Bank resolutions in the EU will still prove challenging even though the Bank Recovery and Resolution Directive (BRRD) came into full force on Jan. 1, says a new report from Fitch Ratings.
BRRD rules require bank shareholders, debt holders, and others to suffer losses before public equity can be injected in to a failing bank. Yet Fitch says that resolving a failing bank will still be politically difficult. “One key complication is that bank resolutions can force losses on retail investors in bank debt, which might be politically unacceptable and undermine retail investor confidence in the banking sector,” the Fitch report says.
In some countries, such as Italy and Portugal, it is common to sell bank bonds to retail investors, the Fitch notes, which “blurs the line between a government’s responsibility to provide an appropriate level of protection for individuals’ savings and investments and maintain domestic financial stability, and the need to implement [new recovery rules].”
The Fitch report suggests that a handful of bank resolutions “were probably rushed through” before the end of 2015 in Italy and Portugal to avoid the new regime, and the impact on retail investors.
In addition, the new rules are being implemented somewhat differently throughout Europe, the Fitch report notes, which complicates matters. Nevertheless, Fitch also says that the Single Resolution Mechanism (SRM), which implements new regime, “should ensure that politics are kept out of resolution decisions by curbing the powers of national resolution authorities.”
“Elke Konig, who chairs the Single Resolution Board, stresses that when a bank fails, market economy principles will be applied strictly and even retail investors must be held responsible for their investment decisions,” the Fitch report adds.