How should banks in crisis be managed? – the Riksbank's comments on the final report of the Financial Crisis Committee
Date
30/10/2014
In the spring the EU Bank Recovery and Resolution Directive was issued. The Financial Crisis Committee, which was appointed by the Swedish government, is now providing suggestions as to how the directive can be incorporated into Swedish law in its final report "Resolution – a new method of managing banks in crisis (2014:52)". The Riksbank welcomes the Committee's proposal and largely shares its assessment, but proposes some clarifications and alternative solutions.
Resolution - a new method of managing banks in crisis
The Financial Crisis Committee was tasked with determining how the EU Bank Recovery and Resolution Directive is to be transposed into Swedish law. The new framework introduces a new procedure as alternative to bankruptcy or liquidation of financial institutions – resolution. This procedure should make it possible to wind up or to reconstruct a failing bank in an orderly manner, so that systemically-important functions can be maintained. The central government should be able to take control over the bank and to sell all or parts of it. Furthermore, it should be possible to force the bank's owners and creditors to take responsibility for losses. To attain these objectives, the authorities are given a number of new tools to manage banks in crisis.
The Riksbank is positive to the authorities receiving a larger toolbox here. However, the Riksbank shares the Financial Crisis Committee's misgivings regarding the restrictions that the directive, combined with the EU regulations on government support, may entail for the scope to take supplementary central government measures. The ability to make such interventions can be crucial in a systemic crisis.
Clearer consultation and exchange of information
The Riksbank would like to point out that resolution is only one part of the management of a financial crisis. The Riksbank would probably be involved at an early stage of a crisis in its capacity as "lender of last resort". It would probably benefit society's overall ability to manage financial crises if the Riksbank, prior to various decisions, is kept informed and given the opportunity to contribute its opinion. The deciding body, the resolution authority, should therefore consult with the Riksbank prior to important decisions.
Survey the Riksbank's capacity to provide ELA
The Riksbank welcomes the liquidity-support role in connection with resolution. However, the Riksbank considers that the Committee is underestimating the difficulties in attaining concordance with EU legislation and therefore proposes that the Riksbank and the resolution authority, as soon as it is established, should together survey the conditions for supplying liquidity in resolution proceedings.
The conditions for resolution of financial infrastructure companies should be investigated
The Riksbank observes that financial infrastructure companies are not covered by the new framework, but that the European Commission is currently working on a proposal in this field. The Riksbank proposes that an inquiry is appointed immediately with the task of investigating the conditions for the resolution of financial infrastructure companies. In this way, the Swedish authorities can be prepared when the European Commission's proposal is presented and negotiations at EU level start.
