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EU now has tools to resolve failing banks but hopes to never use them: regulator

The European Union has better tools for resolving too-big-to-fail banks now than it had four or five years ago but the hope is they would not need to be tested, Elke König, chair of the Single Resolution Board said Nov. 6.

König told an audience at the 3rd European Central Bank Forum on Banking Supervision she hoped the SRB's resolution planning gives the banks sufficient options early enough so they do not become an SRB client.

The SRB, which is the agency in charge of handling bank failures in the EU, is in the process of finalizing bail-in buffer requirements for lenders under its remit. The so-called minimum requirement for own funds and eligible liabilities, or MREL, is the EU version of the global standard for total loss-absorbing capacity, TLAC.

Glass half full

The EU is at the point where MREL buffers are being built up and in that sense, the glass is at least half full in terms of readiness to resolve big banks, König said.

The most worrying issue when it comes to ensuring large banks are well prepared for a bail-in is the discussions between EU and national authorities at a member state level about the calibration of MREL buffers, according to König. Large groups operating in more than one jurisdiction have to set aside capital for a group-wide bail-in but also must hold MREL buffers at key subsidiaries which will use bail-in measures in a jurisdiction other than the one where the group is headquartered.

"There is ... a system where the sum of the parts should not normally exceed 100% but with a compromise found within the package you might end up with pre-positioning a lot of MREL in subsidiaries and a parent that might not have sufficient firepower to solve a problem that comes up somewhere else," König said.

Trust issues

"We have a home-host issue within the EU and we seem to have less of this for G-SIBs worldwide," König said. "It is a weird situation" where there seems to be more trust between the EU and U.S. authorities than between regulators on an EU and on a national level within the bloc," she added.

The calibration of bail-in buffers on a group and subsidiary level has been flagged as one of the biggest future challenges for bank resolution regulation by global authorities as well. Earlier this year, Mark Branson, chair of the Financial Stability Board's Resolution Steering Group, warned of the existing tensions between home and host supervisors which could lead to destabilization of global banking groups.

In her comments, König also said resolvability is not just about having enough MREL-eligible instruments to bail in a bank in trouble. When it comes to very large banks, the European Bank Recovery and Resolution Directive, BRRD, provides the tools to stabilize the bank, then bail it in, but where the framework is still lacking is in the liquidity provision in the consequent step-by-step restructuring of the institution, König said.

"This needs to be addressed," she said and added having good quality collateral in the bank is essential for receiving liquidity from the ECB in resolution cases.

The SRB will publish an MREL policy paper in the second quarter of 2020, König said. This will provide guidance for the MREL buffer setting for banks in 2020 under the finalized BRRD II and the second Single Resolution Mechanism Regulation, SRMR II.