22 October 2021
The European Banking Authority (EBA) published today its advice to the EU Commission on funding in resolution and insolvency as part of the review of the crisis management and deposit insurance (CMDI) framework. The EBA response provides a quantitative analysis on banks’ capacity to access available sources of funding under the current framework and under various creditor hierarchies, and with regards to the minimum requirement for own funds and eligible liabilities (MREL).
The EBA response provides a descriptive analysis on banks’ capacity to access resolution financing arrangements (RFA) based on banks’ balance sheets and their business models, as well as an analysis based on a modelling approach to simulate crisis scenario.
The descriptive analysis shows the change to banks’ internal loss-absorption capacity under four scenarios of depositors’ preferences compared to the current creditor hierarchy applicable in each Member State. The analysis, whose findings are presented under several different capital depletion scenarios, draws two main conclusions: i) preferring deposits to other ordinary unsecured claims increases the number of banks that are able to meet the requirements to access resolution financing arrangements (RFA) without the bail-in of any type of depositors and ii) a single-tier depositor preference (i.e. all types of depositors rank pari-passu) comes with the highest impact on covered deposits and the highest contributions from deposit guarantee schemes (DGS) compared to the other policy options and the current situation. The modelling approach, which simulates an economic scenario similar to the global financial crisis confirms the findings.
In a third part, the report also investigates the issue of market access for MREL instruments for small and medium-sized banks to. A limited number of these institutions had not yet issued senior MREL eligible instrument or AT1/T2 instruments as of end-2019.
The response provides strong quantitative basis and evidence to inform the Commission’s work while it does not provide policy advice. In light of the simplifying assumption and data sample limitation, the findings of this analysis should be read with caution.
This analysis has been conducted in response to the EU Commission’s Call for advice to the European Banking Authority (EBA) regarding funding in resolution and insolvency as part of the review of the crisis management and deposit insurance framework.