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Edouard Fernandez-Bollo
ECB representative to the the Supervisory Board
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Enhancing the EU’s crisis management toolkit

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

13 September 2023

The European Commission has adopted a proposal to improve the EU’s crisis management and deposit insurance framework. On 5 July the ECB issued its opinion on this proposal, emphasising the need to maintain the package’s coherence to ensure the framework is effective, and calling for the legislation process to be swiftly finalised.

We strongly support the proposed legislative package because of the valuable contribution it would make to improving the efficiency of the banking market. We are indeed convinced that widening the scope of the European harmonised resolution framework is the most cost-efficient way to facilitate an orderly market exit for failing or likely-to-fail banks. The proposed amendments would in certain cases also minimise net asset losses of struggling banks, contribute to stabilising deposits in the whole system and would also require less funding to be mobilised than is the case with depositor pay-outs. As a consequence, it would provide the private sector with an incentive to offer solutions for the orderly exit of struggling banks from the market. The proposed legislative package would also avoid sustaining zombie banks and the winding up of banks under national liquidation proceedings, rather than using the common European framework for resolving banks.

However, expanding the scope of resolution needs to go hand-in-hand with facilitating wider and more efficient access to the funds of the European safety net. This does not mean increasing the funds earmarked for this purpose, just increasing the capacity to actually mobilise these funds to support market exit solutions. This is the key objective behind the proposed single-tier depositor preference, and the possibility to count the contribution of deposit guarantee scheme (DGS) funds towards unlocking access to the Single Resolution Fund (SRF).

The single-tier depositor preference is from a legal perspective a much simpler solution – even for the sole purpose of a liquidation procedure – than the three-tier system currently in place in the EU, which is possibly the most complicated system of depositor preference in any major financial centre. Establishing a single ranking for all depositors means the “no creditor worse off” principle can be applied in a simpler way in any resolution situation. In addition it will help in harmonising the methodology for the least-cost test in a way that facilitates greater use of the DGS in resolution. The ECB – whose mandate it is to preserve financial stability – observes that the general depositor preference has been in place for a long time in the United States, which has the largest bank bond market in the world. As no particular issues have emerged in the US with respect to funding the market exit of banks, it seems highly unlikely that this approach could not be applied to the European Union framework. The ECB is of course fully open to contributing to further analysis and discussions on the potential unintended consequences of this approach and ways to mitigate them.

Using DGS funds to contribute to unlocking access to the SRF would also be key in facilitating the smooth exit of failing banks from the market. Importantly, the DGS bridge mechanism is limited to transfer tools and is subject to additional safeguards. As this proposed amendment relies on the implementation of the resolution framework, I would like to emphasise that it does not exempt banks that are subject to it from the minimum requirement for own funds and eligible liabilities (MREL), or recovery and resolution planning more generally. It therefore actually reduces the potential moral hazard of “gambling for resurrection”, which relies on more generous national frameworks being applied. Furthermore, the ECB would in all cases be able to withdraw a bank’s licence, following its assessment as failing or likely-to-fail, which will also help responsible authorities ensure that banks who should leave the market do so in an orderly manner.

Finally, let me add that as the rationale behind this proposal is to promote early intervention, there is no reason to think that it aims to hinder preventive interventions that could ensure the same objective, in situations involving banks which have not reached the point of failing or likely-to-fail – quite the contrary in fact. In any case, the ECB clearly wants to also strengthen the effectiveness of the early intervention and preventive measures of these mechanisms and could support any further clarifications to ensure this objective.

In view of the importance of the potential gains in efficiency the proposed legislative package offers, it would be particularly useful to have an open dialogue on its provisions and formulations. This would also dispel any possible misgivings and provide constructive support for its aims.


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