Making Retail Banks Resolvable

31 Pages Posted: 18 Oct 2019

See all articles by Ioannis Asimakopoulos

Ioannis Asimakopoulos

Universite du Luxembourg, Faculty of Law, Economics and Finance

Date Written: October 17, 2019

Abstract

The EU bank resolution framework relies heavily on banks' internal capacity for loss-absorption and recapitalization through the issuance of bail-inable financial instruments (MREL). Meanwhile, the existing collective funding arrangements (resolution and deposit insurance funds) seem inadequate to support other alternatives, such as resolution transfer strategies or administrative liquidation. Based on resolution experience and evidence thus far, such regulatory architecture cannot work effectively on all EU banks regardless of size and business model. Many retail banks – both significant and less significant with deposits higher than 40% of their total liabilities and own funds (TLOF) – struggle to comply with the existing framework due to their funding model and difficulty to tap capital markets. Ultimately, efforts to improve their resolvability could threaten their viability. In order to improve the resolvability of retail banks, regulators need to enhance resolution transfer strategies which would ultimately reduce MREL requirements. Credible transfer strategies though require credible financing arrangements when a buyer is not readily available. Therefore, resolution funds would need to be able to contribute more than the current 5% TLOF in order to credibly supplement bail-in. Otherwise, regulators should incentivize banks to establish voluntary collective industry funds – similar or identical to institutional protection schemes, which would finance transfer-based resolution strategies integrated into the resolution plans. Participation in such voluntary funds would occur in exchange for lower MREL requirements. The use of transfer strategies in conjunction with the establishment of voluntary industry funds would significantly reduce MREL requirements for retail banks.

Keywords: bank resolution, retail banks, bail-in, transfer strategies, liquidation, resolution financing, MREL, deposit guarantee schemes, voluntary funds

JEL Classification: G15, G18, G21, G28, K22

Suggested Citation

Asimakopoulos, Ioannis, Making Retail Banks Resolvable (October 17, 2019). European Banking Institute Working Paper Series 2019 – no. 51. Available at SSRN: https://ssrn.com/abstract=3471187 or http://dx.doi.org/10.2139/ssrn.3471187

Ioannis Asimakopoulos (Contact Author)

Universite du Luxembourg, Faculty of Law, Economics and Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg
Luxembourg

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