The European Union’s banking watchdog has urged banks to strengthen their defences against potential crises, following the recent collapses of Silicon Valley Bank and Credit Suisse. The Single Resolution Board (SRB) said that most leading euro zone banks have met a key requirement for issuing special debt that can be written down in a crisis, but some still need to do more to ensure they can be wound up quickly and smoothly if needed.
MREL targets mostly met, but not enough
The SRB, which is responsible for resolving failing banks in the EU’s banking union, said that by the end of 2022, two-thirds of banks had met their final target for minimum requirement for own funds and eligible liabilities (MREL). MREL is a type of debt that can be converted into equity or written off in a crisis, to avoid using taxpayer money to bail out banks. The SRB said that the total shortfall of MREL was 0.3% of total risk exposures or 20.5 billion euros ($21.87 billion). Some 2.7 trillion euros of MREL debt has been issued so far, and 24 banks have an MREL shortfall, though 14 of them have been given an extension until the end of 2024 or 2025 to meet their targets.
However, the SRB said that having enough MREL debt was not enough to ensure a smooth resolution of a bank in a crisis. It also said that banks need to be able to use these funds effectively and efficiently in a crisis, and demonstrate that they can be resolved without causing disruption to customers or financial stability.
Lessons from SVB and Credit Suisse crises
The SRB’s warning comes after two major banking failures in the US and Switzerland, which exposed the vulnerabilities of the global banking system and the challenges of resolving complex cross-border institutions. In March 2023, Silicon Valley Bank, a leading lender to tech startups and venture capitalists, collapsed after suffering massive losses from its exposure to Archegos Capital Management, a family office that imploded after making risky bets on stocks. The bank’s failure triggered a wave of lawsuits and investigations from regulators and creditors, who accused the bank of mismanagement and fraud.
In April 2023, UBS, Switzerland’s largest bank, was forced to acquire its rival Credit Suisse, after the latter suffered a series of scandals and losses that eroded its capital and reputation. Credit Suisse was hit by the fallout from Archegos as well as the collapse of Greensill Capital, a supply chain finance firm that it had invested in and distributed funds to its clients. The bank also faced legal troubles from its involvement in Mozambique’s debt scandal and Malaysia’s 1MDB corruption case.
The SRB said that these cases showed that banks and regulators need to increase their preparedness for rapidly unfolding crises, and improve their liquidity management and contingency planning. It also said that it will review the resolution plans of banks in the EU’s banking union by the end of this year, and take remedial action if needed. It also said that it will develop further guidance on the assumptions to be used by banks when assessing their liquidity needs in a crisis scenario.
EU banking union still incomplete
The SRB’s report also highlighted the challenges of resolving banks in the EU’s banking union, which is still incomplete and lacks some key elements. The banking union was launched in 2014 as a response to the euro zone debt crisis, and aims to create a single market for banking services in the EU, with common rules and supervision.
It consists of three pillars: the Single Supervisory Mechanism (SSM), which gives the European Central Bank (ECB) the authority to supervise significant banks in the euro zone; the Single Resolution Mechanism (SRM), which gives the SRB the power to resolve failing banks; and the European Deposit Insurance Scheme (EDIS), which is supposed to provide a common guarantee for bank deposits across the EU.
However, the EDIS has not been implemented yet, due to disagreements among member states over how to share risks and costs. This means that depositors in different countries still face different levels of protection and confidence in their banks. The SRB said that completing the EDIS is essential for ensuring a level playing field for banks and enhancing financial stability in the EU.
The SRB also called for more harmonisation of national insolvency laws and tax regimes, which can create obstacles and uncertainties for cross-border resolution. It also urged for more cooperation and coordination among national authorities and international organisations, such as the Financial Stability Board (FSB) and the International Monetary Fund (IMF), to address global systemic risks and challenges.
