UK Chancellor George Osborne said last week that he was confident Europe could achieve a framework for sorting out bank resolution within six months. But to meet this ambitious timetable, the region’s policy-makers must resolve several key issues.
The Financial Stability Board (FSB), the regulatory division of the Group of 20 leading economies (G20) is focussed on a G20 meeting in November for resolving questions such as how to manage globally active systemically important banks (also known as G-sifis) if they run into financial difficulties.
Since the collapse of Lehman Brothers in 2008, regulators have been implementing a complex framework of interlocking policy reforms that will allow big banks to fail without dragging the financial system into its death spiral.
"There has been a lot of progress putting in place the tools for credible resolution regimes in Europe through the recently-agreed Bank Recovery and Resolution Directive,” said Oliver Moullin, director in the resolution and crisis management team at the Association for Financial Markets in Europe (Afme).
“We’re already seeing significant changes to banks to improve their resolvability. We now need more detail on how some of the tools will be applied in practice,” he added.
KEY TAKEAWAYS
With Europe’s regulators and policy-makers staking a large amount of political capital on their ability to sort out bank resolution, Afme has identified the key areas in need of attention to meet this deadline;
Afme’s top two priorities are the minimum requirement for eligible liabilities and the criteria by which contributions to national resolution funds will be set;
Debate in Europe centres on whether gone concern loss absorbing capacity should be the same as the minimum requirement for eligible liabilities under the Bank Recovery and Resolution Directive.
Afme believe there are two clear issues that must be addressed. “Our top two priorities for further work on the BRRD are the criteria by which contributions to national resolution funds will be set and the MREL [minimum requirement for eligible liabilities],” said Gilbey Strub, Afme’s managing director of resolution and crisis management, speaking with IFLR last week.
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" There doesn’t seem to be consensus on the purposes or role of GLAC at the moment within the G20" |
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The MREL refers to the amount of additional loss absorbing capital a bank will be forced to hold.
It is likely to be set as a proportion of total liabilities, rather than risk weighted assets. However, it is still unclear how the MREL will be calculated or applied to individual banks.
Assessing GLAC
Policy-makers are also divided as to how the Financial Stability Board’s conception of gone concern loss absorbing capacity, or GLAC, should be assessed.
Debate in Europe centres on whether GLAC should be the same as the BRRD’s parallel conception of MREL and apply to all banks in the European Union.
Although sources have told IFLR that the EC is ultimately likely to favour this opinion, it differs from the prevailing view among US regulators. They believe that the GLAC should only apply to G-sifis.
“How GLAC is assessed is currently a key area of debate among policymakers,” said Moullin. “Global regulators must now decide issues such as the quantum, how it should be assessed and what instruments are eligible for inclusion as GLAC.”
“There doesn’t seem to be consensus on the purposes or role of GLAC at the moment within the G20,” he added.
EU Member States have until January 1 2015 to implement the BRRD.
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