EU bank crisis-management guide shows as many loopholes as lenders

EU bank crisis-management guidance out today does little to address a complex and discretionary system in which there are almost as many loopholes as lenders.

Policymakers have promised to stop taxpayers having to pay for banking failures, and also say they want a single set of rules that will ensure fair competition within the euro area.

But the latest round of legislative changes, known as the second Bank Recovery and Resolution Directive, has led to concerns that there are too many discrepancies in the system.

Guidance published today by the Single Resolution Board, charged with implementing banks’ crisis-management protocols within the euro area, does not seek to iron out the multiple wrinkles in the requirements to hold a minimum level of liabilities, known as MREL, that can serve as a cushion against failure.

Divergence

Though intended to support fair competition across the bloc, EU banking rules already apply differently in each national system. Germany, for example, takes an expansive definition of when banking-sector liabilities can count towards crisis management — and those discrepancies are only set to get worse.

In principle, banks have the requirement to hold 8 percent of their liabilities and own funds as subordinated financial instruments — so that, in the event of a Fortis-style collapse, it is the holders of those stocks and bonds, not finance ministries, who pay.

In practice, EU laws give the authorities the flexibility to “reduce or increase this target level … on a case-by-case basis,” under the guidance published today.

Smaller banks can also cut MREL levels, depending on the insolvency system that applies nationally. The idea is that creditors such as the holders of senior debt should never end up worse off under EU-sponsored resolution than under regular bankruptcy; but in practice the rule means banks in different countries get different treatment.

Dividends

Even the eye-catching centerpiece of the new regime, a ban on bonuses and dividends for banks that don’t meet MREL targets, may prove illusory.

Directly after a breach occurs, the SRB has discretion over whether to impose the measures, depending on whether it believes the bank can right itself — a subjective analysis that will likely be open to legal challenge.

Even after a nine-month grace period, banks can escape the dividend ban if they can show deficiencies arose from generalized turbulence in financial markets — a carveout that previous experience shows can be generous. Late last year the European Commission deemed the entire Covid-19 crisis a serious economic disturbance, essentially giving a blank check for state recapitalizations that would otherwise breach anti-bailout rules.

Guidance

In practice, regulators can have few options to enforce consistency when the underlying legislation is so labyrinthine.

In March, SRB chair Elke König appeared to concede that point, promising that the MREL policy would be “evolution not revolution” — an approach now followed through in today’s guidance.

But, from Germany’s Norddeutsche Landesbank to Italy’s Veneto Banca, an increasing number of lenders are managing to get public support in spite of the rules.

Further real-life examples due to the current economic downturn will only increase the political pressure for legal reforms, on which proposals are due later this year.