## cr18232 ## Source details **Canonical URL:** [cr18232](https://www.imf.org/-/media/files/publications/cr/2018/cr18232.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18232.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18232.pdf.json) --- ### Executive summary and overarching priorities - Strengthened frameworks: Adoption of the BRRD and SRMR, establishment of the SSM and SRM. - Remaining priorities to complete and unify the regime: - Establish a backstop for the Single Resolution Fund (SRF). - Establish a European deposit insurance scheme (EDIS). - Align conditions and triggers across resolution, state aid, and liquidation regimes; strengthen liquidity support before and during resolution; “pre-schedule” resolution actions to improve preparedness and predictability. - Supervisory and resolution coverage (as of January 2018): - ECB directly supervised 118 SIs. - SRB responsible for 13 cross-border LSIs. - Approximately 3,100 LSIs in total in the euro area. ### Roles of key institutions - ECB (with NCAs): recovery planning and early intervention for SIs; Crisis Management Division supports supervisors and liaises with SRB. - SRB (with NRAs): resolution planning and resolution actions; some resolution actions subject to endorsement/non-objection by the Commission and, in some cases, the Council. - European Commission: ensures government financial support complies with state aid regime (loss sharing, restructuring, monitoring). - SRF: newly established fund to provide resolution financing once operational arrangements are in place. - ESM: available for direct and indirect bank recapitalizations (including a direct recapitalization instrument up to a maximum of €60 billion with specific conditions). ### Lessons from recent intervention cases (Italy, Spain, Latvia) - Mixed application of new regime: one SI resolved under BRRD/SRMR (Banco Popular Español), others handled outside the SRM (MPS precautionary recapitalization; Venetian banks liquidated under Italian insolvency law; ABLV voluntary liquidation). - Case-specific facts (preserved figures and dates): - MPS: one of Italy’s five largest banks, total assets of more than €153 billion; €26 billion bad loan portfolio (value end of 2016); Commission approved precautionary recapitalization on July 4, 2017, of up to €5.4 billion after an €8.8 billion capital shortfall identified on December 23, 2016. - Venetian banks: assets of €28 billion and almost €35 billion; Italian government provided €10 billion liquidity support in January and April 2017; Italian authorities notified intent to grant up to €16.8 billion in liquidation support. - BPE: assets of almost €150 billion; declared FOLF on June 6, 2017; resolution on June 7, 2017—share capital and additional Tier 1 written down to zero; Banco Popular transferred to Santander for €1. - ABLV: ECB instructed creditor moratorium on February 19, 2018; ECB determined FOLF on February 23, 2018; voluntary liquidation approved on June 12, 2018. - Lessons identified: - Misalignment between solvency tests (ECB precautionary recapitalization vs. BRRD/SRMR FOLF); public interest and financial stability assessments not harmonized. - Insolvency regimes heterogeneous; SRM lacks an administrative liquidation tool. - Liquidity support and timely information on collateral and ELA availability were inadequate in some cases. - Litigation risk is high given multiple authorities and decentralized implementation. ### Major transitional and structural challenges - Early intervention and advance resolution preparation need strengthening: early intervention regime, financing and liquidity support (SRF, Eurosystem, others), resolvability impediments, availability of bail-in-able liabilities and loss-absorbing capacity, coordination of FOLF determination and the “resolution weekend,” cross-border cooperation. - Decision-making and independence: - Some SRB decisions remain subject to Commission/Council endorsement/non-objection, which can diminish SRB independence and delay time-sensitive decisions. - Consider designating the SRB an independent EU institution and granting SRB rule-making power to address system-wide resolvability impediments. - Need for unified liquidation regime and state aid alignment: - Diverging national insolvency regimes and less stringent state aid outcomes than SRM create inconsistent creditor outcomes and incentives to resort to national insolvency regimes. - Recommendation to align state aid burden sharing in liquidation with BRRD/SRMR, subject to a financial stability exemption. - Introduce an administrative bank liquidation tool in the SRMR for all banks within SRB remit and banks that are systemic at failure. ### Financial stability exemption and system-wide crisis framework - Proposal: a financial stability exemption usable only in euro area-wide or country-wide crises and subject to strict conditions and governance: - Allow departure from (i) the 8 percent bail-in requirement for accessing the SRF and national public funds; and (ii) the 5 percent cap on SRF funding. - Even with waiver, shareholders and subordinated debtholders should still absorb losses as a minimum. - Recommendation: adopt a system-wide crisis preparedness and management framework to coordinate responses among the ESAs, ESRB, ECB, SRB, Commission, SRF and ESM. ### Deposit insurance (EDIS): rationale, design, and recommendations - Rationale: common DIS increases resilience, spreads risk, and may be fiscally neutral over time by pooling across a larger pool of institutions. - Commission’s staged EDIS design (preserved structure and figures): - Re-insurance stage: up to 20 percent of liquidity shortfall and excess losses of a national DIS may be covered by EDIS (Commission’s 2015 proposal). - Co-insurance stage: threshold increases to up to 80 percent (staggered). - Full insurance stage: targeted by 2024. - Funding target: 0.8 percent of covered deposits built up over time by national DISs channeling contributions to the DIF in EDIS. - Example phased availability: in 2019, 30 percent of relevant liquidity shortfall available, increasing to 90 percent by 2021 (Commission considerations for temporary liquidity re-insurance). - Concerns and design issues: - Legacy issues: high NPLs and holdings of sovereign debt. - Moral hazard and absence of a backstop. - Pro-rata approach on simultaneous pay-outs could be problematic while national DISs remain fully liable for depositor payouts. - Policy recommendation: Authorities encouraged to agree on EDIS with an appropriate backstop to enable risk pooling and address host authorities’ concerns about group subsidiaries. ### Financing resolution: SRF build-up, constraints, and backstop options - SRF status and targets: - SRF collected about €17 billion to date. - By end-2023, SRF should stand at one percent of covered deposits in the banking union (approximately €55 billion), at which point it will stop growing unless clarified otherwise. - SRF comprises national compartments increasingly mutualized—now over 60 percent mutualized. End-2023 national compartments will be fully mutualized and cease to exist. - Operational constraints and rules (exact conditions preserved): - SRF use decided by SRB, subject to Commission and Council approval and certain constraints. - SRF can only be used in combination with other resolution tools. - SRF capital support conditional upon bail-in of at least 8 percent of total liabilities (including own funds). - SRF capital support limited to the lesser of 5 percent of the bank’s total liabilities (including own funds), or the available SRF funds plus any amount that could be raised through ex post contributions in three years. - The 8 percent and 5 percent restrictions do not apply to liquidity support from the SRF. - Transitional bridge funding: - In February 2017, SRB concluded loan facility agreements with all 19 banking union member states for transitional credit lines up to the estimated target level of €55 billion; funding repaid within two years by industry contributions in the country where the resolution took place. - Backstop considerations: - ESM features: lending cap of €500 billion; paid-in shares of €80 billion; €620 billion of callable shares. - ESM direct recapitalization instrument adopted in December 2014 up to a maximum of €60 billion; has never been used and is subject to strict conditions (including the 8 percent bail-in and SRF 5 percent disbursement). - Policy options: designate a backstop for the SRF (such as the ESM); consider folding the ESM direct recapitalization tool into the SRF backstop or merging the two funds; clarify eligibility and operational arrangements for ESM recapitalization tools if used as SRF backstop. ### MREL build-up, shortfalls, and investor protections - SRB MREL policy and timelines: - SRB published MREL policy statement in late 2017; starting March 2018 SRB will set binding parent-level external MREL targets; next resolution planning cycle through 2019 will set binding internal MREL targets (subject to transitional periods). - SRB compliance expectations: - about half of banks will immediately meet MREL requirements; - a quarter will have one to two years to meet requirements; - remaining banks would have up to four years. - Shortfall estimates (exact figures preserved): - SRB estimate (based on end-2016 data): aggregate €117 billion MREL shortfall. - EBA estimates: shortfall between €130–285 billion, depending on final MREL eligibility criteria. - Recommendations: - Expedite internal and external MREL build-up, prioritizing large banks. - Ensure adequate internal MREL to support group resolution strategies and recapitalization of material entities. - Restrict MREL cross-holdings among banks. - Ensure strong investor protection for retail purchasers of MREL (rigorous disclosure, minimum lot sizes). ### Harmonization of creditor hierarchy, depositor preference, and exclusions from bail-in - Legislative changes and status: - BRRD amendments adopted late 2017 partially harmonize hierarchy of creditor claims; by end-2018 member states required to create new “non-preferred” senior debt class. - Conditions for “non-preferred” senior debt instruments preserved as stated (maturity at least one year; no embedded derivatives; contractual documentation refers to lower ranking). - National examples preserved (Germany, Slovenia, France, Spain, Belgium, Italy) illustrating divergent approaches. - Remaining issues and recommendations: - Partial harmonization will not eliminate national divergences in creditor hierarchies. - Need better alignment on list of exclusions from bail-in, treatment of deposits pursuant to Article 108 BRRD, and national insolvency regimes to mitigate NCWO litigation risks. - Explore general depositor preference (tiered approach) to facilitate bail-in of non-deposit creditors. - Address national exclusions from bail-in (e.g., liabilities to charities) that may impede bail-in feasibility. ### Structures for resolution decision‑making, independence, and litigation risk - Independence and decision-making: - KAs prescribe operational independence for resolution authorities, but SRB decisions (e.g., adoption of resolution schemes) still subject to Commission/Council endorsement/non-objection, potentially diminishing SRB independence and delaying decisions. - Recommendation: explore options to enhance SRB authority, grant SRB rule-making authority, and designate SRB as an independent treaty institution. - Expected effects of designation: SRB could finalize binding resolution schemes, limit NRA implementation variance, improve SRF credit rating prospects, and have tailored staff selection/compensation. - Litigation exposure: - BPE case prompted multiple actions: two cases against ECB, around one hundred legal actions against SRB (about one-third also against Commission), approximately 250 cases in national courts against Spanish authorities. - Recommendation: publish more detailed information in accessible formats to reduce information-related litigation; consolidate resolution authority to reduce multijurisdictional litigation avenues. ### Operational readiness, SRB staffing, and coordination with the ECB and NRAs - SRB operational development and staffing (preserved figures from Table 2 and text): - SRB established August 2014; operational January 1, 2015; fully assumed mandate January 1, 2016. - SRB responsible for 131 banks (118 SIs supervised by ECB, including seven G-SIBs; 13 cross-border LSIs) and responsibilities for about 3,100 LSIs (solo basis). - SRB staff figures: - SRB FTE staff end-2016: 164 - SRB FTE staff end-2017: 255 - SRB budgeted 2018: 350 - SRB