The Seminar is one of the most important discussion forums on the challenges in the European financial sector, the planning of new legislative initiatives and the review of the existing ones. For more information about the event visit: https://www.eurofi.net/.

The panel debate revolved around the issues of crisis management in the banking sector in the context of legislative amendments proposed by the EU as part of the Crisis Management and Deposit Insurance (CMDI) package with special focus on the situation of medium-sized banks.

Apart from taking part in the panel, the Chair of the KNF, Jacek Jastrzębski, held a number of bilateral talks with representatives of boards of supervisory authorities, capital market infrastructure providers, as well as major EU financial institutions.

The key points of the Chair’s address:

• As the KNF Office, we are supporting the initiatives underlying the CMDI package: We welcome the idea of broadening the scope of application of the recovery and resolution framework and making it more flexible. Based on our experience from the Polish market gained over the recent years, we see great value in the possibility of applying the resolution regime to avoid liquidation. The said framework, on one hand, ensures that the customers have continuous access to their funds  and banking services, and, on the other hand, will tend to minimise the total cost related to a crisis situation faced by a financial institution – not least because having a business run by an entity in resolution preserved as a going concern (even to a limited extent) should, intuitively, limit its loss of value compared to the liquidation scenario.

• We understand that, at the present stage of work, we are not talking about a paradigm shift or making all or most of banks subject to the resolution regime. We are reflecting on how to make the toolbox to be offered to resolution authorities broader and more flexible. I believe, however, that this discussion can be a starting point for a more general debate on the relationship between resolution and liquidation. As we know, the resolution process has been perceived as an exception from the general rule of the liquidation being the default solution. There will be a point in time  perhaps when we should discuss the optimal model of dealing with banks in crisis, which model might become the default solution – replacing the liquidation regime in that role.

• We support the creation of the possibility of using the Deposit Guarantee Scheme (DGS) funds as a supplementary or bridge solution for resolution funding. We believe that the approach adopted in this regard should be very pragmatic and should take into account, first and foremost, the overall costs which, considered holistically , would be entailed by different scenarios of dealing with banks that are likely to fail. We understand, of course, the arguments related to the technically different purpose of money accumulated in both funds, but in our opinion, however, it is key to realise that in any case the highest value and the overarching goal which we want to achieve is to protect depositors. This is why I do not see a contradiction in using DGS funds for funding resolution. We believe that, ultimately, the basic criterion to determine the choice of option for dealing with a bank which is, irreversibly, likely to fail should be the assessment of the overall costs of a given option. 

• This leads to an increase in the importance of the ‘least cost test’ as the basic and primary criterion for selecting an option. In relation to allowing the possibility of using the DGS funds for financing resolution I think that the assessment of the costs of each of the scenarios is central here. This represents a pragmatic approach to the selection of the best option for dealing with a bank that is likely to fail and follows from permitting the use of DGS funds to finance resolution. At the end of the day, both funds are created with contributions from the banking sector and serve the same values. We also believe that the cost assessment should be as comprehensive as possible and should take into account both the costs of systemic nature – including those related to any possible extraordinary contributions which the banks will be required to pay, and any possible specific ‘second round effects’ in this regard – and alternative costs related to, e.g., lost gains that might be achieved from active management of the accumulated funds and which will not be achieved due to the fund depletion.

• The comprehensive approach to estimating the costs related to different options – including scenarios assuming the use of different funds under different legal frameworks – is also connected with issues of institutional nature. In Poland we have an institutional set-up in which the deposit guarantee fund and the resolution fund are managed by the same institution, which is the national recovery and resolution authority: the Bank Guarantee Fund. I consider this to be a good solution which is of high value when considering the need to estimate – and compare – the overall costs incurred jointly by both funds under different scenarios. I can imagine, however, that such a comprehensive assessment of the overall costs borne by both funds – that is ultimately by the banking sector – may represent a greater challenge in institutional set-ups in which the deposit guarantee and the resolution functions are separated. 

• To conclude, it is worth formulating an open question which may be interesting in the context of the discussion on the banking union. We know that one of the tasks needed to complete the union may be to create a pan-European deposit guarantee scheme. I believe that when working towards this goal it is worthwhile to consider the context described above. It is worth reflecting on how to design a possible single deposit guarantee scheme so that it facilitates the use of the least cost test  for different options of dealing with banks which are on the verge of bankruptcy, so that the decisions made in this regard are a result of an optimally designed process enabling to identify and select a solution that will minimise the overall costs. In this manner we can avoid the scenario in which the least cost test  of different options for dealing with banks which are likely to fail is rendered difficult by the institutional set-up and, therefore, this set-up will not contribute to implementing the best and the most effective option.