Should EU banks be able to use capital and liquidity waivers?

16 January 2020

With European bank profitability low and coming under constant pressure, cross-border banking groups have been arguing for the ability to move capital and liquidity across borders more easily, in order to improve their efficiency in funding economic growth.

A key policy suggestion has been that the Eurozone (EZ) should be treated as if it were one big, single jurisdiction across which banks should be able to centralise management of capital and liquidity. But European Member States continue to push back against such proposals, arguing that local control is needed to deal with localised risks.

In the EU, cross-border banking can currently be done in three basic ways: via subsidiaries, via passported branches or via remote, cross-border provision of services.

To raise levels of cross-border banking in the EZ, in November 2016, the European Commission suggested allowing, under certain conditions, the application of capital, liquidity and MREL (Minimum Required Eligible Liabilities) waivers in the EU subsidiaries of EU-based banking groups. These propositions again faced opposition from Member States and were ultimately not adopted.

But the arguments will not go away.

In a paper, published in December’s Safe Bank (an industry journal from Poland’s deposit guarantee scheme and bank resolution authority, BFG), we make the case for preconditions that could be put in place to enable the use of waivers. These include a suggestion that the European Commission should review and propose improved guarantees for banking groups and home country authorities. This could give confidence to host countries that they would have the tools and resources to deal with a crisis.

We also look at alternatives to waivers, such as expanding the use of branches to replace subsidiaries. But for a branch-based approach to work, the EU needs to pass its European Deposit Insurance Scheme (EDIS) Regulation. This would mean deposits across a pan-European structure would be insured by more than just a home country’s deposit insurance.

In summary, if the EU wants more cross-border banking to efficiently deliver competitively-priced banking services, it must develop a system of workable guarantees that can enjoy the support of host countries, or complete the Banking Union, specifically a European Deposit Insurance Scheme.

Or it could do both.

Brian  Polk

Brian Polk | Director, PwC United Kingdom
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Piotr  Bednarski

Piotr Bednarski | Director, PwC Poland
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