budgeted 2019: 400 /5 - SRB envisaged 2020: 410 /5 - SRB SNEs: 12 (end-2016); 15 (end-2017); 25 (2018); 25 (Budgeted 2019); 26 (Envisaged 2020) - Total NRAs: 332 /3 (end-2016); 374 /4 (end-2017); 405 (2018); 414 (Budgeted 2019); 422 (Envisaged 2020) - Total SRM: 508 (end-2016); 644 (end-2017); 780 (2018); 838 (Budgeted 2019); 858 (Envisaged 2020) - Of which, SRB resolution planning: 156 (end-2016); 185 (end-2017); 195 (2018); 202 (2019); 208 (2020) - Note markers preserved: /1 Seconded National Experts; /2 numbers for 2018–2020 are estimated for some NRAs; /3 November 2016; /4 Budgeted; /5 subject to Plenary approval. - Observation: SRB grew from 101 staff at end-2015 to 255 staff at end-2017; plans to grow to 410 staff by 2020. - Operational readiness and manuals: - SRB Resolution Manual follows FSB and EBA guidance; being updated to be more operational and should be expedited, tested, and complemented by ECB guidance. - Emphasize bridge bank tool feasibility—advance preparation for governance, financial structures, and national procedures. - Coordination and MOUs: - ECB–SRB MOU (December 2015) and revised MOU to improve crisis information exchange. - Recommendation: SRB permanent observer status on ECB Supervisory Board; make ECB and SRB voting members of EBA Board of Supervisors and EBA Resolution Committee; conclude SRB MOUs with the Commission and all non-banking union NRAs; formalize EBA role in DIS oversight. - Staffing surge capacity and legal services: - Ensure SRB and ECB Crisis Management Division staffing is commensurate with mandates; plan for surge staffing and increased legal capacity given expected litigation. ### SRB resolution planning approach, resolvability impediments, and LSI oversight - SRB planning approach and phases: - Five-phase modular approach used through end-2017; matrix approach adopted end-2017; 2018 cycle split into January and September batches; aim that by 2020 all banks will have complete resolution plans. - Resolvability impediments: - SRB should identify and mitigate impediments (management information systems, access to FMIs, legal structure, service agreements). - Article 17 BRRD procedures on substantive impediments may suspend planning for a significant period; recommended amendment to allow decisive mitigation while continuing planning. - LSI oversight workload: - SRB reviewed 522 LSI draft resolution measures in 2017; expects to process approximately 800 draft resolution measures for LSIs in 2018. ### Deposit insurance systems (DISs): status, constraints, and use in resolution - DGSD enhancements and timelines: - Coverage up to €100,000 per depositor per bank. - Seven-working-day payout effective January 1, 2024 (reduced from 20 working days in three phases). - Risk-based premiums to reach 0.8 percent of covered deposits by July 3, 2024 (estimated at €45 billion for the banking union). - Fragmentation and discretion: - DGSD contains over a dozen provisions for national discretion (Annex II); only a little over one-third of member states made use of transfer-of-covered-deposits option. - Voluntary lending arrangements among DISs limited; few backup credit lines with national governments operationalized. - Use of DIS funds in resolution: - SRB lacks liquidation authority and does not consider DIS funding in resolution because it lacks legal authority to access DISs. - SRB interprets Article 109 BRRD strictly, preventing DISs from providing upfront support in resolution beyond estimated net liquidation cost. - Recommendation: change interpretation to allow DISs to disburse funds upfront in resolution if estimated cost net of recoveries would be no higher than net liquidation cost—allow a gross contribution from the DIS up to the value of covered deposits. - Funding adequacy: - EBA analysis: while 32 out of 43 DISs in the EU increased funds in 2017, only 17 DISs reached the target level of 0.8 percent of covered deposits. - Recommendation: operationalize backup credit lines and set a backstop for EDIS (possibly by the ESM). ### Key recommendations (selected, preserved timing and priority labels where provided) - Expedite BRRD conformity and implementation assessments; map transposition and pertinent legislation. (EC; SRB; ¶8–9) — Timing: ST; Priority: M - Establish EDIS, with a backstop arrangement. (EU ***; ¶13–15, ¶76) — Timing: ST; Priority: H - Adopt policies, methodologies, and operational arrangements for SRF financing in resolution. (SRB, EC; ¶21) — Timing: ST; Priority: H - Clarify that the SRF’s target level is at least 1 percent of covered deposits also after 2023. (EC; ¶21) — Timing: MT; Priority: M - Designate a backstop for the SRF (such as the ESM) supported by effective operational arrangements. (EC, SRF, ESM; ¶22) — Timing: ST; Priority: H - Fold the ESM direct recapitalization tool into its SRF backstop, possibly merging the ESM backstop and the SRF. (EU; ¶22) — Timing: ST; Priority: M - Grant the SRB directly applicable resolution powers and the power to supersede relevant national legislation. (EC; ¶24) — Timing: MT; Priority: M - Strengthen and harmonize solvency, financial stability, and public interest assessments across regimes. (EU, ECB, SRB; ¶25) — Timing: ST; Priority: H - Subject to a financial stability exemption, align state aid burden sharing requirements in liquidation with the BRRD/SRMR. (EC; ¶26) — Timing: ST; Priority: H - Introduce a flexible administrative liquidation tool in the SRMR. (EU; ¶28) — Timing: ST; Priority: H - Ensure adequate internal MREL and accelerate MREL build-up, prioritizing large banks. (SRB; ¶29, ¶31) — Timing: I; Priority: H - Ensure strong investor protection for retail purchasers of MREL; restrict MREL cross-holdings among banks. (SRB, ESMA; ¶31) — Timing: ST; Priority: H - Designate the SRB as an independent treaty institution. (EU; ¶34–35) — Timing: MT; Priority: H - Introduce a financial stability exemption from (i) the 8 percent mandatory bail-in for accessing the SRF and public funds, (ii) the 5 percent cap on SRF funding, and (iii) proposed stricter state aid burden-sharing rules. (EU; ¶37, 39) — Timing: ST; Priority: H - Adopt a system-wide crisis preparedness and management framework. (SRB, EC, ECB; ¶41) — Timing: ST; Priority: H - Ensure staffing of the SRM and the ECB’s Crisis Management Division is commensurate with mandates. (SRB, ECB; ¶47) — Timing: C; Priority: M - Finish revising the SRB resolution manual; test the manual; adopt complementary ECB guidance—prioritize the bridge bank tool. (SRB, EBA, ECB; ¶49–51) — Timing: I; Priority: M - Operationalize lending facilities between DISs in all EA countries; formalize EBA role in DIS oversight and coordination. (EC, EBA, national authorities; ¶72–73) — Timing: I–MT; Priority: M - Ensure effective DIS financing of deposit transfers in both resolution and liquidation. (EU, national authorities; ¶74–75) — Timing: ST; Priority: H *Source: cr18232 (EXECUTIVE SUMMARY, sections and boxes extracted).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Overview - The euro area (EA) bank resolution and crisis management arrangements have been strengthened through the adoption of the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR), and the establishment of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). - Remaining priorities to complete and unify the regime include establishing (i) a backstop for the Single Resolution Fund (SRF), and (ii) a European deposit insurance scheme (EDIS), alongside other measures that align with recommendations in this report. - As of January 2018, the ECB directly supervised 118 SIs. The SRB is responsible for 13 cross-border LSIs and the EA has approximately 3,100 LSIs in total. ### Roles of Key Institutions - ECB (supervisory capacity, assisted by NCAs): responsible for recovery planning and early intervention measures against problem significant institutions (SIs). - SRB (with NRAs): responsible for resolution planning and taking resolution actions against failing banks within its remit; some actions (e.g., adoption of resolution schemes) are subject to endorsement/non-objection by the Commission and, in some cases, the Council. - European Commission (Commission): ensures government financial support to problem banks complies with the state aid regime, including loss sharing by private creditors, restructuring requirements, and post-restructuring monitoring. - SRF: newly established fund that may provide resolution financing. - ESM: available for bank recapitalizations. ### Lessons from Recent Cases - Interventions in SIs under the new regime show mixed application: one case was resolved under BRRD/SRMR, other cases were handled outside the resolution regime. - These cases and prior experience indicate needs to: - Align conditions and triggers across resolution, state aid, and liquidation regimes. - Strengthen liquidity support before and during resolution. - "Pre-schedule" resolution actions to improve preparedness and predictability. ### Major Transitional and Structural Challenges - Early intervention and advance resolution preparation need strengthening: areas include early intervention regime, financing and liquidity support (SRF, Eurosystem, others), resolvability impediments, availability of bail-in-able liabilities and loss-absorbing capacity, coordination of FOLF (failing-or-likely-to-fail) determination and the “resolution weekend,” and cross-border cooperation. - Resolution decision-making procedures should be streamlined; SRB independence and powers should be buttressed. Consideration: designating the SRB an independent EU institution to scale back Commission or Council involvement, facilitate higher credit rating for the SRF, and grant rule-making power to address system-wide resolvability impediments. - Completing the banking union requires a more unified, transparent, and predictable resolution regime: - Diverging national insolvency regimes and less stringent state aid outcomes than SRM create inconsistent creditor outcomes and incentives to resort to national insolvency regimes. - Aligning state aid burden sharing in liquidation with BRRD/SRMR would reduce incentives to "escape" SRM, subject to alternatives for flexibility. - Include an administrative bank liquidation tool in the SRMR for all banks within SRB remit and for banks that are systemic at failure. - A financial stability exemption is essential—usable only in euro area-wide or country-wide crisis and subject to strict conditions and governance—to allow departure from (i) the 8 percent bail-in requirement for accessing the SRF and national public funds, and (ii) other limitations (e.g., the 5 percent cap on SRF funding). Even with such a waiver, shareholders and subordinated debtholders should still absorb losses as a minimum. - A system-wide crisis management framework should be considered to bring together pertinent agencies for feasible, coordinated responses. - The banking union needs a common deposit insurance system and an SRF backstop: - A well-designed, adequately funded deposit insurance system would boost retail depositor confidence and address host countries’ risk-sharing concerns. - SRF funds will be limited even in steady state after 2023; a credible backstop (e.g., ESM) would reassure markets. - Consider paring back state aid oversight for resolution decisions where competition effects are unlikely—e.g., presuming SRB resolution decisions meet state aid rules or granting presumption of compliance for DIS-funded deposit and asset transfers executed on a least-cost basis. ### Key Recommendations (summary from Table 1) - Expedite BRRD conformity and implementation assessments, and map transposition and pertinent other legislation. (EC; SRB; ¶8–9) — Timing: ST; Priority: M - Establish EDIS, with a backstop arrangement. (EU ***; ¶13–15, ¶76) — Timing: ST; Priority: H - Adopt policies, methodologies, and operational arrangements for SRF financing in resolution. (SRB, EC; ¶21) — Timing: ST; Priority: H - Clarify that the SRF’s target level is at least 1 percent of covered deposits also after 2023. (EC; ¶21) — Timing: MT; Priority: M - Designate a backstop for the SRF (such as the ESM) supported by effective operational arrangements. (EC, SRF, ESM; ¶22) — Timing: ST; Priority: H - Fold the ESM direct recapitalization tool into its SRF backstop, possibly merging the ESM backstop and the SRF. (EU; ¶22) — Timing: ST; Priority: M - Clarify eligibility criteria and operational arrangements for using the ESM recapitalization tools. (SRF, EC, ESM, SRB; ¶22) — Timing: ST; Priority: M - Grant the SRB directly applicable resolution powers and the power to supersede relevant national