directorate banking regulation coordination or integration of bank insolvency in the eu? an holistic...
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Directorate Banking Regulation
Coordination or Integration of Bank Insolvency in the EU? An Holistic Approach
Maria J. Nieto
Building a Crisis Management Framework for the Internal Market European Commission19 March, 2010
Directorate Banking Regulation
Coordination or Integration of Bank Insolvency in the EU? An Holistic Approach
Maria J. Nieto
Building a Crisis Management Framework for the Internal Market European Commission19 March, 2010
DIRECTORATE BANKING REGULATION
These views do not necessarily represent
those of Banco de España
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DIRECTORATE BANKING REGULATION
OUTLINE
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• Bank resolution as the fourth arm of the safety net
• Importance of incentive compatible safety net encompassing resolution/insolvency structures
• Optimal design resolution/liquidation policies in the EU
• Conclusions
DIRECTORATE BANKING REGULATION
BANK RESOLUTION AS THE FOURTH ARM OF THE SAFETY NET
• Public policy objective of resolving failed banks should be to permit free entry and exit of failed banks at minimal cost to society
• Laws and procedures for bank resolution importantly influence the safety net´s ability to succeed
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DIRECTORATE BANKING REGULATION
OUTLINE
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• Bank resolution as the fourth arm of the safety net
• Importance of incentive compatible safety net encompassing resolution/insolvency structures
• Optimal design resolution/liquidation policies in the EU
• Conclusions
DIRECTORATE BANKING REGULATION
IMPORTANCE OF INCENTIVE COMPATIBLE SAFETY NET ENCOMPASSING RESOLUTION / INSOLVENCY STRUCTURES
• If failed banks can be provided liquidity and resolved at no cost, there may be few negative externalities that provide a justification for extensive prudential supervision
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DIRECTORATE BANKING REGULATION
IMPORTANCE OF INCENTIVE COMPATIBLE SAFETY NET THAT ENCOMPASSING RESOLUTION / INSOLVENCY STRUCTURES
• Resolution rarely starts sufficiently promptly while the bank still has a positive net worth
• Poorly designed deposit insurance imposes losses on depositors
• Bank resolution procedures not particularly aimed at preserving financial stability
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DIRECTORATE BANKING REGULATION
OUTLINE
• Bank resolution as the fourth arm of the safety net
• Importance of incentive compatible safety net that encompassing resolution/insolvency structures
• Optimal design resolution/liquidation policies in the EU
• Conclusions
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DIRECTORATE BANKING REGULATION
OPTIMAL DESIGN OF RESOLUTION/LIQUIDATION POLICIES IN THE EU
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Approach
Safety Net
Centralized Explicit cross country coordination arrangements
DecentralizedImplicit coordination mechanisms
(harmonization)
PrudentialRegulation
- o Lamfalussy architectureoMore homogeneous secondary legislation
oNational legislation subject to therestriction of minimumharmonization
Prudential Supervision
- o European System of Financial Supervisors (ESFS)oCoordination via MoU(PS+LOLR); (PS+LOLR+MF)
o National on site and off sitesupervision
LOLR(Emergency Liquidity)
- o Explicit coordination via MoU (PS+LOLR); (PS+LOLR+MF)o ECB Governing Council
o Implicitly decentralized NCBs
Deposit Insurance - oNational DIsoMinimum harmonization
Reorganization andWinding-Up
- oNational Resolution AuthoritiesoMinimum harmonization (coordination of procedures based on pples home country control, unity and universality)
Living Wills?
DIRECTORATE BANKING REGULATION
OPTIMAL DESIGN OF RESOLUTION/LIQUIDATION POLICIES IN THE EU
• Full internalization:
•Centralization of the EU safety net
Absence of a single fiscal authority
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DIRECTORATE BANKING REGULATION
OPTIMAL DESIGN OF RESOLUTION/LIQUIDATION POLICIES IN THE EU• Partial internalization:– Strengthening “implicit mechanisms” of coordination
• Further harmonization of the national resolution frameworks» Special Resolution Regime for banking groups
– Strengthening “explicit mechanisms” of coordination• Info sharing PS – Resolution authorities (MoU)• Colleges (administrative or judicial) resolution authorities:
joint resolution measures for the benefit of the group (Mayes, Nieto, Wall, 2008)
• Delegation» CRD (Art 131) "[u]nder these arrangements additional tasks may be entrusted to the
competent authority responsible for supervision on a consolidated basis
» Ex ante agreement to make the process of restructuring less cumbersome
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DIRECTORATE BANKING REGULATION
OPTIMAL DESIGN OF RESOLUTION/LIQUIDATION POLICIES IN THE EU
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Decentralized Centralized Authority Resolution Colleges
(“lead administrator/liquidator”)
Delegation in the
Home country (“Ad hoc”
centralization)
Resolution Authority
Legal Changes Harmonization (min set of harmonized resolution rules –including closure
rules-)
New Charter (contractual agreement)
EU Special Resolution Regime for
resolving cross border banks
Implementation Easy
Relatively easy (relicensing)
Slow
(launching resolution
authority; special charter)
DIRECTORATE BANKING REGULATION
OPTIMAL DESIGN OF RESOLUTION/LIQUIDATION POLICIES IN THE EU
• Partial internalization (Cont.) - Strengthening “explicit mechanisms” of coordination
– Coordination with prudential supervision (Hardy and Nieto,2009): » First best approach: Highly coordinated PS and
Resolution/Liquidation» If Resolution/Liquidation is centralized and not PS, benefits would
be limited by PS forbearance » Strengthening “explicit mechanism” of coordination amongst PS
is valuable and reduces the cost of financial crisis ...even if coordination amongst resolution/liquidation authorities is limited
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DIRECTORATE BANKING REGULATION
CONCLUSIONS
• Failed bank resolution processes influence the safety net´s ability to succeed
• Reforms should aim at strengthening the tools and coordination - Prudential Supervision and Reorganization and Winding up - Deposit Insurance and Reorganization and Winding up
• Coordination failures may result in negative externalities• Lack of centralization of PS and Resolution/Liquidation in an
integrated market such as the EU increases forbearance Larger losses of failed banks
• Centralization of Resolution/Liquidation w/o centralization of PS would limited benefits due to PS forbearance
• ...Further complicating the cost burden sharing: - Private vs Public and Domestic vs Foreign
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DIRECTORATE BANKING REGULATION
Thank you!
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