Brussels: Big euro-area lenders face a choice; clean up the complicated corporate structures that make them difficult to wind down in a crisis, or watch Elke Koenig do it for them.
Koenig, head of the Brussels-based Single Resolution Board, said in an interview that streamlining banks’ architecture and ensuring they can fund their own demise without taxpayers’ help will be priorities in the year ahead.
“You have banks where you end with something that looks more like a spider web than a clean structure," Koenig said. The message that those banks will receive is: “Please tidy up," she said.
The SRB is part of the European Union’s efforts to end the problem of too-big-to-fail banks. In 2018, it will adopt resolution plans for nearly all of the 140-odd lenders within its remit, then start to identify “substantive impediments" to orderly wind-down.
Under EU law, when the SRB finds such obstacles, it sends a report to the bank, which must respond within four months on how it plans to fix the problem. If the SRB isn’t satisfied, it can instruct the supervisor to impose a range of measures on the bank, including issuing loss-absorbing liabilities, altering its legal or operational structures and selling assets.
This task assumed greater importance earlier this year when the the European Commission withdrew a bill that could have forced major banks such as Deutsche Bank AG and BNP Paribas SA to split their trading and retail operations. Finance Watch, a public-interest watchdog, has said that without that bill, it’s “squarely" on authorities like the SRB to make sure systemically important banks can be wound down in an orderly manner.
Koenig accepts that the SRB is responsible for making sure banks have resolvable structures. “That’s clearly on us," she said. “And it’s something that needs to be addressed swiftly."
“The ideal structure for me is one where you can with confidence isolate certain functions to keep them up and running in case something unforeseen happens," Koenig said. “I would not try to differentiate between investment banking functions and retail banking functions, but think about it this way: If you need to separate businesses, are you producing a viable set of companies? Can you really separate them in a timely manner?"
Koenig said she prefers an informal approach, speaking directly to managers rather than sending official notices, which she said would halt any further resolution planning until the obstacles had been removed. Banks will also be expected to enhance the availability of data and to make sure their liabilities can be used to cover losses as the law foresees, she said.
The SRB handled its first bank failure in June, when it forced the sale of Spain’s Banco Popular Espanol SA to Banco Santander SA for one euro, wiping out shareholders and some creditors. The case has sparked a slew of lawsuits and challenges before the SRB’s own appeals panel, which recently ruled that more information about the resolution must be published.
Koenig said that she doesn’t agree with those who say this backlash presents a threat to the EU’s rules. “Since the European resolution framework is quite new, I think it is a natural consequence that with the first case we are now faced with multiple lawsuits," she said.
Lawmakers in Brussels and Spain have joined investors in questioning Koenig’s handling of Popular, especially the decision not to publish a report by an independent auditor used to value the bank before its sale. Nevertheless, the European Parliament this week voted to extend her term for five years.
One of the most pressing questions in the aftermath of the Popular failure is how to provide liquidity to a bank in crisis, according to Koenig. While she and the commission think that central banks should provide the necessary funding, this debate far from finished, she said. Bloomberg
—With assistance from Boris Groendahl