Crisis management: reform on the way

Contribution by Anneli Tuominen, Member of the Supervisory Board of the ECB, for Eurofi Magazine

20 February 2024

The current review of the crisis management and deposit insurance (CMDI) framework aims to improve the way we resolve crisis situations. Implementing the CMDI proposal is an important move to further enhance the European crisis management framework, making it possible to deal more effectively with the failure of smaller and mid-sized banks. This is a welcome step in the right direction. The urgency of having a proper crisis management framework in place cannot be overstated, as we saw last year.

I would like to emphasise a few aspects of the proposed reform.

When a bank does not meet or is unlikely to meet its supervisory requirements, we are empowered to take supervisory and early intervention measures aimed at keeping it viable and preserving financial stability. The proposed legislative changes include important improvements to the existing supervisory early intervention framework. This will support us to swiftly adopt the necessary and most appropriate measure for any given situation.

One key aspect that should be a cornerstone when assessing the proposed reform, is the principle of optionality. From a supervisory perspective, we consider it crucial that all relevant stakeholders can deal effectively with banks in distressed conditions. Recognising that no bank crises is identical, the relevant authorities should be able to choose the most appropriate tool for the situation at hand from a range of options and be able to make effective use of it. This optionality should exist at each phase. Policymakers should have a proper toolkit before a bank is declared failing, and they should also have access to robust tools once a bank has been declared failing.

An important element of the toolkit, is precautionary recapitalisation. We are pleased to see that the European Commission’s proposal ensures that it remains available, subject to strict conditions. Though exceptional, precautionary recapitalisation is a useful part of the current crisis management framework, and its current conditionality appears appropriate. At the same time, the flexibility provided to relevant authorities to take the specific circumstances of each case into account should not be restricted.

Another notable development in the toolkit concerns the expanded role of deposit guarantee schemes (DGSs), traditionally seen as a safety net for depositors. The proposed changes call for DGS funds to be used for more than simply depositor payouts. For instance, instead of paying out covered depositors, DGS funds could contribute to facilitate transfers of assets and liabilities to an acquiring bank under what are known as “DGS alternative measures”. The “DGS preventive measures” represent another form of DGS tool. These could be used in the pre-resolution phase by helping banks to ensure or restore compliance with the prudential requirements while they are still going concerns.

Ensuring adequate funding in resolution is an important precondition for the proposed expansion of resolution to medium-sized banks. The DGSs can also play an important role in helping to provide this funding.

Besides access to a robust set of tools, I would like to point out the need for close collaboration. The ECB and the SRB already cooperate very closely and exchange information based on a bilateral Memorandum of Understanding. We also work very closely with all other relevant stakeholders. The Commission’s proposals to enhance cooperation and information-sharing are very much supported.

Finally, as the recent March turmoil in the US and Switzerland has shown, having proper arrangements in place for liquidity in resolution, is a crucial element to support a successful resolution. The Financial Stability Board considered in this respect that authorities need to have credible liquidity backstops and other frameworks in place that are overt and easily understood by market participants and depositors in order to restore market confidence when a bank is resolved.^[1]

In conclusion, the CMDI proposal represents an important opportunity to further enhance the existing EU crisis management framework using the lessons learnt during the first years of its application. We hope the ongoing discussions will help to reach a consensus on these important changes to the European crisis management framework.

At the same time, I would like to point out that, even if we reach a consensus and the crisis management reform takes place, that is not the end of the journey. The Commission’s proposal does not address some fundamental elements of the broader crisis management architecture. The third pillar of the banking union, a European deposit insurance scheme, is still missing. Given its importance, we hope that this will be addressed in the next legislative term.