Bank Resolution Research Articles

Austria

This note assesses and makes recommendations regarding bank resolution and crisis management arrangements. The scope of the assessment includes the institutional arrangements for recovery, resolution, and crisis management; the supervision of banks’ recovery plans; the legal regime for bank bankruptcy and resolution; resolution planning by the authorities and addressing impediments to resolution; assuring funding to support resolution; the two deposit guarantee schemes; and the government authorities’ collective preparedness to deal with financial crisis. The authorities relevant to this note are the Ministry of Finance (MOF), the Financial Market Authority (FMA), and the Austrian National Bank (OeNB). Main findings: Recovery and resolution planning are well advanced. Key impediments to resolution have been identified and are being addressed, yet adequate means to ensure sufficient funding in resolution remains to be determined. The legal framework is sound, although additional flexibility could be provided in the bankruptcy regime. The authorities’ collective contingency planning for financial crisis and testing of plans should be intensified. The following paragraphs elaborate on these and other matters.

금융위기 시 예금자 우선변제제도의 역할에 관한 연구 : 한국의 부실저축은행 구조조정을 중심으로

금융위기 시 예금자 우선변제제도의 역할에 관한 연구 : 한국의 부실저축은행 구조조정을 중심으로

금융위기 시 예금자 우선변제제도의 역할에 관한 연구: 한국의 부실저축은행 구조조정을 중심으로(The Financial Crisis and a Deposit Preference: Focusing on Resolution of the Insolvent Mutual Saving Banks in Korea)

Korean Abstract: 본 연구는 금융회사 파산 시 예금자가 다른 일반채권자보다 우선하여 파산재단으로부 터 예금채권을 변제받을 수 있도록 하는 예금자 우선변제제도가 예금보험제도와 상호보 완적인 역할을 담당하여 궁극적으로 금융시스템 안정에 기여할 수 있음을 인식하고, 예 금자 우선변제제도의 예금보험기금 절감효과를 살펴봄으로써 동제도 도입의 필요성을 제언하고자 하였다. 본 연구에서는 2011년~2015년 부실저축은행 정리에 투입된 금액과 예금자 우선변제 제도를 적용한다고 가정할 경우의 정리비용을 비교함으로써 예금보험기금의 절감효과를 확인하였다. 분석 결과, 첫째, 보험금 지급 후 청ㆍ파산 방식 하에서 예금자 우선변제권 은 예금보험기구의 파산배당률을 높여 회수금액의 극대화를 통해 약 1.4조원의 정리비용 을 절감할 수 있음을 확인하였다. 둘째, 제3자(또는 가교금융회사) 계약이전 방식으로 부실저축은행 정리 시, 예금이 부분보호되고 예금자 우선변제가 있는 경우, 약 3.9조원의 예금보험기금 절감효과를 확인하였다. English Abstract: This study analyzes the reduction effects of the deposit insurance fund in the depositor preference system. In addition, this study examines the importance of the depositor preference system, which allows depositors to repay deposits from bankruptcy in preference to other general creditors in case of bankruptcy. Depositor preference plays a complementary role with deposit insurance and ultimately contributes to the stability of the financial system. In this study, we examined the savings of the Deposit Insurance Fund by comparing the amount of money spent on the resolution of insolvent mutual savings banks from 2011 to 2015 in Korea as well as the reconciliation cost in the case of applying the Depositor Preference. Results found the depositor preference system under the bankruptcy method can increase the bankruptcy dividend rate of the deposit insurance organization, thereby reducing the resolution cost of about KRW 1.4 trillion by maximizing the amount recovered. Second, when arranging insolvent mutual savings banks by the transfer of third party (or bridging financial company) contracts, we found the savings of the deposit insurance fund of approximately KRW 3.9 trillion when the deposits were partially protected and with the depositor preference.

Guinea

In response to a request from the BCRG, the IMF conducted an FSSR mission from June 12–24, 2019. A scoping mission had been undertaken in January 2019, and on the basis of that mission it was agreed with the authorities that the FSSR would cover the following topics: (i) financial stability oversight; (ii) systemic liquidity; (iii) payments systems; (iv) banking supervision; and (v) crisis management, bank resolution, and safety nets. While the current economic situation is benign, the financial soundness indicators (FSIs) point to increasing vulnerabilities (see Annex I). The economic outlook is currently positive. Moreover, financial inclusion is growing rapidly as mobile money services are quickly adopted. However, the FSIs suggest growing vulnerabilities and possibly some idiosyncratic stress in the banking sector. For example, nonperforming loans (NPLs), large exposures, and the net-open position are on a negative trend. Given data quality and availability issues, it is however difficult to draw firm conclusions. For example, while the net-open position according to the reported FSIs is larger than 100 percent, prudential reporting points to a ratio of on average below 20 percent. This discrepancy needs further analysis and explanation. In addition, the BCRG does not prepare an adequate analysis and explanation of the drivers of the observed trends.

