Bank resolvability in the time of Covid

We will balance flexibility and resilience, says director of EU’s Single Resolution Board

Bank resolvability during Covid

These are unprecedented times. Just nine months ago, few could have predicted the pandemic that the world is currently dealing with.

While the European banking sector entered this crisis in much better shape than it was at the beginning of the previous one, the impact on the banking sector itself is not yet clear; it will largely depend on the measures taken to support the real economy, and how different industries fare during the crisis.

It is realistic to expect that banks with weaker business models and low profitability will be under more pressure, and that non-performing loans will increase. This is why a strong resolution framework that prepares for and can manage bank failures is a key element in mitigating the negative impact of the current crisis.

Earlier this year, the Single Resolution Board published a new document called Expectations for Banks. Its purpose is to act as a ‘one-stop-shop’ for bankers to help make their institutions resolvable. It is not a new set of regulatory obligations – it is a guide to help banks’ management understand clearly the best practices the SRB expects them to implement in order to ensure their entities are resolvable.

Of course, in light of the Covid-19 crisis, the SRB has been flexible, with specific operational relief measures so that banks can continue working at a steady pace on their resolvability path. However, while we have been flexible, we will not lose sight of our goal to make every bank resolvable.

With the gradual phase-in of the Expectations, tailored to bank and resolution strategy specifics, the SRB aims to apply a proportionate and flexible approach to enhance banks’ resolvability, supporting the overall strengthening of the financial system.

The SRB will also maintain such an approach with individual banks. Together with our partners across the EU and internationally, we have sought to make the best possible use of the flexibility embodied in the current regulatory framework to respond to the coronavirus crisis. There has been a remarkable amount of good co-ordination in the eurozone banking union since the pandemic hit.

However, I also want to stress the importance of not rolling back the regulatory reforms, or compromising on the underlying objectives of existing international standards. Indeed, the progress made with the introduction of tighter banking regulation since the last crisis a decade ago has proven vital in the current one. The greater resilience of the financial system is the result of the lessons learnt from the 2008 financial crisis. 

Self-assessment

There are seven dimensions to resolvability laid out in the Expectations document: governance; the minimum requirement for own funds and eligible liabilities (MREL) that can be bailed in to absorb losses; funding in resolution; operational continuity; IT capabilities; communication plans to keep investors informed; and the ability to separate and restructure the legal entities of the bank.

The SRB drafts resolution plans for the banks, whereas recovery plans are drafted by the banks themselves. Resolution plans are now in place for all banks under the SRB’s remit, but given that businesses are constantly changing, they need to be kept up to date on a regular basis. The findings of the Financial Stability Board’s work will also be reflected in the resolution plans the SRB drafts for each bank.

Resolution plans must reflect the current levels of business, and most importantly, they may need to be activated with very little notice. The SRB’s Expectations will assist in this goal.

It is hoped that resolution plans will never actually be needed, but the fact that they are in place means financial institutions have already had to do much ground work to assess their own stability and see what would be required in the event of unforeseen circumstances. This internal ‘housekeeping’, in itself, is a valuable contribution to financial stability.

The Expectations document has therefore been designed to be used by the banks as a departure point from which to maintain and improve their resolvability. The build-up of MREL forms a key component of this.

 

 

This guidance document sets the level playing field for banks to work on resolvability and the harmonised criteria on the basis of which the SRB will assess banks’ progress on removing impediments to resolvability.

In 2020, banks have been requested to conduct a self-assessment against the Expectations and to develop a multi-year work programme endorsed by the management body, setting out the measures the bank will take on the road to resolvability.  

MREL and valuations

The SRB will continue engaging with each bank and outlining the key work priorities with regard to meeting the Expectations and building up MREL. One important element of such communication is the priority letters each bank receives on an annual basis. They reflect the SRB’s assessment of the work carried out by the bank in the previous annual resolution planning cycle, while also setting out the bank’s working priorities for the 12 months ahead.

Among the priorities for 2020–21, the build-up of MREL and operationalisation of bail-in capabilities are key. In addition, this coming planning cycle will introduce access to sufficient funding and liquidity sources in resolution, and the availability of data needed for valuation, as key working priorities. The SRB will also work closely with the banks on the operationalisation of asset transfer tools and separation strategies.

One part of the SRB’s role is to promote financial stability, but the other is to ensure that banks play their part in managing themselves responsibly so the taxpayer does not end up footing the bill. The banking system overall is on much firmer foundations than it was just over a decade ago. Now we have to use those foundations and ensure the system remains able to weather any storm we can see today on the horizon – in the EU and globally.

Sebastiano Laviola was appointed board member and director of resolution strategy and co-operation at the Single Resolution Board in May 2019

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