SRB's Laboureix: The challenges of the European supervisory and resolution framework

17 May 2023

...The CMDI review will modify the EU framework, not only the Banking Union one. These are imperfect, but good proposals. If adopted, they will enable EU authorities to manage bank crises in a more efficient and harmonised way...

...However, despite successes to date, there is still more to do – we must remain on our guard. That brings me to my second area of focus this afternoon.

[2. Challenges for resolution and a word on CMDI]

So what is needed in order to improve the European resolution framework that covers the twenty seven EU countries? What is missing to really make that framework work better?

Let me start firstly by eliminating two elements. I think we do not need to introduce a system for full coverage of deposits nor do we need a systemic risk exception. These are big topics of conversation over the Atlantic, but I am confident that we have the right balance on depositor protection, combined with all the other factors, to maintain stability.

In addition, the third thing we do not need, is any further calls for clarification of the stacking order in terms of what is bail-in-able. The stacking order is very clear as it is today in the EU, as recalled by our common press release issued by the SRB together with the ECB and the EBA, just after the Credit Suisse collapse. And we need to keep the AT1 instruments in this stacking order, as they provide for a useful funding for banks.

Instead of spending too much time on these, let’s look at the other important things that are actually required for the resolution framework to function better.

One of the things that will help our banking resolution in Europe is the European Commission’s Crisis Management and Deposit Insurance review.

1. The CMDI review will modify the EU framework, not only the Banking Union one. These are imperfect, but good proposals. If adopted, they will enable EU authorities to manage bank crises in a more efficient and harmonised way.

If we are to broaden the application of resolution, sufficient access to funding is needed. Deposit Guarantee Schemes could play a key role here, and for the Banking Union, and it could ease the access to the Single Resolution Fund.  One thing I am sure of: the enlargement of the scope of resolution cannot happen without its funding.

1. Liquidity in resolution is the elephant in the room. Nothing new, but still an unsolved issue. Recent events in the US and Switzerland have shown that liquidity crises can happen fast – and be driven by social media and digital banking. The resolution framework provides the powers and tools to restore the solvability of failing institutions. However, it is not enough to successfully handle a resolution action. Even if a bank is well recapitalised after the resolution weekend, it will probably suffer liquidity stress for a number of reasons. The first is that of liquidity outflows: depositors may withdraw their money and creditors terminate their operations with the bank.  The second is difficulties in accessing market funding - private counterparties will likely be reluctant to deal with the bank in the immediate aftermath of a resolution, at least on an unsecured basis.

Secured funding, either with private counterparties, or more likely with central banks, will play a key role for funding in resolution, but enough collateral in both quality and quantity is not necessarily available in all cases.

If we do not have enough liquidity to handle a resolution, then we remove the option of resolution as a tool to preserve financial stability in the European Union.

The current framework is designed for crisis coming from credit risk, not for a crisis resulting from these new sources of risk, and even more, the framework is already not easy to implement for sanctions, anti-money laundering or even a bank run driven by social media.

And, as I said, the EU and Banking Union’s framework does not entirely tackle liquidity in resolution. We must be careful to be ready to fight the next war in financial stability....

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