Legislative reform essential for banking union resolution efficiency
A new Occasional Paper from the Bank for International Settlements identifies significant complexity in the European banking union's resolution framework. This complexity undermines its efficiency and effectiveness, necessitating determined legislative action for improvement.
Unpacking the complexity drivers
The paper details several features that increase the complexity and reduce the efficiency of the banking union's resolution framework.
These include cumbersome decision-making procedures and granular, complex regulation, particularly concerning MREL calibration.
The interaction with national insolvency regimes is also highlighted as complicated.
This unnecessary complexity imposes significant costs on both financial firms and regulatory authorities.
The authors note that these issues stem primarily from specific legislative framework singularities, rather than shortcomings in policy approaches.
For instance, rigid arrangements for external funding and the lack of a European deposit insurance scheme have led to problem banks being managed through national insolvency measures, as seen with Banca Popolare di Vicenza and Veneto Banca in 2017, rather than under the Single Resolution Mechanism (SRM).
A decade of resolution challenges
The European banking union, established after the Great Financial Crisis and euro area crisis, aimed to denationalise bank risk and provide robust failure management.
Its Single Resolution Mechanism (SRM) has implemented FSB Key Attributes, putting resolution plans in place for significant institutions and building loss-absorbing capacity.
The framework has successfully managed several bank failures, including Banco Popular Español in 2017 and Sberbank Europe in 2022.
However, the paper argues that the SRM's design and funding arrangements have also led to shortcomings, preventing the full denationalisation of banks' risks within the union.
Legislative inertia's heavy toll
This analysis underscores a critical disconnect: a robust framework exists, yet its inherent complexity stifles its potential.
Without determined legislative action to address institutional rigidities, the banking union risks perpetuating inefficiencies and undermining its core objectives.
The paper serves as a stark reminder that true financial stability demands not just rules, but rules that are both effective and pragmatically implementable.