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Even post-Popular, EU postcrisis bank resolution rules await first real test

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Even post-Popular, EU postcrisis bank resolution rules await first real test

The EU used new powers to resolve the ailing Spanish bank Banco Popular SA in June 2017, by selling it to larger Spanish lender Banco Santander SA. But in any future case of a larger-scale bank resolution, there will be potential "problems of correlation" between authorities in scores of different jurisdictions, Jens-Hinrich Binder, a professor at Tubingen University, said in an interview.

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"Too-big-to-fail" remains an issue for EU regulators because of a wide divergence in national insolvency laws across member states, strong political interests and unfinished legislation on an EU-level, coupled with the challenges of coordinating with global resolution authorities. The EU's post-crisis resolution framework has proven useful in reducing the risks to the bloc's financial stability, but there are big questions around its ability to successfully deal with a large bank failure.

Conflicting laws and "hugely conflicting" political interests working to protect individual stakeholders will add to the difficulties in planning and executing a large bank resolution, he said.

Since the global financial crisis, EU regulators have been working to break the so-called doom loop between banks and their governments, exacerbated by state bailouts, whereby banks are weakened by their holdings of risky sovereign debt and the banks make government finances more risky.

In the eurozone, the need to prevent future taxpayer-funded bank bailouts became particularly acute, as a doom loop situation in Greece in 2012 and 2013 rocked the country and endangered the whole monetary union.

The European Bank Recovery and Resolution Directive, or BRRD, adopted in May 2014, was the result of the efforts of EU regulators to establish a common approach to failures of banks and investment firms in the bloc and ensure they had enough own funds for a bail-in. A cornerstone of the BRRD, the bail-in consists of writing down or converting into equity part of the bank's own debt to absorb losses.

The Single Resolution Board, or SRB, which was established to enforce the bail-in rules for banks in the eurozone, is expecting approval from the EU authorities for extra funding so it is capable of providing more liquidity for lenders in trouble.

But SRB Chair Elke König said in June that even with an additional backstop, the Single Resolution Fund would "be too small to bridge liquidity needs of a large bank or a series of failing banks." The size of the [Single Resolution Fund], funded by eurozone banks, is currently €25 billion and is expected to grow to €60 billion by 2023, Koenig said in a recent interview with Frankfurter Allgemeine Zeitung.

Uncharted Territory

These factors would come into play if a truly large bank were deemed by authorities to be likely to fail, and it is difficult to say how it might play out, according to Binder.

The resolution framework was tested for the first time in June 2017 when Popular was sold to Spanish peer Santander for a nominal €1 and a large part of its capital and subordinated debt wiped out.

But even though this showed that the decision-making processes work on an EU level work, Popular is in no way comparable in size to the likes of banking behemoths like Deutsche Bank AG, Barclays PLC and HSBC Holdings PLC.

"If the regime worked in that particular case, it does not mean that this proves it would work in cases where much more is at stake, and where the factual circumstances are much more complex," Binder said. Regulators would still be in "completely uncharted territory," he said.

A lack of real-life experience is one of the big challenges in putting the new bank resolution rules into practice, Agustin Carstens, general manager of the Bank for International Settlements, said at a conference in early 2018.

Each case is very different, so adopting a "learning-by-doing" approach does not provide complete solutions for the future, he said.

Furthermore, cross-border cooperation between resolution authorities is complicated by political sensitivities as bank resolution cases tend to quickly become major political events, Carstens said. And in the near term, regulators need to ensure the global requirements for total-loss absorption capacity, or TLAC, are consistently implemented across all geographies and banks hold enough bail-in-able debt.

Unfinished rules

Under the global TLAC requirements, global systemically important banks, or G-SIBs, have to hold 16% of their risk-weighted assets in bail-in-able debt from Jan. 1, 2019, and raise that proportion to 18% of RWAs from Jan. 1, 2022. In the EU, regulators have imposed additional requirements which will apply not just to GSIBs but all banks and complement the TLAC standard.

The rules are designed to make sure banks have enough bail-in-able debt in case they run into trouble, and limit the too-big-to-fail problem.

But the EU legislation related to the minimum requirement for own funds and eligible liabilities, MREL, is yet to be finalized and recent decisions on the issue have been seen as rather beneficial to large banks.

In June, the European Parliament's Committee on Economic and Monetary Affairs voted in favor of a cap on MREL requirements. The decision drew criticism, with committee member Sven Giegold saying "lax requirements ... are a lobbying gift to the major European banks," Bloomberg News reported.

Beyond the EU, Switzerland's top two lenders UBS Group AG and Credit Suisse Group AG were warned June 21 by the country's central bank they are still not fully compliant with resolution rules and that, given their size relative to the country's economy, "too big to fail" is still an issue.