EP Key Risks in Banking Sector Study

On Nov. 22, EP issued in-depth analysis on evolving key risks in sector

  • EP issued paper Evolving key risks in the banking sector and related priorities for SRB.
  • Lack of effective transfer-based bank crisis framework by Ramos Munos, Lamandini.
  • To successfully deal with bank crises the EU framework needs to facilitate smooth transfer of funds, assets, liabilities from financially troubled entities to other entities.
  • Currently EU framework does not guarantee that, reasons identifiable, can be solved.
  • Overview
  • There is possibly no greater risk for EU banking system than obstacles to implement transfer strategies in bank crisis management.
  • Resilience of EU bank system may depend less on exogenous shocks than on ability to deal with them, EU can do less to prevent shocks than make it easier to address them.
  • Will depend on availability of strategies that allow banking groups, national authorities /SRB to swiftly execute transfers of funds, assets, liabilities/shares: transfer strategies.
  • Current rules lack sufficient clarity re when intra-group transfers of resources or liabilities repayment can take place to avert subsidiary crisis/maximize transfer value.
  • Even in situation where parent itself may be in financial distress; national contract, corporate/insolvency law can present obstacles, lack certainty re how to make transfer.
  • Resolution framework is primarily regulatory while successful transfer strategies require a more M&A-oriented approach.
  • Once authorities visualize M&A process, some limitations of current framework become evident, including cross-border recognition, treatment of SPVs.
  • Coordination between authorities or potential liability of transferee or parent company.
  • Successful transfers often need funding, but current framework makes it difficult for the Single Resolution Fund (SRF) to adequately fulfil that role.
  • Further, there seems to be no intention to explore idea of EU-wide market of NPLs using mechanisms like securitization which straddle across banking, capital markets.
  • Such mechanisms could make NPL management more efficient, improve both crisis management and liquidity of secondary loan markets, deepen Capital Markets Union.

Regulators EP
Entity Types Bank
Reference OP, PE 733.730, 11/22/2022
Functions Compliance; Financial; Legal; Operations; Research; Resolution; Treasury
Countries European Union
Category Central Government
Products Banking; Equity; Loan
Regions EMEA
Rule Type Guidance
Rule Date 11/22/2022
Effective Date 11/22/2022
Rule Id 154302
Linked to N/A
Reg. Last Update 11/22/2022
Report Section EU

Last substantive update on 11/24/2022