The Single Resolution Board, headed by Elke König, was formed five years ago in the wake of the eurozone financial crisis to tackle a patchwork of national rules for bank bailouts and give investors more confidence. Regulators wanted to ensure consistent treatment of banks and creditors across the eurozone while allowing banks to be wound down with minimum risks to financial stability.

However the December rescue of NordLB is the latest in a stream of cases that have been handled outside the remit of the SRB, raising questions over whether the resolution framework is fit for purpose.

Only one bank — Spain’s Banco Popular — has been fully dealt with by the board.

Ms König acknowledged there was a "perceived inequality of treatment". She said she would like more clarity about when national regulators could use national deposit-guarantee schemes to step in to rescue banks, as has happened with lenders in Italy as well as NordLB.

Such rules would set out a hierarchy of when using deposit schemes was the lowest-cost action and preferable to allowing banks to be wound down under the SRB’s regime.

That would remove the need for national judgment and eliminate questions on whether state aid decisions, which are overseen by the EU’s competition directorate, are aligned with the SRB’s treatment of failing banks.

NordLB’s rescue, led by the German state of Lower Saxony, was approved by the EU’s competition authority, which said it did not constitute state aid. The extra support meant the German bank was not classed as "failing" and therefore did not fall within the SRB’s remit.

Ms König, a former head of the German financial services regulator who was appointed for a second five-year term at the SRB in 2018, said the EU also needed to get its capital markets union "really moving forward". This would ensure that banks would be able to issue the debt that is supposed to become part of their resolution plans.

Regulators are demanding that banks issue debt that can be converted into equity on an institution’s balance sheet if it comes under stress. This would then mean a lower burden on taxpayers in any rescue.

This debt, which converts to equity at times of stress, is supposed to be used to shore up failing banks instead of using a bailout from taxpayers.

"The single capital market is not really existing because the foundations are not really entirely harmonised," Ms König said. She highlighted the need for the EU first to regularise insolvency rules across the bloc and said she anticipated "significant" progress on doing so in 2020.

(Published by Financial Times, February 10, 2020)
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