Facilitating orderly market exit in the EU crisis management framework

Article by Edouard Fernandez-Bollo, Member of the Supervisory Board of the ECB, for Eurofi Magazine

7 September 2022

There has been a consensus for some time now at the Member State level that the next practical step towards integration of the European banking market should aim to improve the crisis management framework. At the ECB, we are convinced that useful progress can be made towards making the present European framework more efficient and furthering its basic approach so as to protect public funds without any need for additional contributions from the banking industry. The amounts earmarked for the crisis management framework in Europe are already comparable to those in the United States, so reaping the benefits from increased use of such funds has the potential to reduce crisis costs and, ultimately, the burden for both public and private contributors.

The key will be to focus on measures that make it possible to manage an orderly exit from the market for troubled banks of all sizes through both resolution and liquidation, without economic disruption or indirect forms of bailout by public authorities. By avoiding fire sales of assets, orderly exit reduces the burden that the industry has to bear. It also allows for a healthier banking market; preventing continued activity by “zombie banks” benefits all market participants.

For resolution, this could be done by facilitating access to the Single Resolution Fund (SRF). The ECB supports the IMF recommendation of a possible financial stability exemption. A similar argument can be made for situations where the resolution authority decides that a failed bank needs to exit the market. In such cases, we think consideration should be given to the idea of allowing deposit guarantee scheme (DGS) funding to be used to unlock access to the SRF by helping to finance a possible shortfall below the intervention threshold.

In liquidation too, we favour allowing broader scope for DGS interventions when the objective is to allow an orderly exit from the market. We see strong merit in harmonised European principles allowing DGSs in all Member States to contribute to preventive, alternative and exit measures. For preventive interventions, it will be important to ensure a level playing field between DGS and institutional protection scheme (IPS) interventions, in particular in the way we recognise their contribution to lessening the costs of interventions after the fact. We recommend clarifying and harmonising the least-cost test as a way of promoting alternative exit funding measures once a bank has passed the stage of failing or likely to fail (FOLTF).

We therefore favour a common EU basis for calculating this test, taking into account a broader concept of the costs of a pay-out scenario. We also support limited harmonisation of national creditor hierarchies in liquidation, as these are key to determining the least cost. Instead of a limited DGS super-preference, in our view a more general depositor preference should be introduced. This would support the level playing field across the whole of the European Union and facilitate resolution by reducing the complexity of the “no creditor worse off” test. Both these elements would also enhance DGSs’ capacity to contribute to the funding of resolution strategies. 

As the rationale of all these proposals is to facilitate exit from the banking market, it is of course essential that the competent authority can ensure exit in all cases. The resolution authority can do this. The supervisor should be able to do so as well, even in situations where the trigger for national insolvency proceedings may not be met. While the role and powers of the supervisor in these situations could also be a field for further harmonisation of national legislation, market exit by a credit institution can be ensured by withdrawing its licence. This is why the ECB very much welcomes the amendment in the Commission’s CRD VI proposal allowing the supervisor to withdraw a licence in all cases where banks are FOLTF, and encourages legislators to support it. In the interests of efficiency the supervisor needs to retain discretion in assessing the timing and conditions of withdrawal, in particular so this can be combined appropriately with possible support measures from the DGS. Automatic withdrawal would make much it more difficult to arrange an orderly exit, as the supervisor would be obliged to take a decision that puts an end to its authority and powers over the institution.

At the ECB, we are convinced that the best way to make practical progress towards the integration of the European banking market is harmonisation which allows a combination of flexibility on means with clarity on the objective of market exit.