legislation. (EC; ¶24) — Timing: MT; Priority: M - Strengthen and harmonize solvency, financial stability, and public interest assessments across regimes (resolution, liquidity assistance, precautionary recapitalization, ESM, etc.). (EU, ECB, SRB; ¶25) — Timing: ST; Priority: H - Subject to a financial stability exemption, align the state aid burden sharing requirements in liquidation with the BRRD/SRMR. (EC; ¶26) — Timing: ST; Priority: H - Pare back state aid oversight of SRB resolution decisions and the use of the SRF and DIS funding on a least cost basis. (EC; ¶26) — Timing: ST; Priority: H - Introduce a flexible administrative liquidation tool in the SRMR. (EU; ¶28) — Timing: ST; Priority: H - Ensure adequate internal MREL. (SRB; ¶29) — Timing: I; Priority: H - Accelerate MREL build-up, prioritizing large banks. (SRB; ¶31) — Timing: I; Priority: H - Ensure strong investor protection for retail purchasers of MREL, and restrict MREL cross-holdings among banks. (SRB, ESMA; ¶31) — Timing: ST; Priority: H - Further harmonize the hierarchy of creditor claims in bank insolvency, ensuring more consistency with the SRM bail-in regime. (EC, national authorities; ¶32) — Timing: MT; Priority: H - Designate the SRB as an independent treaty institution. (EU; ¶34–35) — Timing: MT; Priority: H - Introduce a financial stability exemption from (i) the 8 percent mandatory bail-in for accessing the SRF and public funds, (ii) the 5 percent cap on SRF funding, and (iii) the proposed stricter state aid burden-sharing rules. (EU; ¶37, 39) — Timing: ST; Priority: H - Ensure that financial stabilization tools (e.g., government guarantees, recapitalization) are available and can be effectively employed in all member states. (EC, national authorities; ¶40) — Timing: ST; Priority: M - Adopt a system-wide crisis preparedness and management framework. (SRB, EC, ECB; ¶41) — Timing: ST; Priority: H - Ensure that the staffing of the SRM and the ECB’s Crisis Management Division is commensurate with their mandates. (SRB, ECB; ¶47) — Timing: C; Priority: M - Make full use of the toolbox, particularly the bridge bank tool, in resolution planning. (SRB; ¶49) — Timing: I; Priority: M - Finish revising the SRB resolution manual; add new guidance for resolution funding plans; test the manual; adopt complementary ECB guidance—all prioritizing the bridge bank tool and its feasibility. (SRB, EBA, ECB; ¶49–51) — Timing: I; Priority: M - Establish uniform practices for banks’ disclosure of early intervention measures, allowing flexible use of financial stability delays. (ESMA; ¶52) — Timing: ST; Priority: M - Strengthen the SSM early action framework by (i) removing legal constraints on early intervention measures, (ii) making the FOLF determination more forward looking and controlling its timing, and (iii) adopting a quantitative escalation process for early intervention. (ECB, EC; ¶53–54) — Timing: I; Priority: H - Strengthen the SRM’s advance resolution preparation by: (i) operationalizing its FOLF powers; (ii) making resolution preparation less dependent on early intervention measures; (iii) enhancing SRB access to prudential information, direct bank contacts, and relevant information on the availability of liquidity and collateral; (iv) suitably engaging with host authorities; and (v) ensuring that adequate liquidity will be available. (SRB, ECB; ¶54–55) — Timing: I; Priority: H - Mitigate resolvability impediments, and ensure continuity of resolution planning while addressing substantive impediments. (SRB; ¶62) — Timing: I; Priority: M - Conclude the SRB MOUs with the Commission and all nonbanking union NRAs; conclude SRB cooperation agreements with EA NRAs and on CMGs. (EC, SRB, EBA, NRAs; ¶64, 67–70) — Timing: I; Priority: M - Make the SRB a permanent observer on the ECB Supervisory Board. (EC, Council; ¶66) — Timing: I; Priority: H - Ensure that EU and national authorities consult the SRB on pertinent legislation. Make the ECB and SRB voting members of the EBA Board of Supervisors and the EBA Resolution Committee. (EC, Council; ¶66) — Timing: I; Priority: M - Operationalize in all EA countries lending facilities between DISs. (EC, EBA, national authorities; ¶72) — Timing: I; Priority: M - Formalize the EBA’s role in DIS oversight and coordination. (EC; ¶73) — Timing: MT; Priority: M - Ensure effective DIS financing of deposit transfers in both resolution and liquidation. (EU, national authorities; ¶74–75) — Timing: ST; Priority: H ### Operational and Institutional Enhancements - Strengthen SRM and ECB operational readiness: staffing, operational arrangements for SRF financing, SRB resolution manual completion and testing, use of bridge bank tool, and enhanced SRB access to prudential information and liquidity/collateral data. - Improve coordination across agencies via MOUs, cooperation agreements, and inclusion of SRB in supervisory governance (e.g., permanent observer on the ECB Supervisory Board). - Formalize lending facilities between DISs and enhance EBA role in DIS oversight and coordination to ensure cross-border deposit insurance operations function effectively in resolution and liquidation. *Prepared from "EXECUTIVE SUMMARY", cr18232.* ### 4. The review is guided by certain interacting objectives, some derived from general ### cr18232 - 4. The review is guided by certain interacting objectives, some derived from general ### Objectives guiding the review - Supporting the banking union and its completion, where banks from different euro area jurisdictions compete on a “level playing field;” - Minimizing moral hazard; - Attenuating the nexus from banks to sovereigns by reducing as far as possible implicit national government guarantees or other support for banks; - Minimizing the overall cost of dealing with a failing bank; and - Balancing the need for predictability in a rules-based system against the need for flexibility to deal with contingencies and ensure incentive compatibility. Progress towards these objectives will contribute importantly towards reducing risks in the system. ### Progress and experience so far - The 2013 EU FSAP concluded that much had been achieved to address the 2008–09 crisis, but vulnerabilities remained and intensified efforts were needed across a wide front. The 2013 EU FSAP recommended anchoring financial stability in the EA and establishing a banking union, including: a single crisis management framework, the SSM, a KA-consistent resolution regime, a single resolution authority, a common DIS with a common backstop, an ESM direct recapitalization tool, and strong supranational inter-agency cooperation arrangements. - Since then, the EA bank resolution framework was strengthened considerably: - The EU co-legislators adopted the BRRD and the SRMR, and established the SSM and the SRM. - The Commission and the Council have crisis management procedures coordinating DG COMP and DG FISMA, and procedures aiming to ensure prompt endorsement/non-objection of SRB resolution decisions. - The ECB, with NCAs’ assistance, is responsible for recovery planning and early intervention of problem SIs; its Crisis Management Division supports supervisors and liaises with the SRB. - The SRB, together with NRAs, is responsible for resolution planning and actions, with resolution schemes subject to endorsement/non-objection by the Commission and, in some cases, the Council. - The newly established SRF may provide liquidity and capital support in resolution after operational arrangements are in place. The ESM remains available for bank direct and indirect recapitalizations. - The EBA contributes through technical standards and guidelines elaborating on the BRRD. ### Resolution toolkit, mapping, and national implementation - The resolution toolkit: - Default resolution tools in the BRRD/SRMR include bail-in, sale of business, bridge institution, and asset separation. - The BRRD allows two optional government financial stabilization tools: public equity support and temporary public ownership. - The BRRD also allows additional resolution tools. - Mapping and national implementation: - A comprehensive mapping of resolution tools and requirements is warranted; national resolution handbooks should help. - Authorities have not yet completed the mapping of the BRRD’s national implementation; Annex I shows that consistency across EA countries is not complete. - The SRB should maintain a thorough understanding of the BRRD’s application and other pertinent national legislation, such as insolvency laws as applicable to banks. - Availability of tools: - Almost half of the EA member states have incorporated the optional government financial stabilization tools and about one-third established additional resolution tools. - A few member states provide for additional MREL criteria. - Rationale: The full set of tools should be available because developments in banking crises can be highly variable and require variable responses. ### Recent intervention cases (Italy, Spain, Latvia) — chronology and outcomes - Overview: - Recent intervention cases against SIs in Italy, Spain, and Latvia demonstrated challenges of the new regime—only one of these SIs was resolved by the SRB. Monte dei Paschi di Siena (MPS) received precautionary recapitalization support from the Italian government with Commission approval; the two Venetian banks were liquidated with state aid under Italian law and with Commission approval; and Banco Popular Español (BPE)—the only SRB resolution case so far—was sold. The BPE resolution is being litigated in Spanish and EU courts; investors reportedly are pursuing litigation in U.S. courts and international arbitration. The Latvian case is still ongoing. - Italian cases: - On July 4, 2017, the Commission authorized precautionary recapitalization of Banca Monte dei Paschi di Siena S.p.A (MPS) by the Italian government. MPS is one of Italy’s five largest banks, with total assets of more than €153 billion. - On June 23, 2017, the ECB determined that two mid-size Italian banks, Veneto Banca Società per Azioni (with assets of €28 billion) and Banca Popolare di Vicenza Società per Azioni (with assets of almost €35 billion) (collectively, “the Venetian banks”) were FOLF. The SRB concluded it was not in the public interest to place the Venetian banks into resolution; the Italian authorities wound down the two banks under Italian insolvency law proceedings. - MPS history and timeline highlights: - MPS had state recapitalizations in 2009 and 2013; poor stress test performance in 2014 and 2016. - MPS proposed sale of bad loan portfolio (ca. €26 billion) with negative capital impacts covered by a capital increase of up to €5 billion; the target completion was year-end 2016 but the capital raising failed in December 2016. - On December 23, 2016, the ECB confirmed a €8.8 billion capital shortfall in the adverse scenario of the 2016 stress test and provided a point in time Pillar 1 solvency statement (based on Q3 2016 figures). - On June 21, 2017, the ECB provided another point in time solvency statement for MPS based on Q1 2017 figures. - On June 26, 2017, Atlante II agreed to purchase bad loans from MPS. With conditions fulfilled, the Commission approved a precautionary recapitalization on July 4, 2017, of up to €5.4 billion. The approval prescribed a five-year restructuring plan and disposal of €26 billion of bad loans (value end of 2016). - Venetian banks: - History of low profitability, high NPLs, capital shortfalls; failed capital plans in 2015 and 2016; private fund Atlante took almost 100 percent stakes in early intervention; Italian government provided €10 billion liquidity support in January and April 2017; ECB confirmed technical solvency; the Commission approved the measures. - On June 19, 2017 the ECB concluded the merger proposal was implausible; after FOLF determination on June 23, 2017, the SRB found resolution not in the public interest. The Italian government notified intent to grant up to €16.8 billion in liquidation support; Intesa to buy performing business; nonperforming business left in residual entity. - Spanish case (Banco Popular Español, BPE): - On June 6, 2017, the ECB determined BPE (with assets of almost €150 billion) was FOLF. Early on June 7, with the Commission’s approval, the SRB decided resolution was in the public interest. - BPE faced problems from the start of ECB supervision in November 2014: low profitability and high NPAs, poor stress test results, 2016 losses, rating downgrades, and liquidity problems in April–June 2017. - Timeline highlights: SRB hired an accounting firm on May 23 to prepare a valuation; SRB began marketing procedures on June 2. On June 6 the bank suffered