Banks should invest more in IT infrastructure because providing quality data immediately makes all the difference when a bank needs to be resolved in an orderly fashion, the EU’s Single Resolution Board has said.
Last June, the SRB piloted the first resolution of a European bank under the EU’s new rulebook for dealing with teetering lenders. The process to wind down Banco Popular was seen as a success by European authorities.
Looking back, the chair of the SRB, Elke König, admitted on Thursday (5 April) that “we were lucky” because a solvent and viable buyer for the ailing bank was found.
Santander eventually bought Popular for a token 1 euro on June 7 in an operation closed in a few hours before branches opened in a weekday.
But under the new rules, junior bondholders and shareholders were bailed in, writing off €2 billion of junior bonds and triggering a cascade of court cases in Spain and Luxembourg.
König wondered what would have happened if the authorities had not found a solvent purchaser on time.
If luck is absent, at least “good quality data” must be there as it allows resolution authorities to act, she said. To that end, lenders “need to invest significantly” in IT systems to provide this data, König explained.
Although she said that banks are starting to allocate more resources to this end, she warned that “much more needs to be done in this area”.
One of the work priorities for the Board in 2018 is to identify “substantive impediments to resolution”.
The lack of adequate availability of data, in particular liability information and adequate IT systems, creates some of the most important obstacles, together with overly complex legal structures, lack of safeguards to access financial markets, or lack of funding in resolution.
The need to improve banks’ IT systems so they can cope with future crises adds to financial sector woes with the digital world.
Although finance is the largest spender on information technology, most investments are dedicated to maintaining legacy systems, which are vulnerable to cyber attacks, EU officials have warned in the past.
In addition, banks are facing increasing competition from so-called fintech startups offering financial services, forcing them to accelerate their digital transformation.
Against the backdrop of mounting digital challenges, IT is one of the few areas that the Single Supervisory Board, the EU’s supervisor for systemic banks, recommended strengthening despite the difficult period of low revenues banks are currently faced with.
König also warned that UK’s departure from the EU could force banks to look for fresh capital in the markets.
If no solution is found for bonds issued by eurozone banks under British law after Brexit, these assets would no longer be eligible for the minimum requirement for own funds and eligible liabilities (MREL).
These are the capital buffers required by the new banking rules to eurozone lenders to absorb losses and keep running in times of crisis.
The SRB estimates that there is €100 billion worth of bonds issued by euro area banks from the City of London.
The solution could include a clause in new emissions to transpose these bonds to the EU framework once Brexit happens, or find a legal arrangement with the UK during the negotiations.
Solving this issue would be key given that “sufficient MREL in quantity and quality is a key feature to make banks resolvable”, König told reporters.
In this regard, the SRB aims at setting binding MREL targets this year for the most complex banks in their remit (around 60 groups).