Resolution of cross-border banks

Transcription

1 Resolution of cross-border banks Dirk Schoenmaker (Bruegel, RSM) FINSAC Bank Resolution Conference Vienna, 12 December 2016

2 Outline FINSAC Guidebook and Case Studies Need for fiscal backstop -> how for cross-border banks? Theory: Equilibria of international banking EU institutional set-up: Banking Union and beyond Policy conclusions need for burden sharing!

3 FINSAC Guidebook + Case Studies FINSAC Guidebook Very useful translation of legal texts to practical guidelines Ch touch on cross-border cooperation: Resolution colleges are expected to reach a joint decision But what are the requirements or incentives? Case Studies Extremely useful to show that resolution and bail-in is possible Often combination: SNS in Neth. -> bail-in + nationalisation Joint-Vienna Initiative case during crisis should be added

4 Reform after crisis Much has been done: More capital, including systemic surcharge G-SIBs Key principles for resolution of international banks, but soft law Bail-in: yes for idiosyncratic failures, but for large systemic banks? We take the presence of large banks as given Still need for fiscal backstop for (large) banks How to solve coordination failure in resolution of cross-border banks? Hard law: ex ante binding burden sharing agreement to organise fiscal backstop 4

5 5 Financial trilemma

6 Equilibrium A. of financial trilemma 6

7 A. Multinational banks with national subs Idea: National subs are separately capitalised and managed National authorities resolve separately: MPE (multiple point of entry) But is this equilibrium viable? Synergies from centralised risk management + 1 brand name Legal firewalls cannot prevent indirect contagion Empirics: correlation default risk parent and sub is 0.2 / 0.3 Long run equilibrium Truly stand alone: increasingly high ring-fencing requirements No incentives for national authorities to cooperate 7

8 Equilibrium B. of financial trilemma 8

9 B. Global banks from large countries Fiscal capacity: Small and medium countries cannot support large banks: downsizing Only large countries can afford and follow SPE (single point of entry) But what about foreign retail branches? Home country (and parent bank) may choose to support, or not Incentive host countries to ring-fence -> equilibrium A. (with MPE) Long run equilibrium Geopolitics and powerplay: US + China may impose their model Nevertheless, host countries may not accept unilateral approach 9

10 Equilibrium C. of financial trilemma 10

11 C. Global banks with burden sharing Idea: Give up on national policies: joint supervision + burden sharing for resolution based on hard law Facilitates SPE (single point of entry) Technically easy, but politically difficult Tightly connected group of countries: Banking Union Ad hoc (e.g. Joint Vienna) may work if all interests are aligned, but you cannot count on it Long run equilibrium Regional groupings (beyond euro area?) 11

12 EU institutional set up I. Single Resolution Board (SRB) and National Resolution Authorities (NRAs) work together in Banking Union Is resolution supra -national or national? Potential government support and ELA are still national remain possible ESM as fiscal backstop? -> conflicts II. EU countries outside euro -area - options Join Banking Union: both supervision and resolution In addition to Intra -Group Financial Support Agreements, burden sharing between countries in resolution plan (Avgouleas et al, 2013) Or, ring-fencing of national subsidiaries (arms race)

13 ESM as fiscal backstop Shifting goal posts In direct bank recap to break sovereign nexus If bank rescues, then banking supervision needed -> Banking Union In backtracking: one of building blocks Indirect recapitalisation (Art 15 ESM Treaty) via country not sufficient ESM Direct Recapitalisation Instrument (DRI) conditions: Member s fiscal sustainability in danger Own contribution of member Bail-in of 8% of bank s total liabilities Unanimity of votes -> protracted negotiations with uncertain outcome Prohibitive -> no credible fiscal backstop 13

14 Conclusions International financial stability remains elusive Soft law approach ( expected to reach a joint decision ) will not solve problem Burden sharing based on hard law needed to solve coordination failure ESM is on its way as fiscal backstop for euro area banks Common backstop to Single Deposit Insurance and Resolution Fund Improve direct recapitalisation instrument Part of broader risk sharing and risk reduction agenda

15 References Avgouleas, E., C. Goodhart and D. Schoenmaker (2013), Bank Resolution Plans as a Catalyst for Global Financial Reform, Journal of Financial Stability, 9, Schoenmaker, D. (2016), Resolution of International Banks: Can Smaller Countries Cope?, CEPR Discussion Paper Schoenmaker, D. (2016), The impact of the legal and operational structures of euro-area banks on their resolvability, Policy Contribution Issue no 23, Bruegel.