strengthens the choice of the best resolution strategy in order to
protect the European taxpayer and promote financial stability in the EU.
Laviola, Board Member and Director of Resolution Strategy and Policy
Coordination at the SRB, explains the new approach in his blog. The addendum to the public interest assessment can be found here.
The public interest assessment is a key
safeguard in bank resolution, to protect taxpayers and financial
stability. When faced with a failing bank, the SRB considers whether
resolution best serves the public interest or whether the bank can go
into normal insolvency proceedings. To do this, we assess a number of elements, including the need to protect depositors, safeguard financial stability and minimise the use of public funds.
assessment is carried out each year as part of resolution planning for
each bank in our remit. However, it is updated when a bank is failing or
likely to fail, because the prevailing economic circumstances can
trigger a different outcome. The results can change through good and bad
times, and this is certainly even more relevant now, as we prepare for
the post-pandemic impact on some sectors of the economy and banks,
particularly with the progressive unwinding of government supports to
businesses and the likely rise of non-performing loans.
has improved its approach to conducting the public interest assessment.
We will continue to perform it as part of the resolution-planning based
on normal market conditions, but will add an element based on potential
system-wide stress, where an adverse scenario affects the banking
To allow for a transparent and consistent assessment, the
SRB will base the scenario on the EU-wide stress test performed by the
relevant authorities. The estimated impact on banks’ capital reflects
the effects of an underlying extreme, but plausible, macroeconomic
deterioration affecting all banks simultaneously. After having weakened
the rest of the banking system with a depletion of CET1 in line with the
outcome of the stress test, the public interest assessment looks at the
direct and indirect contagion effects caused by the failing bank.
are implementing this addition to the public interest approach in the
2021 resolution planning cycle. The main features are set out in an addendum to the public interest assessment paper
published in 2019. As stated in our approach to the public interest
assessment, if there is a doubt between liquidation and resolution, we
would prepare for a resolution scenario.
Moving forward, the SRB
is also considering whether we need to further enhance the public
interest assessment framework. Along with technical enhancements on the
financial stability objective, we are working on the improvement of the
fulfilment of the objective concerning the protection of covered
deposits and on the scope of critical functions.
In the first
area, the analysis looks at whether the pay-outs of deposits by a
deposit guarantee scheme could be a potential source of financial
instability in a liquidation case. In the second area, the issue is
whether a function is deemed critical only when its interruption has an
impact on the economy of an entire Member State (or at EU level) or also
at a more local/regional level. The analysis focuses on the definition
of the geographical dimension to be taken as reference in the event that
a function were to be abruptly interrupted, as well as the availability
of the required information at that level to measure the disruption.
public interest assessment is at the centre of the resolution
framework. The consideration of system-wide events enhances our crisis
readiness and will be beneficial when it comes to making resolution
decisions, however the final assessment on the best resolution strategy
will have to be performed at the point of failure.