Crisis preparedness

EU resolution authority attests banks "good progress"

Most banks have built up sufficient buffers to involve owners and shareholders in the costs of rescue in the event of a crisis. For the remaining banks, the deadline is approaching.

EU resolution authority attests banks "good progress"

Praise from Brussels for Europe's banks: The EU Single Resolution Board (SRB) has given most of them a good report card in terms of their readiness for resolution in case of trouble. "Most banks have continued to make good progress. They have built up financial resources to withstand severe financial shocks and are on track to achieve their goals by the end of this year", stated SRB Chief Dominique Laboureix.

The SRB assesses a crisis buffer called MREL, composed of equity and specific liabilities. In the event of resolution, the authority uses it to involve bank owners and shareholders, rather than taxpayers, in covering the costs. The Resolution Fund SRF, which banks will have filled with approximately 78 billion euros by the end of this year, also serves this purpose.

Crisis raises bail-in costs

The deadline is January 1, 2024. By then, banks must have accumulated enough bail-in capital instead of relying on a state bail-out, which fell out of favor during the global financial crisis. As of the end of 2022, 30 banks under the SRB's supervision were not yet compliant, collectively lacking 21.5 billion euros in capital for resolution purposes.

According to the SRB, this amount represents 0.3% of the total risk exposure in bank balance sheets. The gap has been narrowing for years and decreased by an additional 10.4 billion euros between the end of 2021 and the end of 2022. Two-thirds of the banks under the SRB's supervision had reached the target amount of loss-absorbing capacity by the end of the year. SRB Chief Laboureix sees them on track to achieve an "important milestone on the path to financial stability" in the European Union.


For the remaining 30 banks, it may be more challenging than expected to cover the shortfall in a timely manner and fully close the bail-in gap this year. The turmoil in the US and Swiss banking sectors temporarily increased the financing costs for the crisis buffers. The local authorities ultimately resolved the crisis not through a traditional resolution but with emergency mergers of First Republic Bank and Credit Suisse.

For SRB Chief Laboureix, the – forced – transfer of assets has proven to be an effective crisis tool, even for large banks. "However, this does not mean that bail-in is less important," Laboureix said during the Eurofi financial conference in Santiago de Compostela last week. "It rather shows that we need to be flexible in our resolution strategies and have backup options," Laboureix believes. "We should be able to switch or combine tools to respond effectively to any situation."

Banks are getting visits

As claimed by Laboureix, the authority he heads is preparing for the worst with weekend test runs. "Furthermore, we call on banks to conduct dry runs themselves to test their ability to carry out a bail-in," Laboureix explained. Europe's banks must also prepare for visits from the authority. Officials want to ensure on-site that banks are indeed resolution-ready in case of an emergency.

For next year, the SRB has also announced plans to review the minimum capital requirements for resolution. A public consultation with the industry is scheduled for this purpose.