Recovery challenges for Eurozone banks

Recovery and Resolution Planning

From looking at Europe’s is challenges with from a macro point of view, we spent Wednesday afternoon at RiskMinds International 2017 in Amsterdam looking at things from a regulatory perspective.

What were the current challenges for Eurozone banks with regards to recovery and resolution planning?

Since 2014, the bank recovery and resolution directive has aimed to provide authorities with comprehensive and effective arrangements to deal with failing banks. Under the new regulation, banks have to prepare recovery plans to overcome periods of financial distress.

But whilst the regulatory framework is now in place, banks are still left with various uncertainties, as discussed by Wednesday afternoon’s panel.

Some of the biggest headaches alluded to by the panel included its breadth and scope:

“It’sa helpful strategic analysis, not only for regulators but also ourselves,” said Matthijs van Oers, Head Recovery and Resolution Planning at ING Bank.

“But the scope is getting broader every year. It can make it 1,000 pages long, so updating it every year can be a challenge.”

Blind spots

And the legislation still had some blind spots, he felt. “The concepts have been embraced by almost all of us, but the implementation and operationalization is sometimes quite challenging,” he argued.

“Sometimes that has to do with pure operationalisation issues, like the bail-in tool, or other things like liquidity and resolution. For instance, we don’t have immediate liquidity if and when necessary.

“Valuations is still a big thing to be figured out,” he added. “They are extremely important, but extra difficult.

“But maybe the biggest blind spot is whether we can actually go all the way with a fully-fledged bail-in that creates new shareholders along with existing shareholders. How long will it take to get such a resolved bank back to the market and back to private funding?” he wondered.

For Harry Petersen, SVP Regulatory Oversight & Response at Rabobank it was the level of detail in the recovery plan that was a worry.

The most important part of the plan was outlining what your options are. But it was unlikely anyone would use the scenarios when in a crisis.

“There’s lots of discussion on how much detail you should put in there. Ours describes our crisis management combined with lists of the most important people and how to contact them, and an overview of recovery options, including effects on capital liquidity and other indicators,” he said. “But that’s all.”

“The other thing we see is the ECB asking for all sorts of financial details from the recovery plan. Whilst it’s very helpful to have a nice list and to have indicators and effects, at the same time how is the ECB going to use it to compare banks? In reality, recovery options aren’t comparable between banks, so what are they going to do with that information?

Boudewijn Berger, Head Recovery & Resolution Planning at ABN AMRO felt that the most important part of the plan was outlining what your options are. But it was unlikely anyone would use the scenarios when in a crisis. “It’s a nice way to deepen your thinking about what could happen, but during a crisis you’re not going to look at them,” he said.

But as he concluded, it was all a journey: “The multi-year journey; it may take more time to get it all done, we should not have the illusion that we can do all of this in one year.”