EU watchdog scrutinises banks’ defences after SVB, Credit Suisse woes

Most leading euro zone banks have met a January 2024 target for issuing special debt to replenish capital in a crisis, but some need to do more to ensure they can, if necessary, be wound up quickly, a European Union regulator said on Wednesday.

Recent banking crises in the United States, where Silicon Valley Bank collapsed, and in Switzerland where UBS was forced to acquire Credit Suisse, show that banks and regulators need to increase preparedness for rapidly unfolding crises, the Single Resolution Board (SRB) said.

Forcing banks in the EU’s banking union to have minimum requirements for their own funds and eligible liabilities (MREL) was a lesson from the 2008 global financial crisis where taxpayers had to bail out banks.

MREL debt is written down in a crisis to “bail in” the bank and help stop it from being “too big to fail”.

The SRB, which sets MREL targets, said that by the end of 2022, two-thirds of banks met their final target.

The shortfall is 0.3 per cent of total risk exposures or 20.5 billion euros ($21.87 billion). Some 2.7 trillion euros has been issued so far, and 24 banks have an MREL shortfall, though 14 of them have been given an extension until the end of 2024 or 2025 to meet their targets.

“While holding sufficient loss-absorbing resources at all times is key, it is equally important for banks to be able to use these funds in a crisis,” the SRB said in a report.

Its focus is shifting to ensuring banks can credibly demonstrate by the end of this year that they can be smoothly “resolved” or wound down, restructured, or sold without disruption to customers.

“The SRB will review whether material shortcomings remain and take remedial action where needed,” it said, though there is no sign so far that it will need to intervene.

Evaporating liquidity was a hallmark of recent banking turmoil and is being scrutinised in the resolution plans of banks.

“In order to foster consistency across banks’ scenarios to be considered while integrating lessons learnt from recent crisis cases, the SRB will develop further guidance on the assumptions to be used,” the watchdog said.

($1 = 0.9373 euros)