funding risk for a recapitalized institution after resolution.”1
Although from a regulatory point of view we do not see any obstacles or insufficient legal tools to provide resolved banks with liquidity during a resolution scenario, we think that the legal framework can be improved in two ways:
▪ Provide more powers and more clarity to the existing mechanisms which could potentially provide a resolved bank with liquidity in a resolution scenario (e.g. national central bank monetary policy, resolution fund);
▪ Allow for a credible and quickly available public sector backstop from central banks in order to avoid contagion and market disruption if market confidence is not yet sufficiently restored for the resolved bank to raise funding by itself. The mere existence of this tool, could help resolved banks to raise funds in the capital markets without the need to use the public-sector backstop itself.
EBF Members call for a credible and effective public sector backstop funding mechanism, which is quickly available to solvent institutions, for the rare cases where it will be necessary to complement the tools available under BRRD, in order to safeguard market confidence and sustain private sector counterparties to provide funding to a financial institution in resolution.