Europe: A New Strategic Vision

Like the United Kingdom, Europe shares the view that resolvability will never be done.

Whilst Europe was relatively unscathed by the events of 2023, European authorities have not been complacent, nor have they slowed down the work on resolution planning and preparedness.

In February, Europe's central banking resolution authority, the Single Resolution Board (SRB), launched its new strategic vision 2028.

The strategy for the new vision was developed over 12 months, with seven different consultations, both internally as well as with European national resolution authorities and industry. The strategy covers three key areas: core business, governance and human resources. It has nine strategic objectives, with 20 action plans to be implemented between now and the end of 2028. The specific activities and performance indicators are included in the SRB's multi-annual plan which covers priorities and activities over the next five years. The key component of the new vision is its strategic shift from theory to practice, with an increased focus on operationalisation, resolution testing and crisis readiness. In a nod to the speed with which events occurred in 2023, the SRB wants to ensure that each plan and preferred resolution strategy for each bank under its supervision can be implemented at short notice.

Like the United Kingdom there has been a recent end of year report card on banks resolvability. The news from the SRB's latest assessment was good with the headlines being that all banks that had to comply with their final minimum requirement for own funds and eligible liabilities (MREL) targets had done so and that overall, banks had developed comprehensive contingency plans to maintain access to financial market infrastructure service providers in resolution. In addition, banks had improved most in the areas of governance and communication. In particular, banks had taken measures to ensure that their management body was actively involved in the resolution planning activities.

But there are still areas for improvement.

Another institution that supervises EU banks, the European Banking Authority (EBA), issued its own report in August which noted, among other things, that work still needs to be done as regards the operationalization of the bail-in tool, the tool that allows for the write-down of debt owed by a bank to creditors or its conversion into equity. The EBA found that when it comes to this tool EU national resolution authorities still display a low level of preparedness which has the potential to cause challenges in the event of its operationalisation. Potential issues relate to identifying holders of instruments and requirements for issuing prospectuses. The EBA expects EU resolution authorities to work on this.

This is something that the SRB has also picked up on.

All EU banks supervised by the SRB earmarked for bail-in need to develop a playbook. This operational document, owned by the bank, is expected to address all internal and external actions that must be carried out by, or on behalf of, the bank to effectively apply the bail-in tool. It also describes the needed data provision and ICT processes. To support this, the SRB has provided banks with guidance to develop playbooks and establish their bail-in data capabilities in 2020 which, together with the 2021 guidance on bail-in for international debt securities, complements the SRB Expectations for Banks published in 2020.

Whilst the SRB has noted that some EU banks have made "huge progress" on bail-in readiness some are still lagging behind and there are areas where more work is needed on both the banks' and the regulators' side. This concerns, for instance, the involvement of external stakeholders, such as central securities depositories and various operational agents, and ensuring that banks are ready to comply with third countries’ securities markets laws, to provide more clarity and certainty to bail-in in a cross-border context.

Also on the horizon are changes to the European Crisis Management and Deposit Insurance (CMDI) Framework. The European Commission proposed targeted revisions to the CMDI Framework in April 2023 and these are currently in trilogue (i.e. being negotiated between the European Parliament, the Council of the EU and the European Commission). Such revisions include changes to the depositor creditor hierarchy, with the introduction of a single tier of depositor preference. However, the revisions do not include the last pillar of the European Union's Banking Union architecture, i.e., the European Deposit Insurance Scheme, where legislative progress has been stalled since 2015, nor does it include further measures to harmonise national insolvency regimes in the EU.

And finally, both authorities in Europe and the United States require significant banks to issue capital and debt instruments capable of absorbing losses on financial markets, in compliance with the international standard on total loss absorbing capacity. A recent Banque de France bulletin usefully compares the loss absorbing capacity requirements, finding that European standards remain more stringent than those in the US.