"Achievements and challenges following a decade of European resolution "
Ten years have passed since the implementation of a supervisory system for banks in Europe to help them absorb losses in the event of a crisis so that the state doesn't have to bail them out. Needless to say, much progress has been made in this last decade: banks have become significantly more resilient, are compliant with MREL requirements, and have designed and tested recovery and resolution plans. Moreover, Europe has gained some experience in actually implementing the resolution framework following the failures of Banco Popular and Sberbank.
This year marks the tenth anniversary of the creation of the Single Resolution Board (SRB) which, together with the national resolution authorities, makes up the Single Resolution Mechanism (SRM), the second of the three pillars underpinning the wider banking union (the first being the single supervisory mechanism, and the third—and still pending—an EU-wide common deposit guarantee scheme). The SRB is vested with centralized resolution powers within the banking union and is tasked with the effective and consistent functioning of this mechanism. It works closely and proactively with national resolution authorities in addressing the need for crisis readiness and resolution planning and in improving the resolvability of large and small European banks.
The SRB is vested with centralized resolution powers within the banking union and is tasked with the effective and consistent functioning of this mechanism
The creation of this institutional framework, together with a robust regulatory package consisting of the Bank Recovery and Resolution Directive (BRRD I and BRRD II) and the SRM Regulation, has led to an overhaul of the regulatory framework for managing banking crises over the last decade. This framework was set up to ensure that institutions have measures in place to help them recover from financial difficulties, and that they can continue to perform their main critical functions if they ultimately become (or have a high probability of becoming) non-viable. The overriding objective is to preserve financial stability and minimize the costs borne by taxpayers should any financial institution become non-viable. With ten years having passed since the inception of the SRM, now is a good time to look back on its achievements and, more importantly, to see what has yet to be achieved and the strategy to be followed in terms of resolution.
A further reform of the crisis management and deposit insurance framework for banks, known as CMDI, is currently on the drawing board. This review process would include a comprehensive set of measures largely aimed at improving the resolution process for small and medium-sized banks. This is because on several occasions, crises at such banks have been resolved through the use of national insolvency procedures, rather than the European resolution framework. Notably, this reform is a further step towards the completion of the banking union, as agreed by the Eurogroup in June 2022. Yet the negotiations are proving difficult in the European corridors of power, with conflicting positions and fierce opposition from several member states.
A further reform of the crisis management and deposit insurance framework for banks, known as CMDI
Aside from the creation of a common deposit insurance scheme, there are several other unresolved issues that need to be considered. First of all, a single, harmonized insolvency regime for EU banks is needed to make national liquidations quick, efficient and comparable across Member States. This proposal would mirror what various international organizations (IMF and BIS) and European authorities are calling for. Second, there is a need for resolution processes to include a liquidity mechanism featuring a credible and robust public backstop; one able to inject sufficient liquidity into the banking system to be able to cope with a crisis event at a global systemic institution, or at several medium-sized banks at the same time. We need look no further than last year’s financial turmoil, which taught us that a small institution can also create ripples or even waves in the wider banking system.
For these reasons, there is no room for complacency, despite what we have achieved. The SRB has presented a new strategic vision for 2028, marking a shift in its priorities to focus more on issues related to the operationalization of resolution processes. This new strategy is a clear change of direction for the SRB, and follows a joint reflection process alongside national resolution authorities and other agents concerned. It marks the dawn of a new phase of work in which the SRB and national resolution authorities will move on from an initial phase that focused more on the key elements of resolution planning and readiness, to one that will focus more heavily on operationalization, exercises and crisis readiness. The aim is to have resolution plans and strategies ready to be deployed within a short time frame, thus allowing for even greater readiness and heightened resilience to crises in Europe.