The European Union’s banking watchdog has urged some of the bloc’s leading banks to step up their preparations for a potential crisis, after recent collapses of Silicon Valley Bank and Credit Suisse exposed gaps in their defences.
Banks meet MREL targets, but face challenges in resolution
The Single Resolution Board (SRB), which is responsible for winding down or restructuring failing banks in the EU’s banking union, said that most of the major banks had met their January 2024 deadline for issuing special debt that can be written down or converted into equity in a crisis.
This debt, known as minimum requirement for own funds and eligible liabilities (MREL), is designed to ensure that banks have enough loss-absorbing resources to avoid taxpayer bailouts and prevent contagion in the financial system.
According to the SRB, by the end of 2022, two-thirds of the banks had met their final MREL target, with a total shortfall of 0.3% of total risk exposures or 20.5 billion euros ($21.87 billion). Some 2.7 trillion euros of MREL debt had been issued so far, and 24 banks had an MREL shortfall, though 14 of them had been granted an extension until the end of 2024 or 2025 to meet their targets.
However, the SRB warned that meeting the MREL targets was not enough, and that banks also needed to demonstrate that they could use these funds effectively in a crisis and be resolved smoothly without disrupting customers or markets.
“While holding sufficient loss-absorbing resources at all times is key, it is equally important for banks to be able to use these funds in a crisis,” the SRB said in a report published on Wednesday.
The SRB said it would review whether there were any material shortcomings in the banks’ resolution plans by the end of this year and take remedial action if needed. It also said it would develop further guidance on the assumptions and scenarios that banks should use to test their liquidity and operational readiness in a crisis.
Lessons from recent banking crises
The SRB’s report comes after recent banking crises in the United States and Switzerland highlighted the challenges and risks of resolving large and complex financial institutions in a rapidly unfolding situation.
In March 2023, Silicon Valley Bank, a leading lender to technology startups and venture capitalists, collapsed after suffering massive losses from its exposure to Archegos Capital Management, a family office that imploded after taking on excessive leverage and bets on volatile stocks.
The failure of Silicon Valley Bank triggered a wave of panic and uncertainty in the global financial markets, as regulators scrambled to contain the fallout and prevent contagion to other banks and investors. The Federal Deposit Insurance Corporation (FDIC), which is the US equivalent of the SRB, had to intervene and sell off the bank’s assets and liabilities to other institutions, while absorbing some of the losses.
In April 2023, UBS, Switzerland’s largest bank, was forced to acquire its rival Credit Suisse, which had also suffered heavy losses from its involvement with Archegos and Greensill Capital, a supply chain finance firm that went bankrupt after allegations of fraud and mismanagement.
The deal, which was brokered by the Swiss Financial Market Supervisory Authority (FINMA), was seen as a last-resort measure to save Credit Suisse from collapse and preserve financial stability in Switzerland. However, it also raised questions about the concentration and competitiveness of the Swiss banking sector, as well as the adequacy of supervision and regulation.
These cases show that banks and regulators need to increase their preparedness for rapidly unfolding crises, especially in light of the increasing interconnectedness and complexity of the global financial system. The SRB said it was closely monitoring these developments and learning from them to improve its own resolution framework and practices.