large deposit outflows and could not obtain further ELA; the ECB declared the bank FOLF. On June 7, the SRB approved a resolution scheme using sale of business; FROB wrote down share capital and additional Tier 1 to zero, converted Tier 2 to new equity, and transferred BPE to Santander for €1. - BPE was the first bank declared FOLF by the ECB and the first resolved by the SRB. - Latvian case (ABLV Bank): - On February 19, 2018, the ECB instructed the national supervisor to impose a creditor moratorium. On February 23, 2018, the ECB determined that ABLV (and its Luxembourg subsidiary) was FOLF, citing significant deterioration of liquidity; the SRB did not find resolution to be in the public interest. - An extraordinary shareholders’ meeting decided to initiate voluntary liquidation in Latvia; Latvian authorities approved voluntary liquidation on June 12, 2018. - This case illustrates uncertainties arising from applying national insolvency regimes to a failing SI following FOLF determination but where resolution is not in the public interest. ### Identified challenges and lessons (points from the cases) - Solvency and Financial Stability Assessments: - The 2013 Banking Communication does not provide guidance on solvency tests; the ECB’s solvency test for precautionary recapitalization (within the Communication’s remit) was not aligned with the FOLF test of the BRRD/SRMR. Financial stability assessments are similarly not aligned, risking inconsistent outcomes. - Public Interest Assessment: - The geographic scope of the BRRD/SRMR’s “public interest” test is not fully clear (e.g., national or banking union financial stability); the “common interest” test of the 2013 Banking Communication is not aligned with the BRRD’s “public interest” test. - Parallel Frameworks: - DG COMP maintains a key role in solvency tests and bank restructuring plans, along with the ECB and the SRB; the Commission gives deference to member state authorities, potentially contradicting the SRB’s approach. - Insolvency Regimes: - Insolvency regimes are not harmonized and directly affect the SRB’s resolution decision; the SRB’s toolbox is missing a liquidation tool, as called for by the FSB KAs. - Hierarchy of Creditor Claims and NCWO: - State aid burden-sharing requirements are weaker than those of the BRRD/SRMR; consequently, some creditors could be better off in insolvency with liquidation aid, making the NCWO test heterogeneous and weakening the level playing field between regimes. - Scenarios for Use of Public Funds: - In comparing resolution and insolvency outcomes, the SRB is not allowed to consider using public funds while making the public interest assessment, while a national government can consider that liquidation under the national insolvency regime requires public funds, which the Commission can approve under the 2013 Banking Communication. It is more difficult to use the industry-funded SRF under the SRMR than to use public funds for precautionary recapitalization under the 2013 Banking Communication. - Resolution Preparation: - Without advanced preparation, the viability of the sale of business resolution tool may depend on the ready availability of a willing bidder. The use of bail-in or bridge institution tools requires more preparation. - Financing Resolution: - Liquidity support arrangements from the SRB/SRF or other sources were not in place for resolution. - Information on Liquidity Needs: - The Eurosystem did not always have timely information on the bank’s ability to provide usable collateral for ELA, and could not anticipate liquidity needs even over short horizons. The ECB—both its supervisory and monetary functions—did not always have timely information on some aspects of the provision of ELA by the respective NCB. - Litigation Risk: - Multiple authorities and decentralized implementation open multiple avenues for litigation at EU and national levels, reflecting incomplete harmonization. Legal implications and a conservative approach to minimizing litigation risk reportedly might have induced hesitancy in using early intervention measures and making the FOLF determination sooner. - Uncertain outcomes: - It is possible that the ECB determines a bank FOLF and the SRB decides resolution is not in the public interest, whilst conditions for initiating national court-based liquidation are not fully aligned with the grounds for a FOLF determination or the banking license cannot be withdrawn, possibly leaving the bank in limbo. ### Legislative proposals and ongoing initiatives - EU co-legislators are considering strengthening the SSM and the SRM underpinnings. - November 2016 Commission proposal: risk reduction measures including integration of the FSB TLAC requirement for G-SIBs into the EU’s MREL framework, including confirming the SRB’s power to set binding internal MREL targets and requirements. - Complementary proposal to partially harmonize the hierarchy of creditor claims in bank insolvency was adopted late 2017. - Around the same time, the Commission proposed that the ESM (or possibly a future European Monetary Fund) backstop the SRF, and revamped its 2015 EDIS proposal. These proposals were under discussion at the time of writing. *International Monetary Fund — EURO AREA POLICIES (extracted from the provided content unit)* ### 13. Deposit insurance plays a crucial role in financial stability. A well-designed and well- ### 13. Deposit insurance plays a crucial role in financial stability. A well-designed and well- ### Role and objectives of deposit insurance systems (DISs) - Deposit insurance assures retail customers that they are protected in a bank failure. - Public policy objectives for DISs (per IADI Principles) include: - protecting retail and other small depositors, - minimizing the risk of depositor runs on banks, - mitigating the risk of contagion. - If depositors trust a DIS, they are less likely to run on the bank and withdraw funds in times of bank distress, helping stabilize liquidity and facilitate recovery or resolution. - Loss of depositor confidence can lead to runs that contribute to contagion and instability, as observed in the 2008–09 crisis. ### European Deposit Insurance Scheme (EDIS): rationale and design Findings - The Five Presidents argued a common DIS would increase resilience against large local shocks and be “more likely to be fiscally neutral over time than national deposit guarantee schemes because risks are spread more widely and because private contributions are raised over a much larger pool of financial institutions.” - The Commission proposed an EDIS managed by the SRB while national DISs remain the local interface with banks and depositors for contributions and payouts. - The Commission’s 2015 EDIS proposal was structured in stages: re-insurance; co-insurance; and full insurance. - In late 2017 the Commission suggested introducing EDIS more gradually and subject to more conditions; liquidity and loss-absorbing phases would be split with the aim to have a fully functional EDIS by 2024. Risk reduction and risk sharing should move in parallel. Key features (as described in Box 2) - Building EDIS gradually: - Re-insurance: up to 20 percent of the liquidity shortfall and excess losses of a national DIS may be covered by EDIS. - Co-insurance: the threshold increases to up to 80 percent of the liquidity need or losses (in a staggered approach). - Full insurance stage: reached in 2024. - Unless EDIS resources solely contribute to depositor pay-outs, state aid provisions apply in the context of resolution. - Risk-based contributions and funding: - Target ratio of 0.8 percent of covered deposits will be built up over time by national DISs channeling contributions into the Deposit Insurance Fund (DIF) in EDIS. - DIF resources will increase according to a funding path until the target level is reached. - The SRB establishes each credit institution’s contribution level in accordance with risk-based calculations; requires robust methodology for relative risk determination across euro area credit institutions. - Clarification of legal obligations: - The pro-rata approach for simultaneous pay-out events in case of an underfunded DIF could be problematic as national DISs remain fully liable for depositor payouts. - At the full insurance stage, there should be a clear obligation for EDIS to provide funding to meet depositors’ claims. - Uncertainty exists about how contributions already channeled into EDIS would be made available to a national DIS if the Commission disqualifies that DIS from coverage. - Criticism of EDIS: - Perceived as potentially offering solvency support during early re-insurance while risk reduction measures are pending. - Concerns include design of the final stage, timing of set up, legacy issues (high NPLs and holdings of sovereign debt), need to mitigate moral hazard, and absence of a backstop. - Possible modifications and way forward: - Commission considerations to start with shorter re-insurance for liquidity (not solvency) support if national DIFs are depleted, e.g., temporary funding to be recouped from relevant national banking sector rather than loss-sharing. - Example phased availability: in 2019, 30 percent of relevant liquidity shortfall made available, increasing to 90 percent by 2021. - Moving from re-insurance to co-insurance would depend on conditions such as a targeted asset quality review (by 2022) and specific thresholds for NPL levels and level III assets. - Co-insurance period would provide solvency support by means of loss coverage with ratios starting at 30 percent (with subsequent increases), aiming for full liquidity and loss coverage by 2024. - Measures for portfolio reductions could be considered. Policy recommendation - Authorities are encouraged to agree on EDIS to enable risk pooling across the banking union, helping member states avoid disruptions that overwhelm individual capacities and improving diversification of risks across banks. - EDIS would also help address host authorities’ concerns about subsidiaries of banking groups that may require resolution. ### Financing resolution: liquidity and the Single Resolution Fund (SRF) Findings on liquidity during resolution - Three potential liquidity sources in resolution: 1. the Eurosystem (regular facilities or ELA); 2. DISs; 3. the SRF (which can also provide capital support and NCWO compensation of shareholders and creditors). - Each liquidity source faces serious constraints. - A report concluded liquidity was “inadequately addressed in the legislative overhaul following the global financial crisis,” despite approximately 80 percent of roughly €2.5 trillion injected into the financial system being aimed at strengthening banks’ liquidity positions. SRF build-up and features - To date, the SRF has collected about €17 billion in funds from the industry. - By end-2023, the SRF should stand at one percent of covered deposits in the banking union (approximately €55 billion), at which point it will stop growing even if deposits keep increasing. - Contributions collected by national resolution funds prior to the SRF establishment and contributions collected until end of build-up are transferred to the SRF. - The SRF comprises national compartments that are increasingly—now over 60 percent—mutualized; mutualized funds may be used after exhausting certain parts of non-mutualized funds in the respective national compartments. - End-2023, national compartments will be fully mutualized and cease to exist. Constraints and operational rules - The SRB decides on use of the SRF, subject to Commission and Council approval and subject to certain constraints. - The SRF can only be used in combination with other resolution tools. - SRF capital support conditions: - Conditional upon the bail-in of at least 8 percent of total liabilities (including own funds); - Limited to the lesser of 5 percent of the bank’s total liabilities (including own funds), or the available SRF funds plus any amount that could be raised through ex post contributions in three years. - The 8 percent and 5 percent restrictions do not apply to liquidity support from the SRF. - The SRF is considering issuing guarantees or bonds that banks can use as collateral for private sector funding or ECB liquidity; this requires a sufficiently high credit rating; without such rating SRF bonds would be 100 percent risk weighted, potentially rendering them too costly to access external funding. Transitional bridge funding - In February 2017, the SRB concluded loan facility agreements with all 19 banking union member states for transitional credit lines of up to the estimated target level of €55 billion. - These