Toward a Healthier European Banking System

2013 was a year full of new regulatory impulses. 2014 is the year of major changes in Bank Regulation and Supervision.
The ECB Supervisory Board convened for the first time this year in January.  Following this meeting, Ms. Nouy, Chairperson, stated: “We have to accept that some banks have no future,” and: “We have to let some disappear in an orderly fashion, and not necessarily try to merge them with other institutions.” This statement is remarkable as main preconditions to restructure the European financial system are still work in progress. Current issues are:
         Which banks „have no future“?
         Who decides if a bank shall be liquidated?
         Who pays for it?
Banks with no future: Since February this year, Joint Supervisory Teams and auditors collaborate to conduct an on site Asset Quality Review.  Its outcome is meant to identify European banks that might be restructured or liquidated if they do not meet the thresholds set by the joint ECB and EBA stress tests. Final results of the Comprehensive Assessment are expected in October 2014 at the latest. We expect further stress tests to follow.
The decision to liquidate a bank and the source of the funds required to do so: These are major issues currently discussed by the European lawmakers, which are scheduled to be resolved until April 2014 before the EU parliament adjourns for May elections.
Last week’s negotiations between EU precidency, commission, parliament and council established the following concerning the resolution decision:
  • The ECB will be charged with the task of determining if a bank is failing or likely to fail.
  • The committee which will be charged with the decision upon the resolution of a bank is still in discussion. German Finance Minister Wolfgang Schäuble suggests decision making shall take place through the plenary session of the Supervisory Board. Other interested parties are asking for more independence from national influence and favor a decision by the Executive Board. The final decision lies either with the commission or the council.

Concerning the funding of the resolution costs it appears that Finance Ministers across the EU recognize a common need to demonstrate the European financial system’s robustness in a crisis. Clearly, the time period allowed for the SRM fund’s pooling will be key to signaling this strength. Accelerated funds pooling and/or an additional backstop such as the ESM are possible approaches. Details are currently debated as well.

In view of these developments, movement toward restoring market credibility and restructuring the European financial system can be seen. The question remains: Who pays the bill? The ongoing negotiation on the SRM funds are connected to points already set in 2013: SRM funds shall only be used after Bail-In has taken place. The Bail-In rules will enter into force on January 2016, together with the pooling of SRM funds.
In the meanwhile and with respect to the 2014 Comprehensive Assessment results, EBA and ECB asked the European Finance Minister to help banks “disappear in an orderly fashion“ by making sure that there are national resources available to carry potential recapitalisation or resolution costs. It is essential that each country contributes its part. This understanding is also mirrored by the  ESM-regulation. It states that ESM funds shall only be used for direct bank recapitalisation if the respective country cannot provide the required stake.

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