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Facilitating orderly market exit in the EU crisis management framework

On 8 September 2022, the European Central Bank (ECB) published an article by Supervisory Board Member Edouard Fernandez-Bollo outlining the ECB's recommendations for strengthening the crisis management framework for European banks. The focus was on measures facilitating an orderly exit of troubled banks from the market through resolution and liquidation without causing an economic downturn or requiring the use of public funds for a bailout.

Following proposed amendments have been outlined:
-Facilitating banks entering resolution access to the Single Resolution Fund (SRF)

  • If there is a potential shortfall below the quantitative threshold for accessing the SRF, the idea that deposit guarantee scheme (DGS) financing could be utilized to provide access to the SRF should be taken into consideration.
  • For instance, a potential shortfall below the 8% "total liabilities and own funds" (TLOF) threshold required to access the SRF, losses imposed on depositors could be counted towards making up this shortfall so that the bank can access the SRF.

-Give DGS interventions more latitude when banks are liquidated and harmonize European DGS standards among all Member States.

-Harmonizing the "least-cost test" as a means of promoting alternative exit
funding measures once a bank has been classified as "failing or likely to fail "(FOLTF):

  • The "least-cost test," a barrier to obtaining DGS funds, requires that costs of crisis intervention measures do not exceed the costs of fulfilling the DGS statutory or contractual mandate. However, the DGS Directive does not currently provide comprehensive instructions on how to conduct this test.
  • The ECB is in favor of establishing a common EU framework for computing this test, accounting for a more comprehensive understanding of the expenses associated with a pay-out scenario.

-Limited national creditor hierarchy harmonization

  • Rather than a restricted DGS super-preference, where only the guaranteed share of deposits rank senior to other creditors by virtue of their guarantee, the ECB is in favor of a more broad depositor preference, where all unsecured deposits rank senior to other unsecured liabilities(this approach is already taken in the certain Member States, e.g., Italy).
  • This would facilitate policy harmonization in the EU and simplify the "no creditor worse off" test, thereby facilitating resolution.

-Permit supervisors to withdraw banking licenses in all cases where banks are FOLTF, as per the amendment put forth in the Commission's CRD VI proposal

  • The ECB expressly supports supervisors' right to control the timing and terms of withdrawal since automated withdrawal would make it harder to organize an orderly exit.
  • Currently, only resolution authorities can ensure exit before insolvency triggers are breached.

For inquiries please contact:

RBI Regulatory Advisory

Raiffeisen Bank International AG | Member of RBI Group | Am Stadtpark 9, 1030 Vienna, Austria  | Tel: +43 1 71707 - 5923