credit lines are only available to back the SRF’s national compartments in case of a funding shortfall and after exhausting all other financing sources, including the SRB’s external borrowing capacity. - Funding made available under these agreements is repaid within two years by industry contributions in the country where the resolution took place. Recommendation - Policies, methodologies, and operational arrangements should promote prompt mobilization of SRF financing of resolution measures. - It should be clarified that the SRF target level will be adjusted to maintain at least a one-percent ratio to covered deposits on an ongoing basis, also after 2023. ### Backstop considerations: ESM, merging instruments, and credibility Findings - Subject to strict conditionality, the ESM can provide direct financial assistance to banks experiencing or threatened with severe financial distress. - ESM features: - Lending cap of €500 billion; - Paid-in shares of €80 billion; - €620 billion of callable shares; - Could finance itself from the market and from member states. - ESM assistance only granted when the recipient member state proves it has exhausted all recapitalization options and when ESM assistance is indispensable to safeguard financial stability of the EA or its member states. - Direct recapitalization instrument adopted in December 2014 up to a maximum of €60 billion; can be used only when: - the 8 percent bail-in rule is met; - the SRF 5 percent contribution has been disbursed; - all unsecured, non-preferred liabilities (other than eligible deposits) are written down or converted in full. - Member states required to co-finance the ESM contribution; ESM valuations and stress tests could take a minimum of two weeks. - The direct recapitalization instrument has never been used. Policy options and recommendations - A backstop for the SRF would enhance its credibility given the SRF’s relatively small size even at its target level of €55 billion by end-2023. - Authorities are considering a credit line from the ESM (or possibly a future European Monetary Fund) to the SRF. - Considerations include: - How the SRF’s own funds could be used for bonds and guarantees in the absence of a credit rating. - Folding the ESM’s direct recapitalization tool into the SRF backstop and merging the two into a single fund rather than two funds used sequentially after depleting the SRF. - Note: such a merger would require adjustments because the ESM is designed with a systemic focus drawing on public resources, whereas SRF resources are contributed by the industry. - The use of the ESM’s direct recapitalization tool should be clarified now that the SRF has been established and if the ESM becomes the SRF backstop. - The ESM’s direct and indirect recapitalization instruments should be aligned in terms of processes and eligibility criteria. ### Further unification and harmonization of the regime Findings on fragmentation - Despite establishment of the SSM and the SRM, fragmentation along national lines persists. - Both the BRRD and the DGSD allow many national transposition options. - Application of the SRMR diverges between countries: SRB decisions are addressed to the relevant NRA (rather than applied to individual banks); some NRAs can implement the SRB resolution scheme directly while others must follow national administrative procedures and issue their own resolution decisions. - National divergences (e.g., in labor and procurement laws) complicate uniform application of the bank resolution regime, affecting MREL enforcement and resolution preparation and implementation. Recommendations - The SRB should be granted directly applicable resolution powers or obstacles should be removed so the SRB can be granted powers consistent with KA 3.2 to supersede contracts or national legislation that may hamper resolution implementation or distort a level playing field. - Important concepts such as solvency, financial stability, and public interest assessments should be aligned across regimes. - A single, forward-looking solvency test for FOLF and precautionary recapitalization is recommended and should be codified in the 2013 Banking Communication. - The Eurosystem should use the forward-looking solvency test also for ELA decisions. - The geographic scope for financial stability should be harmonized; the SRM’s public interest test focuses on financial stability at national and banking union levels, while the Commission also considers sub-national financial stability. - More deference could be given to the SRB’s judgment on these matters. - Greater harmonization with the state aid rules would support a more predictable resolution regime. - Reconciling the SRM and state aid regimes is important in three areas: - Equalizing burden-sharing—align state aid burden-sharing in liquidation with SRM to reduce uncertainty and diminish incentives to use national liquidation regimes for systemic institutions. - Favoring European solutions—pare back procedures for state aid oversight (or presume clearance) for SRB resolution decisions to reduce distortion of competition for national interest. - Cost reduction—consider pared-back procedures for deposit and asset transfers in resolution funded by a national DIS (or EDIS when in place) provided on a least cost basis; clarify in the 2013 Banking Communication that, subject to least cost safeguard, such transactions would be compatible with state aid rules and determine “fair and open” procedures for sale of business operations in advance. Italic source attribution line *Source: cr18232 - 13. Deposit insurance plays a crucial role in financial stability. A well-designed and well-* ### Box 3. The Commission’s Crisis Communications on State Aid to Financial Institutions ### Box 3. The Commission’s Crisis Communications on State Aid to Financial Institutions ### Legal basis and crisis communications - Article 107(1) TFEU prohibits “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States.” - Article 107(2) provides for certain exemptions (e.g., social aid, natural disasters). - Article 107(3) provides that some types of aid may be considered compatible with the internal market, among others, for “common European projects or to remedy a serious disturbance in the economy of a Member State” and for “such other categories of aid as may be specified by decision of the Council on a proposal from the Commission.” - Based on Article 107(3)(b), the 2013 Banking Communication was adopted, replacing the 2008 Banking Communication and complementing the 2010 and 2011 Prolongation Communications and the 2009 Communications on Recapitalization, Restructuring, and Impaired Assets. - The “serious disturbance” exception (Article 107(3)(b)) is the one currently used; paragraph 6 of the 2013 Banking Communication notes that the derogation remains possible only as long as the crisis situation persists, creating genuinely exceptional circumstances where financial stability at large is at risk. ### Need for a more unified bank liquidation regime - Completing the banking union requires a more unified bank liquidation regime because SRM resolution involves assessments against significantly diverging national insolvency regimes that are subject to less stringent loss sharing requirements under state aid rules than in the SRM. - National insolvency regimes differ: - Some provide a broad toolkit to support continuity of critical functions and a sale-of-business tool, minimizing destruction of value in liquidation. - Others may yield less effective solutions such as ‘voluntary-liquidation’ (after an FOLF determination). - Recommendation: - Harmonize national insolvency law applicable to banks or carve out specific provisions for the banking sector to make outcomes more consistent, recognizing complexity, time requirements, and the EU’s subsidiarity principle. ### Supranational administrative liquidation tool (SRMR / SRB) - Proposal: - Introduce an administrative liquidation tool in the SRMR for all banks within the SRB’s remit and for banks deemed systemic at the time of failure. - Features and advantages: - SRB authorized to apply the tool to all banks within its remit—irrespective whether the public interest test is met—and to banks considered systemic at the time of their failure. - Tool allows the resolution authority to appoint a liquidator and commence proceedings. - Can be used individually or in combination with other resolution tools, including an effective sale-of-business tool (such as the transfer of assets and liabilities). - Should be supported by provisions for: - continuity of critical functions, - harmonized creditor hierarchy (applicable also for purposes of the NCWO regime), - access to funding, and - deposit insurance funding for the transfer of covered deposits. - Expected outcomes: - reduce destruction of value, - level the playing field for creditors, - reduce the risk of member states “gaming” the system, - ensure cross-border bank cases are dealt with at a euro area level for consistency. - Capacity implication: - The SRB would need to build up operational capacity in this area. - Note: - Arguments exist for providing NRAs with a similar administrative liquidation tool to deal with banks deemed non-systemic at point of failure (some NRAs already have such tools). ### Balancing home-host interests in recovery and resolution - Incomplete banking union causes home-host tensions that need careful balancing. - The SRM should ensure feasibility of resolution strategies for groups with domestic systemically important banks (D-SIBs). - Recovery and resolution frameworks must balance single market objectives with national financial stability concerns. - Key points from EU law and the BRRD / SRMR: - BRRD (Art. 7) for recovery planning (not recovery measures) requires: - group plan must identify measures at the subsidiary level; - competent authorities may require subsidiaries to submit individual plans; - group plan must aim to stabilize the group or any institution of the group, and restore the financial position of the group, while considering financial position of other group entities; - group plan must identify impediments for recovery within the group, including impediments to prompt transfer of own funds or repayment of liabilities or assets within the group. - SRMR resolution planning lists interests (Art. 6.3 and others) to be considered, including: - impact on financial stability, fiscal resources, the economy, financing arrangements, the DIS or investor compensation scheme of any member state where a group operates; - balancing various member states’ interests and avoiding unfairly prejudicing or protecting the interests of a member state; - minimizing negative impact for any part of a group subject to resolution; - ensuring group resolution plans are not to have a disproportionate impact on any member state (Art. 8.11); - group resolvability is assumed if it can be wound up or resolved while avoiding significant adverse consequences for national financial systems in which group entities are established (Art. 10.4); - use of resolution tools and powers must minimize impact on the group (entities) and minimize adverse effect on national financial systems in which the group operates (Art. 15.2). - Decision-making and mediation: - Where Extended Executive Session cannot reach unanimous decision, SRB Chair and four other full-time SRB Members take decision without a vote by host authorities. - Where non-banking union NRAs are involved, EBA mediation is available. ### MREL build-up: timelines, shortfalls, and policy priorities - SRB policy and timelines: - In late 2017, the SRB, together with NRAs, published its MREL policy statement to inform consolidated MREL targets for SRB banks. - Starting March 2018, the SRB will set binding parent-level external MREL targets. - In the next resolution planning cycle, running through 2019, the SRB will set binding internal MREL targets, which will also be subject to transitional periods. - SRB expectations for compliance timing: - about half of the banks will immediately meet the MREL requirements; - a quarter will have one to two years to meet the requirements; - the remaining banks would have up to four years. - Shortfall estimates (preserve exact figures): - Based on end-2016 data, the SRB estimates an aggregate €117 billion MREL shortfall, which may increase next year under revised MREL rules; - EBA estimates put the shortfall between €130–285 billion, depending on the final articulation of MREL eligibility criteria. - Policy recommendations: - Explore need and feasibility to expedite internal and external MREL build up, prioritizing