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EU bank rescue agency mulls bond issues, guarantees to end liquidity dilemma

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EU bank rescue agency mulls bond issues, guarantees to end liquidity dilemma

The EU agency in charge of rescuing failing banks could issue its own bonds or provide guarantees to the ECB to ensure continuing liquidity for a lender placed in resolution.

The Single Resolution Board, or 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. Resolution aims to keep banks functioning even when they are failing by finding a buyer, bailing in shareholders or creditors, transferring assets to an asset management company or to another entity for a limited period of time.

SRB member Dominique Laboureix told a conference in Brussels that the SRB could issue its own bonds, which would act as collateral for a bank should it face liquidity problems post resolution.

However, he said this would not be the SRB's favored option because it would mean that its bonds would be under scrutiny from credit rating agencies. It would prefer to provide guarantees to lenders under the auspices of the ECB.

"Financial stability is a common objective," he said.

SRB Chair Elke König said providing liquidity to troubled banks was a "key gap" in the existing resolution framework.

"If we don’t fix liquidity over the famous resolution weekend then we don’t have a resolution solution then it's national insolvency procedures because we can't do the job," she told reporters following the conference, referring to the fact that most resolutions are supposed to take place over the weekend to avoid disruptions to the banking system.

"There is no point of coming up with a beautiful resolution scheme then saying we need to start again because the bank is illiquid," she said.

Banco Popular

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 were exacerbated by a bank run and an ensuing liquidity crisis. It was acquired in a firesale for €1 by Banco Santander SA, which injected €13 billion into the lender to keep it afloat.

The issue of how to ensure that a lender has sufficient liquidity still needs to be addressed by the SRB, which does not have the funds to cope with a large bank failure, officials said.

"We don't have a sufficient amount in our single resolution fund to give this level of confidence to investors, depositors and others that we will be able to face the liquidity needs of a bank in resolution," Laboureix told the conference.

By 2024, the fund plans to accumulate €60 billion from bank contributions and hopes to finalize an agreement with the European Stability Mechanism, designed to help member states in financial difficulties, for an additional €60 billion by year end.

However, observers said that central bank help would probably be needed to inject liquidity in the case of a very large bank failure and there needed to be more clarity over the role of central banks in the resolution framework.

"These mechanisms are quite small compared to the liquidity needs of very large banks and there we need central bank money," said Guntram Wolff, director of the Bruegel, a Brussels-based think tank.

"How to deal with the central bank and the risks of the central bank money is quite unclear," he said.

Insolvency

With regards to liquidity and resolution planning, the SRB is planning to publish a consultation paper at the end of the month, setting out what the SRB expects the bank to have in place in terms of liquidity and funding in the event of a resolution. Banks will have six weeks to give their opinion on the document.

König said the SRB would also work with the incoming European Commission on harmonizing insolvency laws within the eurozone to put the European banking sector on a level playing field if a bank is not resolved, but put into liquidation.

There needs to be one administrative system, such as the Federal Deposit Insurance Corp. in the U.S., which deals with the liquidation of small and medium-sized banks, König said. At the moment, there are 19 different national insolvency regimes, she said.

"You need to be sure that if you say the bank is failing or likely to fail, not for resolution, that you have an automatism that gets it into an insolvency framework and not you end with something that takes weeks, months to be sure that insolvency is really happening," she told reporters.