Many retail banks struggle to comply with the existing EU resolution framework due to their funding model and difficulty to tap capital markets. According to the author, efforts to improve their resolvability could ultimately threaten their viability. In order to improve the resolvability of retail banks, regulators need to enhance resolution transfer strategies which would ultimately reduce MREL requirements. Credible transfer strategies though require credible financing arrangements when a buyer is not readily available. The paper outlines possible provisions to credibly supplement bail-in for retail banks.
FSC Research Workshop 2019
29 October 2019
Policy paper contribution
The paper has first been published as EBI working paper series 2019 no. 51
Source: Financial Risk and Stability Network
Ioannis G. Asimakopoulos, Doctoral Researcher, University of Luxembourg
The policy paper has been prepared as an accompanying contribution to the Financial Stability Conference 2019 in Berlin and presented at the FSC Research Workshop the following day. Researchers from various institutions were invited to draft policy papers on aspects of the conference topics and financial stability issues to be presented and discussed at the workshop.
The EU bank resolution framework relies heavily on banks’ internal capacity for loss-absorption and recapitalization through the issuance of bail-inable financial instruments (MREL). Meanwhile, the existing collective funding arrangements (resolution and deposit insurance funds) seem inadequate to support other alternatives, such as resolution transfer strategies or administrative liquidation. Based on resolution experience and evidence thus far, such regulatory architecture cannot work effectively on all EU banks regardless of size and business model. Many retail banks – both significant and less significant with deposits higher than 40% of their total liabilities and own funds (TLOF) – struggle to comply with the existing framework due to their funding model and difficulty to tap capital markets. Ultimately, efforts to improve their resolvability could threaten their viability. In order to improve the resolvability of retail banks, regulators need to enhance resolution transfer strategies which would ultimately reduce MREL requirements. Credible transfer strategies though require credible financing arrangements when a buyer is not readily available.
Therefore, resolution funds would need to be able to contribute more than the current five per cent TLOF in order to credibly supplement bail-in. Otherwise, regulators should incentivize banks to establish voluntary collective industry funds – similar or identical to institutional protection schemes, which would finance transfer-based resolution strategies integrated in the resolution plans. Participation to such voluntary funds would occur in exchange for lower MREL requirements. The use of transfer strategies in conjunction with the establishment of voluntary industry funds would significantly reduce MREL requirements for retail banks.
Feedback and comments are welcomed