large banks. - Ensure sufficient bail-in-able liabilities are available to support effective resolution, especially under mandatory creditor bail-in regimes. - Internal MREL targets should support group resolution strategies and enable recapitalization of material entities. - Restrict cross-holding among banks to limit potential spillovers. - Protect retail investors’ exposure to complex bail-in-able instruments via strong investor protection (e.g., rigorous disclosure requirements or sufficiently high minimum lot sizes). - Upgrade reporting and databases to enable effective real-time monitoring and enforcement. ### Harmonizing creditor hierarchy and legislative reforms - Legislative changes and gaps: - BRRD amendments adopted in late 2017 partially harmonize hierarchy of creditor claims in bank insolvency. - By end-2018, member states are required to create a new asset class of “non-preferred” senior debt instruments. - “Non-preferred” senior debt instruments must meet conditions: - (i) the original contractual maturity is of at least one year; - (ii) they have no embedded derivatives and are not derivatives; and - (iii) the relevant contractual documentation and, where applicable, the prospectus related to the issuance explicitly refers to the lower ranking. - The new class would rank lower among senior claims but have a higher priority ranking than capital instruments or any other subordinated liabilities. - Because of subordination, the new instruments are not eligible as collateral in Eurosystem monetary policy operations. - National approaches (examples preserved as stated): - Germany: statutory subordination legislation adopted in 2015 (in effect since 2017) provides for statutory subordination of certain senior unsecured debt instruments, applicable to new and already issued debt instruments; subordination applies to existing senior debt instruments and credit institutions can use some existing debt instruments for TLAC purposes. - Slovenia: introduced statutory subordination in 2016 (together with general depositor preference based on a tiered approach). - France: legislation enacted in 2016 creates legal certainty for issuance of a new class of “non-preferred” senior debt instruments for new instruments (original maturity no less than one year) with contractual subordination arrangements; Spain and Belgium introduced similar systems in 2017. - Italy: BRRD transposition conferred a preference on claims arising out of covered deposits (including claims where the DIS is subrogated), certain eligible deposits above guaranteed threshold of natural persons and micro, small and medium-sized enterprises, and starting from 2019 on all other deposits; introduced a category of "second level unsecured debt instruments" (non-preferred senior) in 2018. - Remaining issues and recommendations: - Current changes will achieve only partial harmonization and fail to address remaining national divergences in creditor hierarchies as applicable to banks. - Better alignment is needed in: - list of exclusions from bail-in, - treatment of deposits pursuant to Article 108 of the BRRD, - national insolvency regimes to mitigate risks of legal challenges by creditors seeking compensation under the NCWO regime in case of bail-in. - Cross-border complexity: - Similar creditors of a bank may be treated differently across jurisdictions under current legislation, raising complex cross-border legal challenge risks. ### Depositor preference and exclusions from bail-in - Proposal and rationale: - Explore merits of introducing a general depositor preference (based on a tiered approach) because it could facilitate bail-in of non-deposit creditors. - Effects of general depositor preference: - With preference for all deposits as a third tier below preferred covered and certain eligible deposits under BRRD, deposits would no longer rank pari passu with senior unsecured bank debt instruments, thereby reducing risk of potential NCWO challenges. - Additional concerns: - Exclusions from bail-in established in national legislation (for example, liabilities to charities), in addition to the common list set out in the BRRD, underscore the need for action to ensure feasibility of the bail-in tool for the SRB. *Source: Euro Area FSAP Team (content unit: Box 3. The Commission’s Crisis Communications on State Aid to Financial Institutions).* ### 34. Structures for resolution decision-making are inconsistent with the SRB’s full ### 34. Structures for resolution decision-making are inconsistent with the SRB’s full ### Independence and decision-making arrangements - Finding: The KAs prescribe operational independence for resolution authorities, but certain SRB resolution decisions on individual banks (for example, adoption of resolution schemes) remain subject to endorsement/non-objection by the Commission (EU executive) and, in some cases, the Council (EU co-legislator), which could diminish the SRB’s independence and delay time-sensitive resolution decisions. - Recommendations: - Explore options to enhance the SRB decision-making authority. - Grant the SRB rule-making authority. - Designate the SRB as an independent EU institution (this may require treaty changes). - Expected effects of institutional designation: - SRB could independently finalize resolution schemes and apply the scheme to a failing bank in a legally-binding manner, with decisions holding throughout the EA, diminishing the need for NRA implementation actions and limiting avenues for litigation. - SRB would be able to design its own staff selection and compensation practices. - SRF could obtain a credit rating, allowing feasible financing arrangements for resolution measures. - SRB would remain accountable to the European Parliament, the ECJ, and the ECA. - Legal/clarification actions suggested: - Clarify what are considered discretionary powers subject to the Meroni doctrine and seek clarification from the ECJ on this doctrine. - Clarify whether the Commission must endorse revised resolution schemes when a resolution scheme has been revised. - Rule-making authority would allow SRB to set system-wide rules to remove resolvability impediments. ### Judicial review and litigation risk - Finding: The BPE case triggered two cases against the ECB and around one hundred legal actions against the SRB (of which around one-third is also against the Commission and one case is also against the EU legislators), all before the ECJ; approximately 250 cases were started in national courts against the Spanish authorities. - Concerns: - Cases question the SRM’s legality and seek the annulment of the resolution scheme, damages, or access to information. - Situation is unsustainable as authorities will be increasingly tied-up in litigation and incur significant costs for external legal counsel. - Mitigants: - Publishing more detailed information in an accessible format and language may preempt some access-to-information cases. - Giving the SRB sole authority on resolution matters would reduce the risk of potential legal challenges in multiple jurisdictions and point to a single counterpart for litigation. ### System-wide crisis management: constraints and the need for flexibility - Finding: The current bank-by-bank resolution framework was not designed to deal with system-wide crises and may lack sufficient flexibility. - Constraints highlighted: - Mandatory eight percent bail-in requirement for accessing the SRF and national public funds. - Banks need sufficient MREL-eligible liabilities to facilitate bail-in; lack of adequate MREL during transition or in steady state could impede optimal strategies and risk contagion. - Five percent cap on SRF financing of resolution measures may be insufficient to prevent contagion in a system-wide crisis. - Neither the eight percent bail-in requirement nor the five percent SRF cap allows sufficient flexibility. - Legal context and comparators: - EU treaties allow exceptions on the four freedoms for reasons of public policy or public security (for example, Article 65(1)(b) TFEU). - Stability and Growth Pact allows deviations in case of severe economic downturns (Article 5, Regulation (EC) No 1466/97; Article 3, Regulation (EC) No 1467/97). - 2013 Banking Communication allows deviations from burden-sharing measures under state aid rules where implementation would endanger financial stability or lead to disproportionate results (Paragraph 45). - Recommendation: Introduce a financial stability exemption subject to strict conditionality and governance arrangements: - Conditionality based on documented, extreme risks to the financial system of a member state as a whole, or of the euro area. - Exemption should apply to tightened restructuring and burden-sharing requirements under the 2013 Banking Communication as proposed. - Exemption could evolve while the banking union is further completed. ### Governmental financial stabilization tools and exceptional powers - Finding: Optional governmental financial stabilization tools (public equity support and temporary public ownership) exist in many EA countries and may be needed in a system-wide crisis. - Facts and constraints: - Almost half of EA countries have established powers for public equity support and temporary public ownership. - Use of such tools should be exceptional and subject to sound exit strategies. - It is highly unlikely (authorities’ view) these tools would be used to intervene in SIs, but they cannot be ruled out in a system-wide crisis. - Position expressed by Council Legal Service: government financial stabilization tools provided for in the BRRD are currently only available for use outside of the SRM (for example, by non-EA member states); such tools would not be available in member states participating in the SRM. - Recommendation: Authorities should consider all tools at their disposal, including government financial stabilization tools, and at the request of national government the SRB should be able to include the use of these tools in the resolution scheme. ### Governance for system-wide crisis responses - Recommendation: Complement the bank-by-bank resolution framework with an appropriate governance framework to manage a system-wide crisis, bringing together pertinent agencies to cooperate effectively in formulating credible responses (including the ESAs, the ESRB, the ECB, the SRB, the Commission, the SRF and the ESM). - Note: The Commission’s coordinated approach under the 2013 Banking Communication is helpful but cannot substitute for a multi-agency arrangement. ### Enhancing operational capacity — overview and staffing - Background: The SRB was set up in August 2014, became operational on January 1, 2015, and fully assumed its mandate on January 1, 2016. - Scope as of January 1, 2018: - SRB responsible for 131 banks, comprising 118 SIs supervised by the ECB (including seven global systemically important banks) and 13 cross-border LSIs. - SRB has responsibilities for about 3,100 LSIs (counted on a solo basis). - Governance structure: - SRB governed by a full-time Board (chair, vice-chair, and four other board members) taking decisions in two bodies: - Executive session: chair and four permanent board members (vice-chair non-voting); Commission and ECB representatives are permanent observers. Executive session generally meets monthly, takes resolution decisions, and approves bank resolution plans and other policies. When a decision concerns a specific bank, the executive session is “extended” to include relevant NRA representatives. - Plenary session: Board plus a representative of each NRA; Commission, the ECB, and the EBA are permanent observers. Plenary meets about six times per year, approves the SRB budget and organizational decisions. Plenary must take decisions if the SRF has provided support exceeding €5 billion (or in the case of liquidity support exceeding €10 billion) for the resolution in question. - Staffing facts and targets (Table 2 data preserved): - SRB FTE staff end-2016: 164 - SRB FTE staff end-2017: 255 - SRB budgeted 2018: 350 - SRB budgeted 2019: 400 /5 - SRB envisaged 2020: 410 /5 - SRB SNEs (Seconded National Experts): 12 (end-2016); 15 (end-2017); 25 (2018); 25 (Budgeted 2019); 26 (Envisaged 2020) - Total NRAs: 332 /3 (end-2016); 374 /4 (end-2017); 405 (2018); 414 (Budgeted 2019); 422 (Envisaged 2020) - Total SRM: 508 (end-2016); 644 (end-2017); 780 (2018); 838 (Budgeted 2019); 858 (Envisaged 2020) - Of which, SRB resolution planning: 156 (end-2016); 185 (end-2017); 195 (2018); 202 (2019); 208 (2020) - Note: /1 Seconded National Experts; /2 numbers for 2018–2020 are estimated for some NRAs; /3 November 2016; /4 Budgeted; /5 