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The Single Resolution Board (SRB), the European Union's banking union overseer, has underscored the necessity for heightened preparedness in response to swift financial crises. This call comes following recent banking calamities in the United States and Switzerland, where Silicon Valley Bank collapsed and UBS was compelled to acquire Credit Suisse (SIX:CSGN).
To avoid a recurrence of the 2008 global financial crisis, the SRB has imposed a minimum requirement for own funds and eligible liabilities (MREL). The MREL debt can be converted or written off during a crisis to prevent banks from becoming "too big to fail". By the end of 2022, two-thirds of banks had met their final MREL targets.
Despite these efforts, a shortfall persists. The deficit equates to 0.3% of total risk exposures or €20.5 billion ($21.87 billion). As of now, €2.7 trillion have been issued, with 24 banks still not reaching their MREL targets. Out of these, 14 have been granted extensions until the end of 2024 or 2025 to fulfill their objectives.
The SRB has emphasized that banks must maintain adequate loss-absorbing resources at all times and be capable of effectively utilizing these funds during crises. The regulatory body is now shifting its focus towards ensuring that by year-end, banks can convincingly demonstrate their ability to be smoothly "resolved" – wound down, restructured, or sold without causing disruptions for customers.
The SRB is prepared to review any significant shortcomings and take necessary corrective actions if needed. It has not yet signaled any immediate need for intervention.
In light of recent instances of evaporating liquidity seen in banking crises, the SRB is closely examining banks' resolution plans. To promote consistency across banks and integrate lessons from recent crisis cases, the SRB plans to provide further guidance on the assumptions to be used.
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