The Single Resolution Board (SRB), the central resolution authority within the Banking Union, has published a report on the management of less significant institutions (LSI).
Introduction
Less Significant Institutions (LSIs) play a vital role in the European financial landscape, and their effective resolution planning and crisis management are critical for maintaining financial stability. In this article, we delve into the key insights from the executive summary of a recent report highlighting the status of LSIs and their regulatory oversight in the European Union (EU).
Direct Responsibility of National Resolution Authorities:
LSIs, with the exception of cross-border ones, fall under the direct responsibility of national resolution authorities (NRAs). These NRAs work in conjunction with the Single Resolution Board (SRB) to ensure the consistent application of the Single Resolution Mechanism (SRM) Regulation. This collaboration spans across 21 participating Member States, aiming to uphold high standards in resolution planning and crisis management.
Diverse Sector Structure:
A significant portion of LSIs, approximately three-quarters, are part of cooperative and savings banking networks. Notably, some of these networks comprise both Significant Institutions (SIs) and LSIs. However, it’s important to note that these networks are not prudentially consolidated. As a result, resolution planning, including the Public Interest Assessment (PIA) and resolvability assessments, is conducted individually at the level of each institution within the network.
Variety of Business Models:
Among the remaining 500 LSIs, half operate with traditional business models, while the other half follows special business models such as custodian services, investment banking, or financial market infrastructure (FMI). This diversity reflects the multifaceted nature of LSIs and the need for tailored resolution strategies.
Challenges in Meeting Minimum Requirements:
At the end of the 2022 resolution planning cycle, 25 out of 68 LSIs with resolution strategies fell short of meeting the final targets of the minimum requirements for own funds and eligible liabilities (MREL). The cumulative MREL shortfall amounted to EUR 3.5 billion, equivalent to 3.8% of the total risk exposure amount (TREA), including the capital buffer requirement (CBR). Additionally, EUR 220 million, or 0.7% of the leverage ratio exposure measure (LRE), was also in deficit. To address these challenges, the MREL transitional period was extended beyond January 1, 2024, for 10 of these LSIs.
Ongoing Oversight Efforts:
The NRAs did not formally identify any substantive impediments to resolvability during the 2022 RPC. However, efforts to phase in and proportionately implement the SRB’s Expectations for Banks (EfB) and the ‘heatmap’ approach continue, ensuring continuous improvement in resolution planning and crisis management.
Collaborative Crisis Preparedness:
The NRAs and the SRB are working collaboratively to enhance crisis preparedness and management for LSIs. This involves sharing best practices among NRAs and improving SRB procedures, fostering a more robust framework for addressing potential crises.
Future Challenges and Considerations:
The current macroeconomic situation may pose challenges for some LSIs, particularly those vulnerable to interest rate risks. Additionally, LSIs’ reliance on non-covered deposits as a source of funding is a point of concern, given the increased mobility of deposits due to the expanding use of social media and digitalization in the LSI sector.
Strengthening the EU’s Framework:
On April 18, 2023, the European Commission adopted a proposal aimed at further strengthening the EU’s bank crisis management and deposit insurance (CMDI) framework. This proposal addresses key challenges identified by the SRB LSI oversight in 2022, emphasizing the EU’s commitment to enhancing the resilience of its financial sector.
Conclusion:
The status and oversight of LSIs within the EU are integral to the stability of the European financial system. Continuous collaboration between NRAs, the SRB, and the broader financial industry is essential to address challenges and strengthen resolution planning and crisis management for LSIs in the evolving financial landscape of the European Union.
Blogger and Investment Management Advisor with focus on Distressed Assets & NPL. Massimo is Chief NPL & Fintech Editor at Credit Village Magazine.