Elisa Ferreira: Resolution and early supervisory intervention
Topics supporting address by Ms Elisa Ferreira, Vice-Governor of the Bank of Portugal, on the
panel discussion of "Resolution and early supervisory intervention" at the "BCBS-FSI High-level
Meeting for Europe on Banking Supervision", Lisbon, 18 September 2018.
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Accompanying slides of the speech.
The firm, cohesive European commitment to Banking Union helped counter financial
fragmentation but its incomplete setup seriously jeopardises its key benefits. As the SSM
was put in place and the SRM started working, the political will to build the third pillar - a
European Deposit Insurance Scheme (EDIS) - and complete the overall architecture waned.
New, bigger political hurdles continue to emerge with policymakers stuck in the risk-reduction vs.
risk-sharing debate, losing sight of the final objectives.
Today, Banking Union means that supervisory and resolution decisions are mostly
European, whilst the ultimate guarantor of financial stability remains national, with limited
tools to act. The Meseberg declaration and last June's Euro Summit, by falling short again of
proposing further risk-sharing while adding additional layers of risk-reduction measures, lead us
to ponder whether the costs of attaining additional risk-sharing are worth the risks to financial
stability that such measures may trigger.
An unstable balance has emerged from the lack of political will to complete the Banking
Europe
Union preventing us from fully reaping the benefits of economic integration.
needs to have concrete plans going forward, and must address pressing questions on what we
need to adjust to guarantee financial stability.
1. Treatment of cross-border banking groups
Without EDIS, as banks are to a large extent, still "national in death", instead of
discussing the adoption of waivers, a specific regime needs to be developed to address
Member States' concerns over the risks of potential failures of cross-border banking
Member States need tools to address financial stability issues arising from locally
groups.
systemic undertakings. This involves:
the rethinking of the Single Point of Entry (SPE)/Multiple Point of Entry (MPE) resolution
model;
the choice between subsidiaries or branches, together with the supervisory powers of host
national competent authorities (NCAs); and
openly debating the contentious topic of ring-fencing measures.
The transformation of subsidiaries into branches has emerged as an answer to this
debate - however that implies, at least, that:
national resolution authorities are involved in the definition of resolution plans and actions
when local undertakings are of systemic relevance to the concerned Member State; and
domestic supervisors should have the capacity to react to strategic decisions affecting
branches as they would, had it been a standalone entity, so that the SSM, SRM and national
authorities are accountable to the Member States.
2. Resolution/winding-down of medium-sized banks
The sustainability of business models of medium-sized institutions predominantly
financed by capital and deposits is currently endangered, with insufficient instruments
available to safeguard financial stability in case of failure. There is no clear room for a
'middle class' of institutions whose failure, and eventual liquidation, could be considered
systemic but whose business model may be incompatible with accession, at a reasonable cost,
to the international market, to satisfy their MREL requirements.
Resolution authorities need to be able to rely on alternative sources to support
resolution actions, such as resolution funds, but are currently prevented from doing so.
The current minimum internal loss absorption requirements (8% of total liabilities and own funds)
and limitations on the amount of the use of resolution funds (5% of total liabilities and own funds)
prevent it, which may subject senior debt and even unsecured deposits to risks incompatible with
financial stability. In this context, the IMF's recent proposal of a 'financial stability exemption'
should be further explored.
Recent experiences have put the harmonisation of EU banks' liquidation regimes on the
agenda of policymakers. However, before we jump into harmonising liquidation regimes,
in view of the public policy dimension, we must understand what bank liquidation means
and assess if we have the right tools to ensure that bank liquidations are orderly in the
current context. As a considerable social and economic impact results from the failure of a
bank considered to be of no public interest at EU level but with systemic relevance at local level,
we need to discuss alternatives for medium-sized and small-sized banks exiting the market,
instead of moving towards a further straitjacketing of nations' room for manoeuvre. These might
include the establishment of an enabling framework for the winding-down of locally systemic
relevant banks combining elements of the resolution and liquidation frameworks while preserving
value and protecting creditors and non-financial borrowers. For that, work is needed to:
create special insolvency proceedings, with recourse to administrative options attributing
additional instruments, such as the ones available in resolution, to a liquidating authority ,as
an alternative to the 'atomistic' court-led liquidation regime. The liquidating authority and the
funding sources available would need to be identified.
ensure effective financing of the deposit insurance system for deposit transfers abiding by
the least cost principle with the liquidating authority having the option to offer guarantees or
enter into profit and loss sharing regimes. For that we would need to revise the applicable
State aid rules.
Recent calls to form a sort of European FDIC, merging the Single Resolution Fund and
EDIS into one single entity, merit our attention in this regard, provided that the legal
framework is fixed and that financial stability - both at European level as well as at national level
- is enshrined as the first and fundamental objective of any intervention.
3. The return of too-big-to-fail?
Regulation-driven consolidation has become an imminent risk, fostering concentration at
local level and the comeback of too-big-to-fail. Existing regulatory requirements were not
thought of as a way to promote consolidation but are currently working in that direction. Driven by
profitability and efficiency concerns, recent calls for the creation of pan-European banks able to
compete with larger institutions outside Europe as a matter of national sovereignty have added
pressure on regulators and policymakers to review existing rules. This in turn has implicitly put
on the table the return of too-big-to-fail with the ensuing moral hazard - something we were trying
to avoid in the first place. Are we so afraid of what digital giants such as Google, Facebook, Apple
and Amazon might give rise to in the future that to compete with them we are turning a blind eye
to the risks of too-big-to-fail? Is a 'forward escape consolidation' the right answer when
challenges remain regarding the failure of cross-border banks even for medium-sized banks?
Shouldn't we instead focus on ways to address the economic dislocation and social costs that
may arise from the gaps in the current architecture?