8.6.2 Introduction of an inclusive funding profile

It is the author’s view that it is more important to find the right balance between financial stability and the protection of public funds than to restrict the use of public funds against all costs. This view fits the interpretation that the objective of protecting public funds aims at introducing a public funding cascade in order to protect taxpayers’ money. The exact structure of this public funding cascade can differ per bank, depending, inter alia¸ on the financial difficulties that the bank faces and the legal instrument (BRRD or SRMR) under which the public funds are applied.

In the author’s view, it would be beneficial if banks were required to prepare a public funding cascade as part of their funding profile (hereinafter referred to as an inclusive funding profile). This inclusive funding profile should not only describe the private funding resources, but also the public funding resources that are available when a bank gets into financial difficulties, both as a result of an idiosyncratic shock and systemic crises. It should not be restricted to the resolution phase, but also discuss the funding resources that are available in the recovery and insolvency phase. An assessment of the access criteria for the different public funding resources should also be part of the inclusive funding profile, so that banks are prepared for and aware of the different steps that may have to be taken to gain access to the respective public funding resource.

Although the author by no means argues, that banks should assume reliance on public funding sources, drafting an inclusive funding profile may contribute to an efficient and smooth use of funds available to restore the financial position of the bank or to wind up this bank in an orderly manner. Already, the resolution plan needs to include an explanation by the resolution authority as to how the resolution options could be financed. In addition, the recovery plan needs to set out the range of capital and liquidity actions required to maintain or restore the viability and financial position of the bank. This, however, excludes the use of EPFS, such as resolution financing by the deposit guarantee schemes or precautionary guarantees and recapitalisation in the recovery phase. In addition, any public funding resources required for the winding up of a bank in an orderly manner in normal insolvency proceedings are beyond scope of these plans.

If all banks were to prepare an inclusive funding profile, this would give better insight into the appeal that banks might make to public funding resources. This may contribute to ensuring that these public funding resources are sufficient and may give input that can be used for the further development of the public funding cascade.