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Economic and monetary challenges - Editorial - Opening interviews

Effective resolution: Strengthening the financial system

By König Elke - Chair, Single Resolution Board (SRB)

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What are the key challenges and priority actions of the Single Resolution Board in the forthcoming 18 months?

Currently, the SRB has around 130 staff members from diverse backgrounds and from nearly all Member States and we are expecting to double this number by the end of 2016. The necessary administrative rules for the Single Resolution Board (SRB) have been set up and operations are running smoothly given that the SRB is still a start-up. But, of course, there is still a lot to do.

The SRB is a forward-looking organisation focused on resolution planning. We will not just wait for our “first customers”.

The main objective for 2016 is to achieve full resolution planning capacity and, in particular, form the Internal Resolution Teams (IRTs) and Resolution Colleges (RCs). Together with National Resolution Authorities (NRAs), we have started to prepare Transitional Resolution Plans for a selected number of banks in 2015 and will enhance these plans and draft a first round of resolution plans for all entities under the SRB’s remit in the coming months.

The SRB will conduct resolvability assessments, define measures to address or remove barriers to resolvability, and determine minimum requirements for eligible liabilities – or MREL – for individual entities and groups.

We intend to publish a vademecum later this year allowing the industry and the general public to understand our approach to resolution planning better and resolution. This is crucial to ensure transparency and provide certainty to markets.

It will clarify how we will handle actual bank resolution cases, how the different resolution tools available (sale of business, bridge institution, separation of assets, and the famous bail-in) can be used, and some of the policies we will implement in resolution cases. We will also conduct crisis simulation exercises involving all relevant stakeholders.

The Single Resolution Board is committed to enhancing financial stability by addressing and removing obstacles to resolution.

What are the lessons learnt from the restructuring of the Italian, Portuguese… banking systems for the EU resolution arrangements?

Not only are we, the SRB, a new player in bank resolution, but all our tools and powers as of 1 January 2016 are, too. This may help explain the flurry of resolution actions at the end of 2015.

The rules for resolution as laid down in the Bank Recovery and Resolution Directive (BRRD) are clear and we will apply them consistently to be as predictable and as transparent as possible. I certainly won’t comment on, or judge, resolution measures taken before our powers came into full effect; these were taken at the full discretion of national authorities.

The Single Resolution Board is committed to enhancing financial stability by addressing and removing obstacles to resolution.

The BRRD sets out a clear order of burden sharing. Liabilities are bailed in by reference to their ranking in terms of seniority. For example, all holders of subordinated debt, irrespective of whether they are retail or wholesale investors, are bailed in on equal terms before any holders of senior liabilities, etc.

A bank should be able to fail without dragging whole countries’ economies with it – just like any other business. The bottom line is clear: burden sharing while banks are being resolved and in a transparent manner.

The Single Resolution Board will improve overall financial stability by addressing and overcoming resolution obstacles. Financial institutions will therefore be more robust, more resistant and the regulatory landscape more efficient.

Bail-in instruments: what are the challenges posed by inconsistent approaches in the EU concerning the relative seniority of the diverse liabilities? What should be the main features of MREL? How to achieve their consistency with TLACs?

Clearly, MREL, or Total Loss-Absorbing Capacity (TLAC), to mention its international sibling, are crucial policy topics. In 2016, the SRB will set the MREL targets for the banks under its remit as a core feature within resolution plans.

MREL, introduced by the BRRD will apply to all banks within the European Union in an appropriate and proportionate manner.

It will be our task to align the main TLAC requirements, which the G20 agreed on for the globally systemic banks, and MREL as far as possible within the framework of the BRRD for G-SIBs and beyond. And this is feasible.

MREL of not less than 8% of total liability – but on a case by case basis possibly well above – will generally be required for the largest banks in the Banking Union. I think it is safe to assume that for these banks, if they get into trouble, resolution, and not regular insolvency procedure, will be the most likely solution, hence, the minimum MREL target of 8%.

Setting MREL will not only mean setting quantitative targets per bank. We will also have to decide on qualitative features which might be more challenging to implement and might require more time for the banks to adjust to.

In February, the SRB, via the National Resolution Authorities (NRAs) of the Banking Union Member States, started to collect the data required for resolution planning and the determination of MREL from all banking groups under its direct responsibility.

We expect that sound resolution planning, together with the banks’ own recovery planning, will lead to fewer resolution cases, as planning will likely trigger earlier private solutions. This will be a sign that the measures taken over the last few years have truly helped increase financial stability.

MREL will give resolution authorities the opportunity to widen the application of loss-absorbing capacity to a wider circle of institutions according to their assessed resolvability. MREL will apply to all banks within the European Union in an appropriate and proportionate manner.

What is the expected contribution of an EDIS to the EU recovery and resolution approach for banks?

We should not forget that the Banking Union was originally designed with three pillars in mind.

The absence of a common deposit insurance scheme for the Banking Union means that depositors remain vulnerable.

The SRB, therefore, welcomes the EC’s proposal for a euro-area wide insurance scheme for bank deposits setting out further, parallel, measures to reduce remaining risks in the banking sector. I cannot stress enough how important it is that we pick the low-hanging fruit, which is the full transposition in all Member States of the DGS Directive and the creation of prefunded National DGS Funds.

The SRB is actively engaging with the Council and Parliament to help add our expertise to this process.

Harmonising insolvency law is much more tricky and every small steps towards bringing national insolvency regimes more in line with each other is welcome.