Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.5.1.2:5.5.1.2 Access differentiation

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.5.1.2

5.5.1.2 Access differentiation

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

The access restrictions that apply under the resolution framework differ depending on whether it concerns the availability of public funding in or outside of resolution. The resolution framework therefore not only provides for access restriction, but also for access differentiation.

The insolvency phase is not covered by the resolution framework. As a result, the resolution framework does not control the access to public funding sources in this phase.

The access differentiation created by the resolution framework can be explained by the different purposes that public funding may have. Public funding can be geared more towards addressing liquidity issues (liquidity support) or solvency issues (solvency (or capital) support). While liquidity support addresses temporary cash flow problems caused by a lack of liquid assets, solvency support aims to absorb losses (in other words, to ensure that the net asset value is equal to zero) and to restore the capital position of a bank (in other words, to restore the regulatory capital ratios).

Liquidity can come from direct cash holdings in currency or on account at a national central bank. More commonly, it comes from holding securities that can be sold quickly with minimal loss. Banks can increase their liquidity in multiple ways, e.g. shorten asset maturities, improve the average liquidity of assets, lengthen liability maturities, issue more equity, reduce contingent commitments, or obtain liquidity protection (e.g. from another bank or the national central bank). All else being equal, the higher the capital levels at banks, the less need there is likely to be for high levels of liquidity. Higher capital levels decrease the likelihood of a loss of confidence by funders and increase the ability of the central bank to perform its lender of last resort function, as it becomes clearer that banks are solvent. Conversely, the lower the level of liquidity, the greater the need for capital to protect a bank from a confidence shock.1

Table 7 shows the public funding sources currently available for banks, divided in liquidity support and solvency support. It shows that public funding sources are more geared towards solvency support in resolution. Liquidity support may, however, also be beneficial for the solvency of a bank and vice versa. Illiquidity and insolvency are linked and closely interdependent, and will often be indistinguishable, in particular in a crisis scenario.2 The distinction is therefore not as clear as may be expected on the basis of the table.

Table 7: Qualification of public funding as liquidity or solvency support

Source of public funding

Liquidity support

Solvency support

Outside resolution (and normal insolvency proceedings)

Precautionary guarantees

X

Precautionary recapitalisation

X (future solvency as result of the failure of the adverse scenario stress test)3

ELA

X

DGS (alternative measures)

X (primary focus)4

Inside resolution

NRF / SRF

X

X (but only in case the resolution authorities have decided to fully or partially exclude eligible liabilities from bail-in)

DGS (resolution financing)

X (not exceeding the costs of fulfilling the statutory or contractual mandate of the DGS)

X (not exceeding the costs of fulfilling the statutory or contractual mandate of the DGS)

GFST

X

ESM DRI

X

Member State support other than GFST (alternative financing sources)

X (e.g. loans and guarantees)

X (e.g. impaired assets measures)

Source of public funding

Liquidity support

Solvency support

As a result, a further distinction can be made between public funding available in the recovery phase, the resolution phase, and the insolvency phase. This distinction differs depending on whether the public funding is available for banks and banking groups in the Eurozone (in scope of the SRMR) or banks and banking groups outside the Eurozone (in scope of the BRRD). Table 8 provides a summary of findings in relation to the access to public funding in the different phases, while making a distinction between the public funding sources available under the SRMR and the BRRD.

Table 8: Summary of findings in relation to access to public funding

ELA

DGS support

NRF

SRF

ESM DRI

Member State support

SRMR

Recovery phase

Yes

Yes (alternative measures)

No

No

No

Yes, precautionary guarantees / precautionary recapitalisation

Resolution phase

No (unless the bank is considered solvent)

Yes (resolution financing)

No

Yes

Yes

Yes, (GFST and) alternative financing sources

Insolvency phase

No

Yes (pay-out function and other use)

No

No

No

Yes, liquidation aid

BRRD

Recovery phase

This depends on national legislation

Yes (alternative measures)

No

No

No

Yes, precautionary guarantees / precautionary recapitalisation

Resolution phase

This depends on national legislation

Yes (resolution financing)

Yes

No

No

Yes, GFST and alternative financing sources

Insolvency phase

No

Yes (pay-out function and other use)

No

No

No

Yes, liquidation aid

Deze functie is alleen te gebruiken als je bent ingelogd.