With the fall of the Americans Silicon Valley Bank (SVB) and Signature Bank and custom recovery attempt First Republic and subsequent mandatory purchase Credit Suisse by its main competitor, UBSa born terminology and tools the Financial Crisis from 2008. As in a bizarre series, investors’ fear found a new victim last week: Deutsche Bank, the first German bank, was once again on the loose. Another day of losses in the stock markets especially for bank bonds. Here are some of the tools for preventing and resolving banking crises.
After the 2008 financial crisis, different instruments were created to mitigate it. banking crises. One of these Single Resolution Fund (furIt is fed by the contributions of all banks and some investment companies of 19 member countries. Bank AssociationIt has three pillars: the single supervisory mechanism, the single resolution mechanism, and the greenest stage: a community-level deposit guarantee fund. The forecast is to collect through FUR an amount equivalent to at least 1% of the closed deposits of credit institutions, which are expected to reach approximately 80,000 million before 31 December 2023. This tool is integrated into the Single Resolution Mechanism (SRM) born in 2015 and designed to guarantee. orderly settlement of banks bankruptcy at minimal cost to taxpayers and is governed by a single decision board (JURY), is completed with MEDE (European Stability Mechanism), in 2012 European Financial Stability Fund (FEEF) was created in 2010 and reformed euro countries to make them more efficient in 2020. The most common function of the ESM is to give credit to member states to clean up their financial systems. Such was the case in countries like Spain. In the case of non-systemic banks at the global level, it is the national authorities that add the resolution process. In Spain it is FROB. If the SRB decides that a bankrupt bank is not in the public interest, it liquidates the bank. Otherwise, the resolutions try to find another asset with more solvency that gets them even at symbolic prices in the first place. Another way is to transfer assets and liabilities to an organization that manages them in order to find buyers. This is the case of the bad bank Sareb in Spain. In June 2017, the SRB adopted the first resolution decision. in the case of popular Bankended up in your hand Santander.
The European Central Bank (ECB) is the bank that has the tools for this. liquidityaspect LTRO (‘Long-Term Refinancing Operation’), lending to banks in emergencies and at low interest interbank market. TLTROs serve to maintain or increase the issuance of bank loans to companies and households in the eurozone, provided that a specific target is met for lending to households (excluding home purchase loans) and companies; and longer-term loans than other conventional liquidity providing instruments, maturing in three or four years. The ECB launched three series of TLTRO operations, TLTRO I in 2014, TLTRO II in 2016, and TLTRO III in 2019. The conditions for this latest series have been changed, especially in 2020, after the arrival of the covid-19 pandemic.
HE MREL (Spanish ‘Minimum Required Eligible Obligations’ or initials of Minimum Required Eligible Obligations) an additional regulatory requirement Those that already exist for European banks. Its purpose is to create solvency buffer that covers the losses of a financial institution in case of settlement. The level of this buffer is determined separately for each bank group according to the risk level and other characteristics. the idea is that Each bank has its own funds and acceptable obligations, first to cover potential losses and secondly to recapitalize itself without having to resort to public money later.. Although there is a long process of adaptation to the standard determined on a case-by-case basis, it entered into force in January 2016. MREL applies to all European banks, regardless of size; TLAC created for thirty institutions on the global systemic banks list.
One of the purposes of bank decisions is to be supported by shareholders and creditors of the businessin order to prevent an impact on the taxpayer when it occurs a bailout, i.e. when the State injects capital to avoid bankruptcy. And that’s why it was founded an order to absorb losses depending on the type of financial instrument or liability in question. Thus the capital instruments (reserves, Capital, AT1 and T2, in that order and shares and participation quotas) and then follow the sequence in bankruptcy liquidation. hybrid debt, such as convertible places (‘coconut’), subordinated debt, non-priority debt and ordinary creditors (significant debt, uninsured deposits of companies over 100,000 Euros and other ordinary creditors). And if only it were necessary, the deposits of SMEs and individuals could reach the amount exceeding the guaranteed amount (100.000 Euro).
One contributing factor to the tension concerns Credit Suisse’s AT1 bonds. As part of the package of measures that led to the acquisition of Credit Suisse by UBS, the Swiss regulatory agency Finma announced that Credit Suisse’s portfolio of these books worth approximately €16,000 million, they will be amortized with zero value i.e. they will become worthless. Such securities issued by European banks, convertible contingent bonds and better known “coconut”is designed to prevent contagion in the financial sector, as they create an easily accessible source of bank capital to increase the solvency of organizations. Falling behind shareholders on the list of bankruptcy losers, but ahead of other types of debt, a higher return, but at a higher risk for those who have. These bonds are the AT 1 debt type, which is one of the riskiest among the different debt instruments issued by a bank. In the case of Credit Suisse, shareholders pocketed some of their investments in stock exchanges with UBS, and unlike these types of bonds, A market valued at around €258,000 million in Europerang alarm bells among investors. And so they quickly came to the fore. ECB, SRB and European Banking Authority (EBA)) to emphasize that it is in the eurozone (except Switzerland) bondholders will never be ahead of shareholders in the distribution of losses.