Canada

This Technical Note on Financial Safety Net and Crisis Management for the Canada presents the findings and recommendations made in the Financial Sector Assessment Program for Canada in the areas of bank resolution and crisis management. The note is based on the findings of the mission conducted during October 29–November 14, 2018. The note highlights that Canada has maintained financial stability for a long period of time. Strong institutional settings, effective supervision, and sound financial sector policies have succeeded in preventing crisis situations. The last bank failure in Canada occurred more than twenty years ago. However, the lack of crisis events does not diminish the need for preparation and for revisions to the existing framework. A substantial part of the financial system is covered by federal crisis management and safety net arrangements that are well-established. Coordination among the federal agencies is strong, underpinned by inter-agency committees. The note recommends that the ongoing work of the authorities in completing and enhancing their contingency plans and implementing testing and readiness programs should be continued.

Go Preventive or Go Home - A New Role of MREL

Bank Resolution is considered a cornerstone of the post-crisis financial regulation; however, it is also widely considered ineffective and inefficient in handling bank failures. This article analyses the preventive potential of the resolution framework, specifically focusing on the minimum requirement for own funds and eligible liabilities (MREL). We argue that MREL has a double nature. On the one hand, it should ensure the feasibility of resolution in case of a bank failure. On the other hand, it aims at restricting the funding model of banks, similarly to the other (preventive) capital requirements. By analysing the 2019 reform of the EU banking regulation, we contend that MREL represents an important complement to the rest of the preventive regulatory framework and that the latest reform unleashes such potential. We demonstrate that the new rules on MREL determination and enforcement allows the resolution authority to look after the build-up of systemic risk. The analysis reveals that MREL can serve both micro- and macro-prudential purposes. Finally, we argue that the current institutional architecture represents the main impeding factor for the new regulation to efficiently work, curbing the positive preventive potential of MREL.

Incentive Compatible Relationship between Ermii and Close-Cooperation in the Banking Union: The Case of Bulgaria and Croatia

The ambition to expand participation in the European Banking Union was to allow the outs to enter in to cooperation, however, it did not include the simultaneous joining of ERM II. Focusing on the cases of Bulgaria and Croatia, this paper attempts to respond to a number of questions: What is the rationale behind the double requirement of having to simultaneously apply to become a member of the ERM II and to prepare to become a member of the Banking Union via rule based close mechanism of coordination between the EU non-euro area NCAs and the ECB? Does the integration of cooperation countries' banking systems with the euro area banking systems support the decision to join ERM II and opting-in to the SSM? Do the existing close arrangements guarantee greater coordination of resource-allocating decisions on prudential supervision and improved internalization of financial stability decisions? What are the advantages of the preparation to become a full member of the euro area and the SSM (e.g. coordination of macro and micro-prudential regulation; coordination of micro-prudential supervision and bank resolution)? It is evident from the research undertaken in this paper that there are clear benefits from cooperation for the respective Member States whose domestic currencies are already linked to the euro in view of the dominant position eurozone banks have in their respective domestic markets.

The Corona Virus Can Infect Banks Too

This paper examines possible options for Member States to redress the impact of the corona virus (SARS-CoV2) on financial institutions in the context of the directive on bank recovery and resolution, the regulation on the Single Resolution Mechanism and the State aid rules on banks. The EU banking regime requires, in principle, that the granting of State aid to a bank should lead to its resolution or liquidation. The paper considers how Member States may support banks outside the scope of Article 107(1) TFEU and how State aid may be granted without triggering resolution or liquidation. The current measures which are rolled out by European governments to support the real economy will indirectly benefit banks too. The paper reviews the recently announced ‘Temporary Framework’ according to which any ‘indirect aid’ to banks will not infringe the provisions of the directive or regulation. The paper identifies gaps in the current rules concerning solvent, but not systemic banks, ambiguities in the interpretation of the concept of ‘serious disturbance’ and unclear guidance as to how indirect aid may be minimised. Keywords: Bank resolution; Liquidation; Temporary Framework; COVID-19.

