Yesterday, on 14 January 2021, the European Court of Auditors presented a special report on European bank resolution. Already in 2017, the Court of Auditors had identified a number of shortcomings and criticised the slow implementation by the European resolution authority SRB (Single Resolution Board). The current report reviewed the findings of 2017 and looked into the implementation for the non-systemically important banks, which are supervised by the national supervisory authorities.
After several banks had to be rescued with billions of taxpayers’ money during the great financial crisis, resolution regimes were established worldwide. Since then, banks have had to set out in resolution plans, the so-called “living wills”, how they can be resolved without the use of public funds when they get into trouble. The corresponding rules were implemented in the EU in 2014 with the Bank Recovery and Resolution Directive (BRRD). Since its establishment in 2015, the SRB has been the responsible supervisory authority for the resolution planning of the large euro area banks. Its statutory tasks include screening the living wills for substantive impediments to resolution. If no such obstacles are found, the bank may be considered resolvable. Otherwise, the authority can force banks to remove the impediments.
The current report criticises that the implementation of the European resolution regime by the SRB is still incomplete. In particular, it criticises the fact that there are still major gaps in all living wills. Currently, they only fulfil 60% of the legal requirements on average and there is a considerable range. Overall, there is also a great heterogeneity in the supervisory treatment of different banks, because either harmonising guidance by the SRB is still pending or or such guidance is not binding. The report is particularly critical of the SRB’s continued inability to conclusively assess the resolvability of banks. Currently, only potential substantive impediments are identified.As a result, the authority currently cannot enforce changes by supervisory means and is dependent on consensual cooperation with the banks.
The central principle of bank resolution is rigorous creditor participation (bail-in) in the event of a crisis. In the past, the state always stepped in with taxpayers’ money when large, systemically important banks got into difficulties. Bank investors could be relatively sure that they would not lose money in these so-called bail-outs. The de facto state guarantee ensured that large banks could refinance themselves very cheaply in the capital markets despite their risky business. The resolution framework was supposed to end this implicit subsidy. But persistently low funding rates show that the resolution of big banks without public money is still not credible.
The report provides rare insights into the largely non-transparent work of the SRB. Since in particular resolution plans are not public, it is difficult for third parties to assess the resolvability of European banks. In the past, I have repeatedly called for more transparency in the SRB (link).
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“Europe is poorly prepared for a possible Covid banking crisis. There is still a lack of solid plans for bank resolution. The living wills of European banks still have large gaps. Banks and supervisors have made too little progress in the last five years. Nobody said that the task would be easy. But this cannot justify that the implementation progressed at a snail’s pace. There has been a lack of ambition on the side of banks and supervisors alike. This sluggishness could now come back to haunt us. It is completely unclear whether the banks’ half-baked living wills are fit for a crisis. After the great financial crisis, taxpayers were promised that they would not have to pay again. This promise has already been broken in several cases. The resolution of major banks must quickly become credible, so that the billions of euros in subsidies through taxpayers’ guarantees finally come to an end.
The SRB must not lose any more time now. There must be no more dilly-dallying regarding the banks’ living wills. It would be fatal if the Corona crisis served as an excuse for further delays. The fact that the authority has not operationalised important supervisory powers undermines its credibility. Above all, it must finally get a grip on the substantive impediments. This supervisory process finally must be implemented.”
Special Report 01/2021 of the European Court of Auditors on resolution planning in the Single Resolution Mechanism:
Special report 23/2017 of the European Court of Auditors on the Single Resolution Board:
My call for more transparency at the SRB after the last hearing of chair Elke König before the ECON Committee:
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