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Law360, London (January 15, 2021, 12:59 PM GMT) -- The European Union must revamp its resolution rules in anticipation of smaller lenders faltering as a result of the coronavirus crisis, Europe's markets regulator said Friday, as it warned there is risk of harm to consumers because a bloc-wide method for protecting cash deposits remains stalled.
The European Central Bank proposed that the Single Resolution Board should have expanded powers to liquidate smaller banks, even if no public interest is identified.
The board can help manage a bank as it falls into insolvency, such as ensuring its main functions continue to operate, if the failure would cause harm to the wider financial sector. But this power should be extended to small and midsized lenders — which are not covered by the resolution rules — because of the COVID-19 pandemic, Andrea Enria, chairman of the ECB's supervisory board, said.
Enria said that lenders have weathered the crisis without much harm to their balance sheets, thanks partly to the unprecedented aid offered by EU authorities such as payment holidays and lowered capital requirements.
"But we should not be complacent," Enria told an audience in Frankfurt. "We cannot rule out that once the government support measures are lifted, some banks may experience a significant deterioration in their asset quality.
"Having an effective and integrated framework for managing crises, including for small and midsized banks, is essential to preserve the trust of depositors and the public at large, to avoid financial fragmentation and to safeguard financial stability," Enria added.
The ECB chairman proposed that the SRB would be in charge of deciding whether a smaller lender should be saved through the resolution process. But the resolution authority based in the bank's home country would have the final say in case this would be "excessively expensive" for that state's deposit guarantee scheme.
"The toolkit available to the SRB would be expanded and equipped with the power to liquidate a bank when no public interest is identified, including by transferring some of its assets and liabilities to another bank within the banking union," Enria said.
Giving the SRB this role will ensure that small and midsized lenders are treated in a consistent way, he added.
The proposal was important, Enria, said, because efforts by the EU to create a common deposit insurance scheme that would protect consumer deposits held by lenders that collapse have stalled.
"This could be an intermediate stage towards the establishment of [a deposit insurance scheme], which remains the ultimate objective," he said.
--Editing by Ed Harris.
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