LawFin Research Seminar: Ioannis G. Asimakopoulos (University of Luxembourg)
Title: Making Deposit-Funded Credit Institutions Resolvable
Speaker: Ioannis G. Asimakopoulos (University of Luxembourg/Centre for Advanced Studies on the Foundations of Law and Finance)
Discussant: Prof. Dr. Jens-Hinrich Binder (University of Tuebingen)
Abstract: The EU bank resolution framework is built on the premise that banks’ own funds and eligible liabilities (MREL) should suffice to cover losses in case of liquidation, and additionally recapitalize banks in case of resolution. In this vein, credible resolution financing is still in the making; deposit insurance remains national and limited, whilst resolution funds lack the capacity as well as a backstop to become credible. However, the enforceability of this approach remains questionable, especially regarding banks adhering to the deposit-funded business model. In particular, given that most of the deposit-funded credit institutions are neither listed nor active in capital markets, they face the following dilemma: either to build up the required MREL buffer and put at risk their profitability or not to comply with the MREL rules and put at risk their resolvability. This paper illustrates this regulatory challenge by assessing the possible outcomes upon a bank’s failure, namely liquidation, resolution based on open-bank bail-in and resolution based on transfer strategies. After examining all three alternatives it becomes evident that resolving deposit-funded credit institutions without the use of public funds becomes a difficult equation for regulators to solve. Therefore, this paper concludes with a series of recommendations related to resolution governance and financing in order to improve the current crisis management framework.
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