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EU agency outlines liquidity expectations for banks in the event of failure

European banks need to address their liquidity needs in the event of failure and ensure they have the right tools in place to cope with outflows of cash, the EU agency in charge of rescuing failing banks said Oct. 23.

In a consultation paper setting out its expectations for European banks, the Single Resolution Board said it wants banks to demonstrate that they can transform assets into cash in a slow-developing or sudden crisis, or in a solvency or pure liquidity crisis. Banks will be expected to demonstrate to the SRB the cash flows they would have from their assets, liabilities and off-balance sheet items.

Lenders will need to address issues such as legal or regulatory obstacles to transfers of liquidity, payment, clearing and settlement obligations. They should show how they would mobilize collateral and how they would deal with any shortfalls.

Lenders have until Dec. 4 to respond to the consultation paper.

Gaps in current framework

The SRB was created in the aftermath of the financial crisis to deal with banks in difficulty, and is seeking to improve existing frameworks for resolving banks. Its chair, Elke König, has said liquidity is a "key gap" under current guidelines because a resolved bank might find itself illiquid and unable to cope after resolution. Resolution aims to keep banks functioning even when they are failing by either finding a buyer, bailing in shareholders or creditors, transferring assets to an asset management company or to another entity for a limited period.

The SRB resolved ailing Spanish bank Banco Popular Español SA in June 2017 after the ECB said it was failing or likely to fail. Popular's difficulties had been exacerbated by a bank run and an ensuing liquidity crisis. It was acquired for a token €1 by Banco Santander SA, which immediately injected €13 billion into the lender to keep it afloat.

Expectations for MREL and IT

Under post-crisis rules, European banks are now subject to new rules, which require them to hold enough debt to absorb losses if they run into trouble, known as the minimum requirement for own funds and eligible liabilities, or MREL.

The SRB is also asking banks to ensure they meet "at all times" their individual MREL requirements and to provide the information needed to assess a bank's MREL on an individual basis.

It also expects lenders to ensure that their technology systems will be kept fully functioning during a resolution, with databases including relevant information in place to ensure the bank can keep operating.

Banks will also have to provide the SRB with a progress report signed off by management at least twice a year, detailing its updated resolution plans. If the report does not meet the SRB's criteria, then it can request further information.

Although the expectations are general in nature, they will be tailored to each bank, and the SRB may request additional information or requirements of each lender.