By the end of 2017, the envelope of the Single Resolution Fund (SRF) will have risen from €10.8 billion to €17 billion. This money will be invested on the markets in line with a strategy currently being put together by the Single Resolution Board (SRB), to allow the fund to have money available to it quickly in the event of a bank default.
On Wednesday 11 January, Timo Löyttyniemi, Vice-President of the SRB, the European authority responsible for managing the financial arm of banking union in the Eurozone since 2016 (see EUROPE 11473) said that the main objective for 2017 is to implement the investment policy, which aims to guarantee liquidity requirements and preserve the amounts held by the SRF. This will be a considerable challenge in an environment marked by extremely low interest rates, said Elke Koenig, the President of the ESRB.
The SRF's investment strategy complies with the European rules calling for certain investment limits in securities such as UCITS funds and shares. Löyttyniemi said that the SRF could also acquire sovereign securities of private companies, adding that the organisation needed to diversify its investments from a geographical and sectorial point of view.
The resolution of MPS is in line with rules
When asked about the resolution currently underway of the Italian bank Monte dei Paschi di Siena (MPS), Koenig declined to comment on a procedure that is still ongoing. She simply said that she had no doubts that the Italian authorities, the European Commission and the banking supervisor were doing good work in full respect of the European rules.
The directive on bank resolution and recovery (BRRD), which has been in place since 2016, introduces the 'bail in' rule to the EU. This role provides for a hierarchical order of shareholders and creditors expected to make a contribution in the event of bank resolution. By way of an exception to this rule, the directive also allows the preventative recapitalisation through public funding for a solvent bank if its default would destabilise the financial markets. This is the road that the Italian authorities have decided to go down.
"The Italian government has announced that they want to further strengthen their banking sector in compliance with EU law. This is welcome. The details are yet to be announced", Koenig said. She did not rule out the possibility that retail investors to whom risky instruments have been sold and who could be required to contribute in the framework of the resolution of MPS will be eligible for compensation on the basis of the European rules governing the financial markets ('MiFID').
In 2016, the SRB did not oversee the resolution of any bank falling within its scope of application (the 130 institutions directly supervised by the ECB plus other cross-border institutions of lesser importance), although other medium-sized banks faced insolvency processes that had no effect on financial stability.
Last year, the European authority also finalised nearly 70 resolution plans of major banking groups and some 30 others are almost complete. Koenig hailed this as a major step forward, but stressed that there is still a long way to go. She went on to observe that many stakeholders had underestimated the scale of the task. In terms of the own funds required in the event of resolution (MREL), she pointed out that the threshold of 8% was a minimum and could be considerably higher for major systemic banks. Setting the level of the MREL is not an isolated exercise or indeed a purely numerical one, but is part of a process related to the resolution plan, she stressed.
The SRB will hold its next annual conference on Tuesday 3 October. (Original version in French by Mathieu Bion)