Single point of entry doctrine in the United States as a form of corporate liability: Рossibilities of legal adoption in the Russian Federation

The article analyzes various aspects of the single point of entry bank resolution strategy in the United States and seeks to determine the viability of legally adopting this approach in the Russian Federation. The single point of entry strategy provides an alternative to “bailing out” large bank groups and bankruptcy proceedings via controlled liquidation of the parent company with simultaneous financial rehabilitation of the subsidiary bank. Orderly Liquidation Authority detailed by Title II of the Dodd-Frank Act provides a legislative framework for the single point of entry strategy, but due to the doctrine only existing as a guideline and not directly regulated by legislation, there are several gaps in legislation that cause various problems in both the practical implementation of the single point of entry doctrine and its scientific evaluation. The insufficiently studied topic of single point of entry doctrine as a form of corporate liability is also examined in the article. Russian legislation and court practices regarding bank rehabilitation and the doctrine of “piercing the corporate veil” are examined to determine the possibility of legally adopting the single point of entry doctrine due to similarities between doctrines. The flaws and merits of the single point of entry doctrine are studied while accounting for potential ways to overcome the legal gaps in the strategy. The article reaches the conclusion that while the single point of entry doctrine is far from perfect, the basic principles can be applied to Russian legislation and serve as a viable alternative to the prevalent “bailout” practice.

The Liquidationist ‘Genie’ Within the Eurozone’s Banking Union

The Banking Union increased bank capital requirements and tightened crisis response policy instruments, favoring bank resolutions or liquidations, while hindering bank bailouts. The ECB has gained new powers as the Eurozone's main supervisory authority and as the leading 'resolution or liquidation' authority. The new framework has led to the multiplication of triggers for the application of resolution or liquidation measures. As a result, the Banking Union has had significant fiscal costs and large redistributive effects. Further, it has weakened financial stability and the 'irreversibility of the euro'.

New Bank Resolution Mechanisms: Is It the End of the Bailout Era?

We study the effectiveness of three common bank resolution mechanisms: bailouts, bank sales, and ‘bad banks’. We first apply the financial fragility model of Goodhart et al. (2005, 2006a) to analyze the impact of these resolution mechanisms on bank behavior. We then use a novel bank-level database on 39 countries that used these resolution mechanisms during 1992-2017 and analyze the relationship between the mechanisms applied and subsequent bank performance. We find that the effectiveness of resolution mechanisms depends crucially on the timing and severity of crises. While mergers can deliver good results at the beginning of a crisis, this is less likely at later stages of a crisis. In the event of severe crises, mechanisms aimed at restructuring bank balance sheets are most likely to deliver positive results. We find no support for bank bailouts as an optimal strategy. A calibration exercise shows that the effectiveness of resolution mechanisms to mitigate systemic risk declines with the severity of crises.

New Bank Resolution Mechanisms: Is it the End of the Bailout Era?

New Bank Resolution Mechanisms: Is it the End of the Bailout Era?

Bending and Breaking the Single Resolution Mechanism: The Case of Italy

AbstractThis article examines the political economy and law of bank resolution in the case of Italy – specifically, its treatment of three failing banks – the Monte dei Paschi, Veneto and Vicenza banks – which were resolved in 2016–17. These three cases stand out for the relatively large degree of discretion exercised by the national resolution and state aid authorities, ultimately with the permission of their European counterparts. This article examines the motivations of Italian authorities in lobbying the Commission for leeway in applying the bank recovery and resolution directive and analyses the intricacies of the legal framework to underline the extent of discretion exercised by policy‐makers. It concludes that the discretion visible in these three cases is not (entirely) contained within EU law, and that bending the law or turning a blind eye to infractions was key to understanding the EU approach to Italy.

Credibility of Bank Resolution Regimes and Market Discipline: Evidence from Corporate Deposits

This study examines changes in market discipline in European corporate deposit markets in response to different crisis periods and regulatory initiatives in the European Union. We measure market discipline by investigating the risk sensitivity of uninsured corporate deposits, i.e. by analyzing whether depositors demand risk premiums from risky banks. Depositors' risk sensitivity towards German banks substantially increased after the introduction of the German restructuring law. A similar effect can be observed for other eurozone banks after the introduction of the European bank recovery and resolution directive (BRRD). For German banks the introduction of the BRRD has no significant additional effect. Consequently, results suggest that both reforms have contributed to strengthen market discipline in the eurozone. We also document that the ECB's targeted long-term refinancing operations (TLTRO) weakened market discipline. As a response to the reduced liquidity risk of banks, corporate depositors became less risk sensitive.