subject to Plenary approval. - Observations: - SRB grew from 101 staff at end-2015 to 255 staff at end-2017; plans to grow to a total of 410 staff by 2020, more than doubling in four years. - Hiring competition from NRAs, the Commission, the ECB, and the European Supervisory Authorities; SRB must follow the Commission’s recruitment framework, not tailored to SRB needs. - Close to half of planned SRB staff in 2020 will be responsible for drafting roughly 130 resolution plans, fewer on average than in other major jurisdictions. - Staffing varies across NRAs; some NRAs may be understaffed as noted in several EA country FSAPs. ### Inter-agency capacities and EBA role - Finding: The SSM is responsible for recovery planning and early intervention of SIs via Joint Supervisory Teams (JSTs) led by ECB staff; DG Micro-Prudential Supervision IV includes a Crisis Management Division supporting JSTs and liaising with SRB. - EBA capacity: - EBA staff capacity for resolution planning in the banking union is limited. - The EBA resolution committee (chaired by an SRB board member in his personal capacity) consists of all member state NRAs; the ECB and the SRB are non-voting observers. - The committee is supported by a small secretariat of about a dozen staff—too small for full crisis management responsibilities including attending CMGs and resolution colleges. - Recommendation: Grant the ECB and the SRB voting rights in the EBA’s Resolution Committee and Board of Supervisors to recognize their roles in early intervention and resolution. ### Staffing surge capacity and legal services - Recommendation: - Staffing of the SRB and the ECB’s Crisis Management Division should be commensurate with their mandates. - In times of intensified bank interventions, ensure effective arrangements for prompt surge staffing from within organizations and external sources. - If the EBA receives additional mandates (for example, deposit insurance), staffing increases will be necessary. - When the SRB actively starts fulfilling its FOLF back-up authority, additional staffing will be required. - Anticipate increased litigation against the SRB as resolution decisions rise; allocate additional staffing for SRB legal services. - Put arrangements in place to promptly mobilize additional staffing in times of intensified bank interventions. ### Operational readiness and resolution planning - Finding: Preparation (detailed policies, manuals, playbooks, table-top exercises, recovery and resolution plans, resolvability assessments, and inter-agency cooperation) is critical to intervene decisively. - SRB actions and gaps: - SRB Resolution Manual describes resolution plan sections and follows FSB and EBA guidance (includes strategic business analysis; description of the preferred resolution strategy; financial and operational continuity; information and communication plan; and conclusion of the resolvability assessment). - Manual is being updated to make it more operational—this should be expedited. - New proposed sections on each of the four tools would strengthen operational arrangements. - SRM should consider more resolution tools and combinations thereof (instead of focusing mainly on bail-in). - Bridge bank tool should be made more feasible and more often considered for SIs because it allows more time to restructure a bank. - Recommendations to increase bridge bank feasibility: - Make it easier to set up and operate bridge banks throughout the euro area by advance preparation for sound governance and financial structures, and clarifying relevant national procedures. - SRM and the EBA should consider how to incorporate a resolution funding plan into each bank’s resolution plan, as recommended by the FSB in 2016. *Source: cr18232 - 34. Structures for resolution decision-making are inconsistent with the SRB’s full* ### 50. The SRB has made good progress, in a short time, to develop internal policy ### The SRB has made good progress, in a short time, to develop internal policy ### Development of internal policy and templates - The SRB adopted guidance on resolution planning by Internal Resolution Teams (IRTs) in 2016 and 2017 covering MREL; access to financial market infrastructures (FMIs); and critical functions. - SRB cooperation with NRAs on LSIs takes place through the LSI Oversight Taskforce created in 2016. - For 2018, the SRB internal policy agenda includes: - public interest assessment; - solo/internal MREL and MREL calibration under transfer strategies; - FOLF; - addressing substantive resolvability impediments. - The SRB has developed or intends to develop reporting templates covering liability data, critical functions, core business lines, and access to FMIs to standardize information for resolution planning and decision-making. - Recommendation: The ECB should develop its own operational guidance for crisis management activities, prioritizing the bridge bank tool and its feasibility, and update its emergency action plan to complement SRB guidance and ensure effectiveness of resolution measures from a supervisory perspective. ### Exercises, testing, and operational readiness - The SRB should continue to conduct table-top exercises to identify changes to enhance operational readiness. - Historical exercises: - First SRB exercise in January 2016 with the Commission and the Council to test procedures for preparing and deciding on a resolution scheme. - July 2017: SRB participated in a Council exercise to test adoption of a resolution scheme. - October 2016: principals’ level exercise with the U.K. and U.S. authorities. - Planned: The SRB is planning two exercises in 2018 with the NRAs. - Recommendation: Exercises should encompass the preparation period (for example, verification of available collateral) and the SRB should test its revised resolution manual. ### Early intervention powers and legal framework - ECB supervisory measures are set out in Article 16 of the SSMR; Article 104 of the CRD; early intervention measures are set out in Articles 27–29 of the BRRD. - Factors affecting ECB choice of powers: - Supervisory measures rely directly on EU law; early intervention depends on diverging transposition of the BRRD in national legislation. - Early intervention measures are more intrusive and may increase likelihood of disclosure under market transparency rules; disclosure practices should be more aligned with flexibility to delay disclosure for financial stability reasons. - Based on proportionality, there is a bias to first apply supervisory measures rather than early intervention measures; use of early intervention measures has been limited so far. - Legislative recommendation: Amendments are needed to remove constraints on the use of early intervention measures. EU co-legislators are considering ECB’s call for amendments to eliminate overlap and to move certain early intervention measures to the SRMR. - The ECB is developing more quantitative early intervention triggers; these are welcome provided JSTs can impose such measures before triggers are met. ### Coordination between ECB and SRB; timing and sequencing - Recommendation: SRB should start preparations sooner where possible (e.g., by reaching out to interested parties for potential sale-of-business transactions); such preparation should not be conditional on formal early intervention measures. - Clarification needed: Parameters for SRB on-site inspections. - Recommendation: ECB and SRB should adopt policies and operational arrangements to ensure FOLF determination and ‘resolution weekend’ are closely coordinated and prescheduled to allow advance resolution preparation and seamless transfer from the ECB to the SRB. - Policy view: This coordinated, prescheduled approach is preferred to expanding moratorium powers (as proposed by the Commission), even if limited in duration and available only to the SRB. ### Moratorium proposal (summary of concerns) - The Commission’s 2016 legislative package proposed suspension powers of up to five working days each for supervisory and resolution authorities, potentially permitting up to 10 days (or even 12 days per Articles 69–71 of the BRRD) if combined. - Concerns: - Scope, length, and conflicting authority. - Treatment of certain financial contracts under ISDA 2015 Universal Resolution Stay Protocol and potential opt-outs. - Extending moratorium to covered deposits could undermine confidence and jeopardize financial stability; pre-resolution moratorium could hasten bank demise and trigger contagion. - Ongoing discussions: resolution moratorium imposed by the SRB for two to five days, a two-day moratorium either before or in resolution, inclusion of covered deposits, and contractual netting issues. - Recommendation: Reassess merits of moratorium tool and keep length to a minimum; emphasize streamlined decision-making and advanced planning to choreograph entry into resolution. ### Liquidity needs, central bank support, and ELA - Preparations for intervention must ensure availability of liquidity during intervention while maintaining safeguards. - Liquidity needs in a major disturbance could be very large and sudden (as suggested by the FSAP stability analysis). - Considerations for planning: - Need for and availability of central bank refinancing and applicable constraints. - Liquidity component of resolution plans must be implementable. - A bank emerging from resolution with liquidity strains could access regular Eurosystem monetary policy operations; otherwise it would need to request ELA. - ELA is available at the Eurosystem’s discretion and only when all criteria are satisfied and safeguards are in place. - Recommendation: ECB’s monetary policy function, the respective NCB, and the SRB need to discuss the EA’s approach to central bank liquidity support, required safeguards, and boundaries of support; consider scenarios where assets eligible as collateral for monetary policy or ELA may not be immediately available. - Suggestion: Mutual understanding would benefit from a memorandum of understanding (MOU). Intervention strategy and planning must respect these constraints. ### Role of host authorities for D-SIBs - While the banking union is being further completed, host authorities of D-SIBs must play a major role in resolution planning, preparation, and implementation for the respective subsidiary or branch. - Rationale: Involvement helps maintain critical functions in the jurisdiction, avoid unfair burdens, and promote cooperative approaches. - Importance applies to both “single point of entry” and “multiple point of entry” group structures. - Recommendation: Ex ante determination of banks of major importance for the wider economy is needed to direct supervisory action, recovery planning, and contingency planning. ### Recovery planning: ECB benchmarking and deficiencies - The ECB is benchmarking SIs’ recovery plans to improve quality. - Cycle history: - ECB is in its third cycle of recovery planning. - Second cycle began in September 2016 and lasted until end-August 2017; first cycle with full comparability among plans. - Observations: - Substantial improvements in completeness and quality of recovery plans. - About 20 percent of the plans either had or were close to having ‘material deficiencies’ in three main areas: - inadequate governance and escalation procedures; - lack of relevant recovery indicators or inadequate calibration of their thresholds; - inadequate recovery capacity, either for liquidity, capital, or both. - ECB action: Plans determined ‘materially deficient’ require resubmission within two months—with potentially a one-month extension. Plans close to ‘materially deficient’ require an action plan to remediate key deficiencies. ### Making recovery plans more operational - ECB objectives for 2018 and 2019: make recovery plans more operational and reach a clearer view on banks’ recoverability. - The ECB is promoting playbooks and dry-runs to improve usability of recovery plans in stress situations; these initiatives are welcomed. ### SRB resolution planning approach, timelines, and proportionality - Until end-2017 the SRB used a modular, five-phase resolution approach for about 130 resolution plans; none advanced past phase three: - Transitional resolution plans (phase one): strategic business analysis; not subject to approval by SRB extended Executive Session. - Phase two: cover financial/operational continuity and preferred resolution strategy; subject to adoption by extended Executive Session—and the resolution college, if any. - Phase three: include MREL determinations at consolidated level; do not include determinations of substantive impediments or MREL; subject to adoption by