06 January 2019

Financial Times: Eurozone is learning to deal with failed banks, regulator says

For years a major bank failure in the eurozone seemed an unlikely possibility that could be safely left to national regulators. But the panic that spread through the financial system a decade ago — and the €1.6tn of taxpayer support that EU governments provided to try to quell the turmoil — changed that.

In one of the eurozone’s biggest institutional overhauls arising from the financial crisis, the Single Resolution Board, the agency Ms König heads, took over responsibility from national governments and central banks for ensuring that a failure of one financial institution does not spread chaos throughout the banking system.

Speaking to the FT to mark three years since the SRB became fully operational at the start of 2016, Ms König said a page had been turned in how the bloc handled bank failures — not least after its first intervention, at Spain’s Banco Popular in 2017 — but that the system remained a work in progress.

Making sure that bank crises could be contained without resorting to taxpayer help was “an ongoing challenge”, she said, pointing to the need to equip the SRB with enough financial firepower and to its work on crisis planning.

The board is part of the eurozone’s broader project to build a “banking union” that shifts operational responsibilities for banks to the European level. As the EU considers how to develop the project further — such as through a shared guarantee for bank deposits — the SRB is a prime example of the possibilities and challenges of such centralisation.

Political leaders faced a stark choice in the financial crisis: use public money to save important banks or let them go bankrupt, which the downfall of Lehman Brothers in the US showed would risk further turmoil. While the crisis years did see some failed lenders broken up or liquidated, such as Franco-Belgian bank Dexia and Germany’s WestLB, taxpayer money was often used to smooth the process.

The SRB’s powers of rapid intervention are intended to provide better options. It can write down creditors, break up a failing bank or arrange its sale. Ms König and her staff say their tools are better than those used in standard corporate bankruptcy proceedings, both in the speed of decision-making — the SRB can deal with a bank over a weekend — and the emphasis on preserving banks’ critical functions.

A first test for the Brussels-based SRB and its 300 staff came in June 2017 when the agency handled a run on Banco Popular, then Spain’s sixth-largest lender. With the bank running out of cash, the board worked overnight on a plan to force lower-ranked creditors to take losses and then sell the institution to Banco Santander, a larger competitor, for a symbolic euro. Popular remains the only bank to have gone through an SRB resolution process.

Ms König hailed the decision as a “game changer” for Europe’s banking system. “It was proof that we can resolve a bank,” she said.

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