ALTERNATIF PENYELESAIAN SENGKETA YANG EFEKTIF, EFISIEN DAN BERKEADILAN BAGI PERBANKAN SYARIAH

Effective sharia banking resolution is one of the efforts to maintain public trust in Sharia Bank. Sharia Banking activities are based on the prudential banking principle, economic democracy and sharia principles. The characteristics of Islamic Banking are promoting balance, justice and sustainability to achieve the goal of creating community welfare. Based on analysis of regulations governing Sharia Banking dispute resolution, disputes ca be resolved through alternative dispute resolution or Religious Courts. Mediation is dispute settlement based on goodwill and the wishes of the parties with the help of mediator, resulting in a fair and in accordance with the wishes of the parties. Mediation emphasizes a balance position between the parties in reaching an agreement, so that the goal of achieving justice will be achieved. In line with the characteristics of Sharia banking the mediation will be effective if carried out in with applicable procedures as stipulated in LAPSPI Regulation Number : 01/LAPSPI-PER/2017 concerning Regulations and Mediation Procedures. In addition, the Religious Court can optimize mediation as part of the process of proceedings in resolving efficient, effective and equitable sharia banking.

Effects of Bank Resolution on Financial Stability and Competitiveness of Banking Sector

The paper provides an analysis of the effects of banking licence revocation by the regulator on the financial stability indicators of Russian lenders. The analysis has found mixed performance of resolution measures in terms of the financial stability of banks and their competitiveness in the wake of the banking sector resolution policy of the Bank of Russia. The authors propose a modification of the individual financial stability indicator equation developed by the regulator. The changes relate to calculating annual growth rate volatility not only for lending operations but overall with respect to the attraction and allocation of banking resources. The authors propose an equation for calculating the overall stability level of the banking sector and possible interpretations of the resulting findings in terms of the stability and competitiveness of the Russian banking sector.

Making Retail Banks Resolvable

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.

State Aid Support to Financial Institutions and the Question of Systemic Importance in the 2008 Financial Crisis: Time for a New Approach?

What is or is not a systemic important bank in times of financial crisis? Such a question is not easy to answer when the demise of even peripheral financial institutions in one country may trigger financial turmoil in others via a domino effect. From a State aid perspective, the question of systemic importance was not adequately addressed during the 2008 financial crisis as the Commission and Member States sought a flexible solution to a complex problem. This solution manifested itself via the continued transfer of taxpayers’ money to insolvent financial institutions simply to maintain the financial stability of other financial institutions. Therefore, the aim of this Paper is to critically assess the Commission’s application of State aid rules to the banking sector and propose a new systemically important test for financial institutions that is rooted in the State aid law domain. As part of this process the level of aid that should be provided to a financial institution deemed systemically important will also be examined as will the need for new competition distortion safeguards to ensure that supporting an insolvent but systemically important bank does not undermine the market position of long-term viable competing financial institutions. The overarching objective of this research is to formulate a future State Aid Crisis Framework for the banking sector that strikes the correct balance between maintaining financial stability and protecting taxpayer resources. In conjunction to this the paper also seeks to examine how a new State Aid Crisis Framework will interact the Bank Resolution and Recovery Directive and whether a new approach could be designed to maintain financial stability in a financial crisis while also ensuring that Member State’s resources are not continually at the beck and call of recipient financial institutions.

Bank bail-in and disputed claims: Can it cope? The case for and against a vis attractiva resolutionis

Within the Banking Union and the European Union as a whole, the so-called bail-in of liabilities has come to be accepted as probably the core element of the new harmonised toolbox for the resolution of systemic bank insolvencies. While the recent debate has focused on the economic conditions that must be fulfilled if the tool can be relied upon in future cases, the present paper examines yet another aspect of the instrumentarium, namely the treatment of disputed claims in bail-ins: claims owed by or to the institution in resolution, whose existence and/or dimension is subject to controversy or even subject to litigation between the institution and the relevant counterparty. The paper argues that disputed liabilities—especially in the case of large claims—inevitably will have an impact on the calibration of the bail-in tool and examines how the resulting problems are addressed under the BRRD and the SRM regulation. It is argued that—in contrast to traditional insolvency procedures, which are designed to facilitate a comprehensive resolution of distributional conflicts between an insolvent debtor and its counterparties—bank resolution does offer no such mechanism. Specifically, disputed claims cannot adequately resolve within the valuation and calibration procedure, given the special nature of resolution as an instrument to protect the public interest in the preservation of financial stability and the protection of public budgets. This insight lends further support to the notion that the application of the bail-in tool should be reserved to pre-defined, designated bail-inable instruments.

Considerations of the SPE and MPE resolution

This document analyses the importance of bank resolutions as a fundamental element to maintain greater financial stability. The core of this work is the analysis of the resolution system using a single point of entry (SPE) and a multiple point of entry (MPE) system, which is the analysis of the implementation of TLAC at the G-SIB level and the MREL at the European level. The aim is to establish the various advantages and disadvantages of the different systems from resolution, with the intention of clarifying the consequences of their application, focusing on the distribution of TLAC within the resolution group.