Speakers of the session
Klaas KnotDe Nederlandsche Bank, President & Vice Chair, Financial Stability Board
Antonio CarrascosaSingle Resolution Board, Member of the Board
Edouard Fernandez-BolloAutorité de Contrôle Prudentiel et de Résolution, Secretary General
Elisa FerreiraBanco de Portugal, Vice-Governor
Klaus KumpfmüllerAustrian Financial Market Authority, Executive Director
Boris VujčićCroatian National Bank, Governor
José Manuel González-PáramoBanco Bilbao Vizcaya Argentaria, Member of the Board of Directors & Chief Officer Global Economics & Public Affairs
Karl-Peter Schackmann-FallisDeutscher Sparkassen- und Giroverband, Executive Member of the Board
Objectives of the sessionThe objective of this session is to discuss the priority areas for securing a common, transparent and predictable resolution regime, to assess the specific contributions of EDIS to the key objectives of the Banking Union and the stumbling blocks to overcome in order to move forward this completion of the Banking Union.
Points of discussionWhat are the priorities for securing a common, transparent and predictable resolution regime?
Can the Banking Union efficiently function without EDIS?
Background of the session
The Banking Union remains fragmented and incompleteBanking markets are still fissured along national borders making financial sectors overly exposed to the same asymmetric shocks as their domestic sovereign. This weakens the global competitiveness of European banks and raises dysfunction risks in the face of a future shock. Indeed, the coincidence of sovereign distress and financial stability remains high.
There is little progress in cross-border lending, especially in the retail markets, or in other words, in lending to households and firms. Ring fencing should no longer be an issue in the Banking Union as there is now a single supervision authority and a single resolution authority which together unite all the National Competent Authorities. However, Member States insufficiently trust the institutional set up of the Banking Union. Indeed, they believe that capital and liquidity will be trapped in individual Member States if a pan European banking group fails. It is therefore essential to address the concerns of “host countries” vis a vis the EU crisis management framework (see the Eurofi paper on “Optimising the Banking Union”) in order to define prudential requirements for the pan European banking groups at the consolidated level and to abandon the “national and solo approach”.
Finding a pragmatic agreement between the SSM and host national authorities on ways to abolish ring-fencingIn this perspective, a pragmatic agreement must be found between the SSM and host national authorities on ways to abolish ring-fencing by agreeing to arrangements by which the host authorities have legal guarantees in case of banking difficulties. These guarantees, provided, as an option, by the parent company of transnational groups to their subsidiaries, should be agreed on now and in advance of possible future crises. In order to create a climate of confidence and trust, host countries should be associated with and involved upstream in the establishment of living wills.
Making more predictable the resolvability of failing banks whatever their size by a common application of the “public interest criteria”Moreover, a common application of the “public interest criteria” by the Single Resolution Board, the EU Commission and the national Resolution Authorities would make more predictable the resolvability of failing banks whatever their size.
Balancing liability and control in the Banking UnionIn terms of control or policy coordination, the SSM and SRM are responsible for bank supervision and resolution, while bank liquidation and government bail outs are still executed by Member States under national law for banks that are not considered of “public interest” by the Single Resolution Board. This can only reinforce the lethal link between the banks and the state and lead to a different treatment among the creditors of the same type in case of liquidation.
In terms of liability, the European level now bears part of the cost of bank failures: in addition to losses imposed on the private sector via bail-in, a Single Resolution Fund (SRF) and its backstop are being established. However, a part of the potential costs still lies with Member States since possible costs in the case of bank liquidation remain addressed entity by entity at the national level. Addressing this striking asymmetry between the supervision and the resolution at the EU level while, on the other hand, the liquidation of failing or likely to fail banks is managed at the national level (entity by entity) is therefore urgently needed.
Aligning the EU crisis management framework and national insolvency lawsGiven the impossibility of harmonising all insolvency laws, it would be as a minimum highly desirable and possible to align the outcomes of insolvency law in the EU to ensure their full consistency with the EU resolution regime.
We should indeed align the EU crisis management framework and national insolvency laws. Currently, a bank that is declared failing or likely to fail under the BRRD and the SRM Regulation does not always meet the conditions that would make it subject to national insolvency proceedings. In fact, under national legislation present and actual illiquidity is usually required if insolvency proceedings are to get under way. But at the European level, not only actual but even likely illiquidity can be grounds for declaring a bank failing or likely to fail.
In addition, the EU crisis management framework should avoid situations whereby creditors of the same type in subsidiaries are treated differently or be seen as discriminated against. Furthermore, it could happen that some medium size banks under the SSM supervision might have in difficulty in raising on acceptable conditions the required level of MRELs. In that case the relevant banks could in principle only be liquidated and the possible ultimate outcome might well be to resort again to the old national bail-out if governments fear a disorderly liquidation.
Completing the Banking UnionFollowing the EU political agreement on the backstop to the Single Resolution Fund, the European Deposit Insurance Scheme (EDIS) remains one of the missing pieces of the Banking Union. All depositors should enjoy the same level of protection in the euro area. In this way, the European Deposit insurance Scheme would underpin stability in the banking sector by providing strong and uniform insurance coverage for all such depositors, independent of their geographical location in the Banking Union.
A possible way forward on EDIS is proposed in the Eurofi paper “The protection of deposits in the EU: Pros and Cons and a possible way forward” (see note in the Regulatory Update). Reaching an agreement on the deposit insurance mechanism would show inter alia that political commitments taken in 2012 have been fulfilled.