Discussion about Banking Supervision and Resolution in Europe
Elke König, President of the Federal Financial Supervisory Authority (BaFin), gave a lecture on the implementation of private liability in the resolution of financial institutions and the future role of banking supervision in Europe on 16 July. In particular, she discussed how to implement new bail-in instruments in the process of bank restructuring. Her lecture was part of the SAFE Policy Center discussion series on structural reforms in the European banking sector.
König warned that the problem of systemic risk that became apparent in the course of the financial crisis, has not yet been resolved. Banking supervisory authorities, as well as researchers, are still searching for a solution to the "too-complex-to-fail" problem. Because of systemic risk, states have supported complex financial institutions at a cost to the taxpayer. This factual bankruptcy protection for systemically important financial institutions has to be abolished, in order to correct the adverse incentives currently in the market, said König.
Therefore, in König's opinion an internationally uniform resolution mechanism for banks is necessary. One key component of this mechanism is the implementation of a broad bail-in. Through bail-in, owners and creditors of banks will bear the costs of restructuring. Converting debt to equity capital can also provide capital for a bridge institution.
There are different proposals for the design of bail-in instruments: In their report, the Liikanen Group pleaded for the emission of specified bail-in bonds, similar to the Contingent Convertible Bonds (CoCo-Bonds) that are already implemented in Switzerland. BaFin and the European Commission argued against the emission of a new type of contractual bail-in instrument, in order to allow for more flexibility for banks, said König. However, the quantity of bail-inable instruments, as well as their liability order, need to be clearly defined for each institute. In the following discussion, König stressed that the existence of recovery and resolution plans is very important for the implementation of the European banking union.