Europe’s bank resolution authority seeks ‘firepower’ to deal with collapsed lenders

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Europe’s bank resolution authority is pushing policymakers to provide more “firepower” to protect depositors and rethink how lenders are wound down after recent failures underscored the need for swift and decisive action in a crisis.

Silicon Valley Bank’s implosion in March prompted the US to invoke emergency powers to guarantee immediate full repayment of all its depositors. Credit Suisse’s shotgun marriage to UBS a week later was eased by the Swiss National Bank’s offer of billions of euros in guaranteed funding to the merged entity.

On Thursday, the SNB called for a review of banking regulations as it warned that existing global rules on capital and liquidity were insufficient. The Bank of England is also reviewing its framework for resolving smaller banks and its deposit insurance scheme in the wake of the crisis.

In Europe, work was already in train on a revamped crisis management framework to reduce the potential for losses to taxpayers or depositors, but Dominique Laboureix, chair of the Single Resolution Board, said that while the package was “good step in the right direction”, there was more to do.

“We need [policymakers] to come back to the drawing board on the issue of funding in resolution,” said Laboureix, whose institution is charged with safely winding down large or systemic eurozone banks that run into difficulty, a group that currently numbers 115.

“If we are confronted with a resolution decision during a weekend . . . we cannot say, OK, let’s ask the central bank to give a liquidity line supported by a guarantee from the government,” he added. “That is not possible in the European context.”

Offering liquidity to a failing bank is one of the key tools to maintain depositor confidence and reduce the risk of a bank run by reassuring customers they can get their money out if they want to.

“The idea is to increase our firepower because we think that under exceptional circumstances we think it would be better if we had a bit more of a solution [on liquidity],” Laboureix said, stressing that “in the majority of cases, we have already sufficient resources”.

The SRB, one of the pillars of the EU’s plan for a banking union across its member states’ borders, wants the European Central Bank to agree to fund banks in resolution, potentially backed by an EU government guarantee. The SRB can currently access funding lines through the Single Resolution Fund and the European Stability Mechanism. 

“We need a framework that gives us the tools to act, without making the decision-making process so difficult in terms of actors and endorsements that we cannot make a decision,” said Laboureix. “If it’s too complex, it won’t work.”

Laboureix said his proposed solution would need “clear inter-institutional support” from EU member states, the ECB and the resolution authorities.

He said it was “realistic” to expect the ECB to support the measure because it already extended emergency liquidity assistance to banks that were in difficulty. The new lines would not necessarily be drawn, rather their existence would improve confidence: “It’s a way of showing that if there is a need of liquidity support, we are here”.

The ECB declined to comment but in 2018 its then vice-president Vítor Constâncio called for such a measure, saying the collapse of Banco Popular the previous year had highlighted the need for a eurozone liquidity facility for banks in resolution.

Laboureix also said the damage to the market for contingent convertible bank debt — additional tier 1 bonds known as AT1s — was not as bad as feared after the Swiss authorities cancelled $17bn of Credit Suisse’s AT1s without first wiping out the bank’s shareholders.

“The reality is that the AT1 market worldwide is not broken by the decisions they [the Swiss] have taken,” the SRB chair said, adding that the actions of the Swiss had “absolutely” preserved global financial stability.