Banks need to maintain sufficient loss-absorbing buffers for resolution

Based on the FFSA’s view, no significant problems have arisen in the application of the bank resolution regulation. Banks were required to achieve resolution capabilities by the end of 2024, and they have generally met the requirements well. Finnish banks have not had any significant problems in meeting these requirements.

Different requirements could threaten the credibility of resolution

Resolution must enable the recapitalisation of a bank that has run into difficulties by writing down and converting liabilities into shares in the bank. The FFSA stresses that this must be possible regardless of the size of the bank or the resolution tool used.

To enable the resolution authorities to prepare for recapitalisation, banks must meet the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) ensuring adequate loss absorption and recapitalisation amount, which is based on capital requirements.

The FFSA warns that the credibility of the bank resolution framework could be threatened if the MREL requirements were limited according to the size of the bank or the planned resolution tool.

“The level of the MREL requirements set for resolution cannot be considered in isolation from the bank’s capital requirements. If the aim is to lower the requirements, this should be done consistently, starting from the capital requirements,” says Jaakko Weuro, Director General of the FFSA.

Common deposit guarantee would be important if implemented correctly

Based on the FFSA’s view, a European deposit guarantee scheme remains an important structural goal for the development of the Banking Union. Experience gained in Finland and internationally indicates that centralising crisis management and deposit guarantee tasks to a single authority is an effective solution. The management of and preparedness for a problem situation is more efficient when all powers lie with the same authority.

However, the FFSA draws attention to the fact that there are still considerable differences in how the deposit guarantee schemes operate in the Member States. National practices must be changed in order to implement an effective common deposit guarantee scheme.

“The common system should not be implemented solely as additional funding capacity for nationally implemented crisis management measures or used to reduce the loss-absorbing buffers built up by banks. This would undermine the integrity of the banking union, and at the same time, the benefits of the common deposit guarantee scheme would largely remain unrealised,” Weuro emphasises.

The Commission is assessing the development of bank regulation

The FFSA's views are related to an ongoing assessment by the European Commission of how banking regulation should be developed from the perspective of promoting competitiveness. The Commission has announced that it will publish an assessment of the development needs during the summer.

The purpose of the memorandum published by the FFSA is to support the discussion on the topic and the development of a national position.