Banks bite back over resolution frameworks

By Rebekah Tunstead | 10 April 2019

Recent comments made by Single Resolution Board (SRB) chair Elke Konig suggest opposition from banks on resolution frameworks, says Giles Edwards, senior director of financial service ratings at S&P Global Ratings.

“There has been push back from the banks initially to say, ‘look you need to be clear about what you want,’” says Edwards. “There has been a certain amount of tension between the two sides over time, but I think it is the first time that they have come out and said that some banks are not cooperating, which is fairly strong language.”

Edwards was referring to comments made by Konig at the recent hearing at the Economic and Monetary Affairs (ECON) committee of the European Parliament.

“Banks know very well the direction of travel and responsible management teams are already doing the work to make themselves resolvable,” she said.

“However, where banks are not cooperating as they should, I have a clear message: the SRB will intervene if it has to. No one can avoid the task of making their bank resolvable, postponing is not an option.”

For Edwards, difficulties for banks to provide good quality data pose a particular challenge in cooperating with the resolution authority.

“Meeting the valuation requirements is one of the hardest things for a bank to deliver,” says Edwards. “The resolution authority needs good enough, rapid enough data so that on the Friday night of the resolution weekend they know within pretty close range what the value of the assets and liabilities are and essentially what is going to be needed in terms of absorbing losses and recapitalization. So that requires good data, and quite frankly banks don’t have a long track record of having great data.

On April 9, Randal Quarles, chair of the Financial Stability Board (FSB) sent a letter to the G20 finance ministers and central bank governors.

In the letter the FSB said it had begun an evaluation of the effects of too-big-to-fail reforms in the banking sector, and that the financial system was considerably more resilient than 10 years ago. However, loosening lending standards, elevated asset values, high cooperate and public debt called for additional supervision.

While the SRB may insist that they will intervene in the case where banks fail to cooperate, there is a reluctance to do so as this would require considerable effort on the regulator’s part, says Edwards.

“[The SRB] has probably got the most difficult job in Europe in terms of delivering resolution, much harder than the Bank of England who has just one market. The SRB has made steady progress in terms of delivering, but it is getting there,” Edwards says.

“The SRB has powers to force banks to make changes if they want, but they have to jump through a number of hoops to actually force the hand of the banks. What they would much rather do – and any regulator would rather do – is to persuade the banks to act out of its own best interests and get on with the job rather than wait for a big stick to be wielded. Maybe the banks have been less proactive in getting on with that part of the job,” he says.

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