Financing bank resolution: An alternative solution for arranging the liquidity required

Thursday, 22 November 2018
Researchers' work published externally

Banking Union Scrutiny by Willem Pieter de Groen

An in-depth analysis requested by the European Parliament's ECON Committee.

Abstract:
Liquidity in resolution is one of the unresolved elements of the Single Resolution Mechanism. Currently, with the Single Resolution Fund (SRF) and the Eurosystem, there are two potential sources of liquidity in resolution, which both have clear limitations in use and amounts. Straightforward solutions to give the SRF and/or Eurosystem more firepower in resolution go against the main objectives of the resolution mechanism (i.e. breaking the sovereignbank nexus and avoiding use of taxpayers’ money). This paper proposes an ECB liquidity facility with an SRFguarantee as an alternative solution for banks in resolution. The funds available should be broadly sufficient to address potential liquidity needs for resolution tools. The proposed solution primarily requires agreement on the ESMbackstop for the SRF, a firmer commitment for (possible) future contributions for the SRF as well as a change to the current emergency liquidity assistance or introduction of a new dedicated Transitional Liquidity Assistance by the Eurosystem.

The full paper is available here.