Liquidity post resolution in the (European) Banking Union: status quo, comparative analysis and proposals

More than a decade ago, the Global Financial Crisis and the subsequent euro-area sovereign debt
crisis generated a strong regulatory impetus. This significantly strengthened the European Union (EU)
banking and financial system, which shifted from the epicentre of the crisis to a mean of countering
it; however, significant gaps remain. Following international standards, the EU legislator has
introduced a new mechanism for the orderly management of banking crises with the objective of
preserving critical activities and safeguarding financial stability while avoiding additional costs to
taxpayers. Unlike other jurisdictions, such as the United States, where resolution powers have been
consolidated in the hands of the Federal Deposit Insurance Corporation, the resolution of significant
banks based in the European Banking Union (EBU) is managed by a number of authorities, resulting
in the fragmentation of mandates, powers and tools. This is a fragmentation that has serious
consequences for the financing of the resolution procedures. While the financing of liquidity during
the execution of the resolution procedure is still quite controversial, the rules governing such
financing during the stabilisation phase (post resolution) are completely absent. Depending on the
resolution strategy adopted by the Single Resolution Board, the resolved bank might experience
important liquidity needs during its stabilisation phase that could jeopardise the success of the whole
resolution procedure.
In the context of the resolution regime for significant banks, the euro area resolution authority has
thus far dealt with cases in which a buyer was immediately available or the resolution of the distressed
bank was considered not in the public interest and, therefore, liquidation was the best approach. The
apparent ease of the recent resolution experience belies the fact that the panorama of the scenarios is
broader and with more adverse implications than can be imagined. Even though past cases show that
crises are usually generated by liquidity problems, the EU legislator has not had to deal with one of
the most critical aspects of the resolution process, namely the provision of liquidity.
While liquidity gaps can arise during resolution, this study focuses on gaps in the post-resolution
scenario, which is considered the most critical for the success of the entire procedure. This sudden
lack of liquidity may occur following more complex scenarios in which the bank could find itself
unable to meet its short-term obligations at the end of the application of the resolution measures. This
is due to information asymmetries concerning the outcome of resolution, the capabilities of euro area
authorities to tackle emergency liquidity needs according to the current unclear regulatory framework
and the fragility of the resolved bank. The bank may be unable to resort to ordinary and emergency
sources for the provision of liquidity, such as those provided by the central bank, due its former
distressed nature and the state in which it is presented to markets following its resolution, which could
result in information asymmetries that generate either sudden liquidity outflows from customers or
market freezes. To date, there are no solutions to this issue in the mandates of the authorities involved
nor are resources available to stem a lack of liquidity during the stabilisation period. In this context,
all the potentially available liquidity sources will be examined, starting with the identification of the
stabilisation phase, which is also influenced by the period preceding resolution. Subsequently, it will
be possible to analyse the various resolution strategies to understand how the needs for liquidity are
generated and the legal and operational limits that prevent liquidity from being provided post
resolution. As a result of this analysis, the guidelines of standard setters and a comparison with more
advanced systems, it will be possible to formulate proposals aimed at solving the research problem
of post-resolution liquidity in the EBU.