extended Executive Session—and the resolution college, if any. - Phase four: include determination of substantive impediments and MREL at consolidated and single entity level. - Full resolution plans: add measures to phase four to remove substantive impediments (potential start of an impediments procedure). - At end-2017 the SRB adopted a matrix approach, splitting resolution plans by timeline and by risk to allow more time for resolution colleges to engage and provide more risk focus. - 2018 cycle changes: - Split annual 12-month cycle into two batches: (1) January cycle for banks without a college; and (2) September cycle for banks with college. - Split resolution plans into two categories: - banks for which a fully-fledged resolution plan is relevant and necessary; - “specific” banks requiring a tailored approach (e.g., banks covered by a European resolution college, those subject to simplified obligations, or those for which the SRB is host). - Expectation: For the 2020 resolution planning cycle, the SRB expects all banks, with or without colleges, to be covered by complete resolution plans with the most advanced set of policies. - Proportionality: SRB intends to introduce proportionality in resolution planning: - Banks with resolution colleges will be covered by the most advanced policies, including binding MREL targets at consolidated level and first identification of internal MREL targets at material entity level. - Banks without colleges will be subject to a two-tier approach depending on degree of priority, as agreed by SRB and relevant NRAs, based on size, complexity, and risk profile. - The SRB intends to determine binding MREL targets at the consolidated level for the majority of the largest and most complex banking groups by mid-2018. - In 2018, the SRB will also carry out a first identification of substantive impediments to resolution. ### Resolvability impediments and SRB powers - The SRB should adopt policies and take actions to mitigate resolvability impediments; assessment of resolvability should be a key chapter in resolution plans. - Status: - After only a few years of resolution planning, it is too early to consider banks resolvable. - The SRB has not yet notified the EBA that any banks are “not resolvable,” as required under Article 17 of the BRRD. - The SSM has started informally identifying impediments in its resolution plans (management information systems, service level agreements, access to FMIs, legal structure). - Concern: If the SRB makes a formal finding that certain impediments are “substantive,” Article 17(2) of the BRRD requires suspension of resolution planning for a significant period (potentially four months or even longer). Recommendation: This feature of the BRRD should be changed to ensure decisive mitigation of resolvability impediments while allowing progress on resolution planning to continue. - Once impediments are identified, develop and adopt policies to mitigate them. Article 17(5) of the BRRD provides strong powers that the SRB should use if necessary in case of a recalcitrant bank. ### SRB oversight of LSI resolution plans and workload - The SRB maintains oversight over LSIs by assessing NRAs’ decisions for adoption of LSI plans and other measures, including resolution decisions. - The SRB reviews all resolution plans prepared by NRAs for LSIs, including their MREL decisions. - Workload: - In 2017, the SRB reviewed 522 LSI draft resolution measures. - In 2018, SRB staff estimates the SRB will need to process approximately 800 draft resolution measures for LSIs. *Source: cr18232 - 50. The SRB has made good progress, in a short time, to develop internal policy* ### 64. Information exchange between the ECB and the SRB has worked well in normal times. ### Information exchange between the ECB and the SRB has worked well in normal times. ### Current cooperation arrangements and practice - In December 2015, the ECB and the SRB signed an MOU specifying their cooperation and information exchange. - Regular high-level contact: the Chair of the ECB Supervisory Board and the SRB Chair meet regularly; other high-level exchanges take place. - Permanent observer and reciprocal attendance: - The ECB Supervisory Board has a permanent observer on the SRB Plenary and all SRB Executive Sessions. - The SRB Chair is regularly invited to the ECB Supervisory Board meetings. - Joint teams and committees: - JSTs and IRTs share relevant supervisory information on their banks. - ECB supervisory staff participates in SRB committees; SRB staff attends the SSM Crisis Management Network’s quarterly meetings. - SRB access to supervisory information: - SRB staff has automatic access to a wide range of supervisory information necessary for resolution planning and enhanced access to supervisory information in situations of financial deterioration in a bank. - The SRB is consulted on banks’ recovery plans and the ECB is consulted on the SRB’s resolution plans. ### Revised MOU and anticipated improvements in crisis information exchange - The revised MOU will improve information exchange between the ECB and the SRB. - Enhanced data flows: - The SRB already receives enhanced information from the ECB on banks that have a score of four (or a score of three with at least one sub-score of four) in the supervisory review and evaluation process. - A broad range of information will be shared for resolution planning purposes. - Escalation with bank deterioration: - As a problem bank advances within the ECB emergency action plan’s stages, cooperation would intensify and the SRB would access greater and more frequent information; it would participate in an institution-specific crisis management team. - The SRB receives the draft FOLF decision from the ECB for consultation three days before the ECB Supervisory Board acts. - Both the ECB and the SRB recognize the need to improve information exchange on liquidity and collateral; the recently revised MOU will make information exchange in crisis situations more automatic. ### Cross-agency representation, membership, and consultation recommendations - Cross-agency representation would improve information exchange and coordination in normal times and in crisis situations: - The SRB should be granted permanent observer status on the ECB Supervisory Board. - The SRB and the ECB should be voting members on the EBA Board of Supervisors and the EBA Resolution Committee. - The EU and national authorities should be required to consult the SRB on draft legislation in its field of competence. - The Commission and the SRB should conclude their MOU; the SRB has a permanent Commission observer but the MOU has been in preparation for several years and should be signed as soon as possible. ### Cooperation with NRAs/NCAs and third-country authorities - SRB–NRA/NCAs cooperation: - In June 2016, the SRB and the NRAs agreed on a cooperation framework agreement providing guidance for cooperation (e.g., IRTs, resolution colleges, and LSI oversight). - This agreement is being renegotiated and was expected to be completed in 2018. - The SRB has the remit for 13 cross-border LSIs that are not under the direct supervision of the ECB and therefore needs to negotiate MOUs with the competent authorities responsible for those cross-border LSIs. - International cooperation and outstanding agreements: - In November 2017, the FSB updated its list of 30 G-SIBs, which includes seven G-SIBs from the banking union. - Four thereof have significant subsidiaries in third countries; as required by the KAs, each has a CMG. - The SRB is participating on behalf of the host jurisdiction in six foreign CMGs and is encouraged to sign the cooperation agreements for these CMGs as soon as possible. - The SRB has signed general bilateral cooperation agreements with the U.S. and Canadian resolution authorities and is working on similar arrangements with other third-country jurisdictions and MOUs with the ECB and non-EA NCAs and NRAs. - If the U.K. is considered a third country after Brexit, agreements with the Bank of England would need updates; the Bank of England would no longer have a seat on the resolution colleges but could be invited to participate for U.K.-headquartered banks operating in the EU. ### Liquidity and collateral information needs - Recent experience highlights the importance of greater information on liquidity and collateral, especially when a bank begins to have difficulties and as contingency planning for intervention intensifies. - Information exchange on liquidity and collateral needs to extend to NRAs and NCBs, in addition to the ECB–SRB channels. ### Deposit insurance system (DIS): status, constraints, and recommendations - DGSD enhancements (2014) include: - coverage up to €100,000 per depositor per bank (with higher coverage for certain life events); - a seven-working-day payout of deposits (effective January 1, 2024), reduced from 20 working days in three phases—information on how member states are progressing was not available; - risk-based premiums to be paid by banks into their national DIS to reach a level of 0.8 percent of covered deposits by July 3, 2024 (currently estimated at €45 billion for the banking union); - alternative funding arrangements to obtain short-term funding to meet claims against their DISs (e.g., a line of credit from the finance ministry)—of which there are very few in place; - voluntary arrangements among member states to allow DISs to lend to other DISs within the EU—of which there are only very few concluded; - protection for deposits taken at branch offices located in another member state. - Fragmentation and national discretions: - The DGSD contains over a dozen provisions providing for national discretion (Annex II), including provisions to reduce the target to 0.5 percent of covered deposits in certain circumstances, exceptions to scope and coverage, repayment periods, and calculations. - Voluntary lending arrangements among DISs have been used by nine member states, but not all have operationalized the lending arrangements. - Different national banking structures and varying speeds of implementation mean DISs operate differently across the banking union. - Oversight and capacity: - Member states are required to inform the EBA about covered deposit amounts and contributions collected by their DISs and of any depositor payouts—since 2015, 50 depositor payouts have occurred. - The EBA has issued guidelines on and oversees the calculation of industry contributions to DISs and conducts peer reviews every five years; the next peer review was scheduled for July 2019. - The EBA could be mandated with overseeing and coordinating the DISs. - Use of DIS funds in resolution and insolvency: - The KAs require legal frameworks to provide for both pay-outs to insured depositors and transfer of insured deposits to another solvent bank in either resolution or in insolvency. - The power to transfer covered deposits in liquidation is optional under the DGSD and just a little over one-third of the member states have made use of this option (Annex II). - The SRB lacks liquidation authority and does not consider DIS funding in resolution because it does not have legal authority to access DISs. - The SRB holds a strict interpretation of Article 109 BRRD, which combined with covered deposits’ preference over other creditors in the BRRD prevents DISs from providing upfront support greater than its estimated cost (net of recoveries in liquidation) without taking recoveries from resolution into account. - Recommendation on DIS disbursements in resolution: - Change the interpretation of relevant directives to allow DISs to disburse funds upfront in a resolution if the estimated cost to the DIS, net of recoveries, would be no higher than its estimated net liquidation costs. - The proposed change should allow a gross contribution from the DIS up to the value of covered deposits (the amount the DIS would have paid out upfront in liquidation). - Without such flexibility, transfer and bridge bank powers may not work in precipitous failures or crises when cash injections are needed. - Funding adequacy concerns: - A recent EBA analysis shows that while 32 out of 43 DISs in the EU have increased their funds in 2017, only 17 DISs have reached the target level of 0.8 per cent of covered deposits. - Several EA country FSAPs note that backup credit lines with national governments are not operationalized and readily available to DISs; this should be remedied. - A backstop for EDIS should be put in place; possibly that backstop could be provided by the ESM. *Source: IMF staff (cr18232).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18232.pdf_