Adequate Loss-absorbing Capacity in the Resolution Process
Languages of publication
The recent financial crisis had a turbulent onset when professional institutional investors decided to withdraw their funding from banks, sparked by fear of credit losses and unmanageable capital requirements in, most notably, the investment portfolios of these banks. In recent years regulators developed a comprehensive set of reform measures aiming to improve the banking sector's ability to absorb shocks arising from financial and economic stress, improve risk management and governance, strengthen banks' transparency and disclosures. At the same time, steps were taken to better prepare for the event of a gone concern situation: recovery plans and resolution plans were drafted by banks and regulators respectively. For G-SIBs, on top of these plans, additional loss absorbing capacity is needed to ensure that, in case of a default, these financial institutions can be resolved in an orderly manner without taxpayer support. The purpose of this article is to present recent regulatory initiatives in the field of loss-absorbing capital buffers and their impact on banks' capital structure and cost of financing.
- 1.Adequacy of loss-absorbing capacity of global systemically important banks in resolution, Consultative Document, FSB, 10 November 2014.
- 2.Admati A.R., DeMarzo EM., Hellwig M.F., Pfleiderer P, Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive, Rock Center for Corporate Governance at Stanford University Working Paper 86, 2011.
- 3.Bańbuła P, Polityka makroostrożnościowa: przesłanki, cele, instrumenty i wyzwania, NBP, Materiały i Studia nr 283, 2013.
- 4.European Covered Bond Fact Book, ECBC, 2014.
- 5.EU loss-absorbing capacity requirement: final MREL guidelines, BBVA, 7 July 2015.
- 6.Fiechter J., Otker-Robe I., Ilyina A., Hau M., Santos A., Surti J., Subsidiaries or Branches: Does One Size Fit All?, IMF Staff Discussion Note, 7 March 2011: chapter II).
- 7.Global Financial Stability Report, IMF, April, 2014.
- 8.Gracie A., Total Loss-Absorbing Capacity - the thinking behind the FSB Term Sheet, BoE, Citi European Credit Conference, December 2014.
- 9.Haldane A.G., Banking on the state, BIS, BIS Review 139/2009.
- 10.How A Bail-In Tool Could Affect Our Ratings On EU Banks, S&P, 2012, May 10.
- 11.Key Attributes of Effective Resolution Regimes for Financial Institutions, FSB, October 2014.
- 12.Laeven L., Valencia F., Resolution of Banking Crises: The Good, the Bad, and the Ugly, in Financial Crises: Causes, Consequences, and Policy Responses, IMF, 2014.
- 13.Marsh A., Covered Bond Bail-in Benefit Prompts Moody's Ratings Proposal, 2013.
- 14.Pawłowicz L., Hazard moralny w finansach i bankowości, "Sektor bankowy w Europie. Co zmienił kryzys?", Zeszyty BRE Bank - CASE Nr 126/2013.
- 15.Stolz P, Wedow M., Extraordinary Measures in Extraordinary Times: Public Measures of Support of the Financial Sector in the EU and the United States, European Central Bank Occasional Paper No. 117, Frankfurt, 2010.
- 16.Ten key points from the FSB's TLAC ratio, PwC, November 2014.
- 17.Thematic Review on Resolution Regimes-Peer Review Report, FSB, April 2013.
- 18.Total Loss-Absorbing Capacity (TLAC): making bail-in feasible and credible instead of bail-out, BBVA, November 2014, p. 5.
- 19.Tsesmelidakis Z., Merton R., The Value of Implicit Guarantees, IMF Working Paper No. 12/128, 2012.
- 20.European Parliament and Council Directive 2014/59/EU of 15 May 2014 establishing framework for the needs of running recovery and reorganization and resolution activities with reference to credit institutions and investment companies and amending the Council Directive 82/891/EEC and European Parliament and Council Directive 2001/24/WE, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/ EU, 2012/30/EU and 2013/36/EU and the Regulation of the European Parliament and Council (EU) No. 1093/2010 and (UE) No. 648/2012, Official Gazette EU 2014 L 173.
- 21.EBA Final Draft Regulatory Technical Standards on criteria for determining the minimum requirement for own funds and eligible liabilities under Directive 2014/59/ EU, (EBA/RTS/2015/05).
- 22.Proposal for a regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions, 2014/0020 (COD).
- 23.Proposal for a regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council, 2013/0253 (COD).
Publication order reference