Those rules require banks to draw up living wills and build up loss-absorbing buffers that authorities can use to stabilize a failing lender over a weekend, a process known as “resolution.” The Single Resolution Board, which handles failing banks, even oversees an €81 billion industry-funded safety net that can support a resolved bank if its bail-in buffer isn’t enough. None of that matters if the rescued bank can’t find the cash needed to run the business on Monday morning.
The European Central Bank, meanwhile, can’t simply print money to absorb losses that belong to a government or failing bank.
To attempt to solve the various problems, the Commission sought “staff level input” for its paper from the EU’s institutional heavyweights: The ECB, the SRB, and the eurozone’s bailout fund, known as the European Stability Mechanism (ESM).
Talks are still at a technical stage, according to three EU officials briefed on the paper, meaning the topic is unlikely to reach finance ministers this year.
But deputy finance ministers have already discussed the topic, also known as “liquidity in resolution” among specialists, and it is one of the priorities of the U.S.’ ongoing presidency of the G20. They’re expected to return to the subject in the fall once the Commission unveils its policy position on how to make European banks more competitive on the world stage, the three officials said.
Chasing waterfalls
The Commission envisages a blueprint akin to a waterfall of responsibilities, whereby, as a starter, the ECB provides a lifeline to the troubled lender. As collateral, the bank issues a special bond that the SRB guarantees.
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