EU Watchdog Scrutinizes Banks' Defenses After SVB, Credit Suisse Woes

The Single Resolution Board (SRB), an EU regulator, has revealed that while most leading euro zone banks have met the January 2024 target for issuing special debt to replenish capital in a crisis, some still need to bolster their defenses to ensure they can be swiftly wound up if necessary.

Recent banking crises, such as the collapse of Silicon Valley Bank (SVB) in the United States and the situation where UBS was forced to acquire Credit Suisse in Switzerland, have highlighted the need for banks and regulators to enhance their preparedness for rapidly unfolding crises.

One key lesson from the 2008 global financial crisis was the need for banks in the EU's banking union to maintain a minimum requirement for own funds and eligible liabilities (MREL). This requirement ensures that in times of crisis, taxpayers are not burdened with bailing out banks, as MREL debt can be written down to "bail in" the bank, preventing it from becoming "too big to fail."

The SRB, responsible for setting MREL targets, reported that by the end of 2022, two-thirds of banks in the euro zone had met their final MREL targets. The remaining shortfall represents 0.3% of total risk exposures or €20.5 billion ($21.87 billion). While €2.7 trillion has been issued to date, 24 banks still have an MREL shortfall, with 14 of them granted extensions until the end of 2024 or 2025 to meet their targets.

In a report, the SRB stressed that while maintaining adequate loss-absorbing resources is crucial, it is equally vital for banks to demonstrate their ability to use these funds effectively in a crisis. The SRB's current focus is shifting towards ensuring that banks can credibly show by the end of this year that they can be smoothly "resolved," wound down, restructured, or sold without causing disruptions to customers.

The SRB affirmed its intention to review whether any material shortcomings persist and to take remedial action where necessary, although there are no indications of the need for intervention at this stage.

The recent banking turmoil has highlighted the significance of evaporating liquidity during crises. The SRB is closely scrutinizing banks' resolution plans to address this issue, and it plans to develop further guidance on the assumptions to be used, aiming to foster consistency across scenarios considered by banks while incorporating lessons from recent crisis cases.