The collapse of Credit Suisse and certain U.S. regional lenders earlier this year created the biggest stress to hit the global banking industry since the implementation of "too-big-to-fail" reforms. For Credit Suisse, the Swiss authorities' reluctance to use established resolution powers has sparked a debate about whether resolution frameworks can do what they were designed to do, particularly when financial market conditions are volatile.

Regulators are set to respond with further efforts to operationalize resolution tools and ensure banks' resolvability in a range of scenarios. The EU will additionally seek to take forward its proposal to update its Crisis Management and Deposit Insurance (CMDI) framework, but progress looks likely to be slow.

S&P Global Ratings continues to see credible resolution plans as supporting authorities' capacity to manage failing banks, and resolution remains our analytical base case for systemic European commercial banks that become nonviable. The regulatory preference for facilitating the acquisitions of such banks by stronger peers is not a surprise to us, since this approach is a more predictable way of minimizing contagion risk, particularly when a struggling bank's weaknesses relate more to liquidity than to solvency.

Our Stance On State Support And Banks' Creditworthiness

We removed uplift for extraordinary government support from our ratings on systemic European and U.S. banks in 2015 because we saw the prospect of last-minute taxpayer-funded equity injections as uncertain following the implementation of resolution regimes. This remains our view today. That said, despite the banking sector's progress on building loss-absorbing buffers, and other aspects of resolvability, the practicality of undertaking an open bail-in resolution action on a major bank will be a topic of discussion as long as it remains a largely untested approach.

Since 2016, we've published this annual summary of resolution-related developments that affected European banks over the preceding 12 months, anticipating changes that could affect rating uplift in respect of additional loss-absorbing capacity (ALAC). Since systemic European banks are due to be resolvable by year-end 2023, this implies resolution developments will soon move into a steady state. However, we anticipate that the resolution and resolvability of banks will remain on the agenda for all market participants for quite a while.

Policymakers Ponder Lessons From Credit Suisse's Government-Facilitated Rescue

Before its collapse, Credit Suisse appeared at least as well positioned for a successful resolution action as any other complex global bank. The Swiss regulator's resolvability assessment as of year-end 2022 concluded that Credit Suisse's preparatory measures were adequate, and it accordingly granted the bank the maximum rebate on its gone-concern loss-absorbing capacity requirement.

However, once the regulator deemed Credit Suisse to be nonviable, the Swiss government determined that emergency legislation to enable a takeover by UBS was a less risky way to achieve financial stability amid the febrile market conditions triggered by U.S. bank failures (see "Crisis Management Observations From Recent European And U.S. Banking Sector Volatility," published April 19, 2023).

UBS' acquisition of Credit Suisse had echoes of Banco Santander's 2017 takeover of Banco Popular, but there were significant differences in the structure of these transactions.   In both cases, the struggling groups benefited from a market solution brought about by regulatory intervention, with uninterrupted provision of key customer services, and their underlying weaknesses related more to their liquidity and business models than to solvency. But there are some important differences. Although Banco Popular was undoubtedly a less complex bank than Credit Suisse, it had a limited subordinated buffer that could be used for recapitalization. In terms of execution, the Single Resolution Board (SRB) used only established resolution tools in respect of Banco Popular, with no government support. After the SRB determined that Banco Popular was failing or likely to fail, it wrote down the bank's capital: equity, additional tier 1 (AT1), and Tier 2 instruments. The SRB then transferred the bank to Santander under the sale-of-business tool for a nominal price, leaving Santander to recapitalize it and provide it with liquidity. Likewise, the Swiss regulator wrote down Credit Suisse's AT1 instruments, but the Tier 2 instruments were unaffected, the bank did not enter resolution, and the Swiss government facilitated the sale of Credit Suisse to UBS with a Swiss franc 9 billion loss-protection agreement and a guaranteed liquidity backstop.

Other resolution authorities--including the SRB and Bank of England (BoE)--distanced themselves from the Swiss authorities' inversion of the usual creditor hierarchy.   We also note that the viability-event language in Credit Suisse's AT1 instruments is not commonly found in other jurisdictions (see "European Bank AT1 Hybrids In A Post-Credit Suisse World," published March 21, 2023). Switzerland has recently created legislation adopting a permanent public liquidity mechanism, based on the emergency backstop created for Credit Suisse (see "Swiss Public Liquidity Backstop Has Limited Implications For Hybrid Ratings," published Sept. 18, 2023).

The Swiss authorities' apparent unwillingness to deploy established resolution tools to Credit Suisse raises questions about the predictability and consistency of applying these measures.   It is possible that, in other jurisdictions, resolution authorities may have intervened in a different way and at an earlier stage. A resolution plan cannot be a fixed playbook, however. The government support that facilitated UBS' acquisition of Credit Suisse was relatively limited in scope, and UBS has since voluntarily terminated these facilities. Nevertheless, this situation highlights that resolution actions need to be feasible, especially in tough market conditions.

The Financial Stability Board is set to lead the discussion on lessons learned from the latest bank failures, starting with a report on implementation challenges for resolution powers.   Recommendations may include measures to operationalize resolution tools more conclusively through, for example, more extensive scenario planning, as well as more detailed preparation for balance-sheet valuations, restructuring, and funding in resolution.

This year's banking turmoil highlighted the potential for the rapid flight of deposits from banks in the media spotlight.   Convincing depositors that resolution regimes protect their interests is one way to address the risk of bank runs. The number of banks within the resolution perimeter is already relatively large in Europe, particularly in comparison with the U.S. For example, the SRB had 113 banks under its remit at the last count, while U.S. regulators are only now proposing to extend the scope of long-term debt requirements beyond global systemically important banks. Still, all regulators face the tricky question of how to ensure depositors retain uninterrupted access to accounts held at failing nonsystemic banks--those outside the scope of resolution--if an acquirer does not come forward. The policy response to this issue is likely to involve the extension of certain resolution requirements to even smaller banks, which is one of the aims of the proposed revision of the EU's CMDI framework.

EU Authorities Push Ahead On Resolvability While Reviewing Aspects Of The Resolution Framework

The European Commission's CMDI proposal, which it published in April 2023, aims to optimize the EU's resolution framework. The Commission considered the framework to be working well on the whole but with room for improvement in certain areas. The main elements of the proposal include revising and harmonizing the public interest assessment, to bring smaller banks within the crisis management framework, and enabling more flexible use of national deposit guarantee schemes to fund resolution actions leading to a market exit, subject to a least-cost test. The proposal also includes a "general depositor" preference that would harmonize the EU creditor hierarchy, with all deposit classes ranking above banks' senior preferred bonds.

We see no direct rating consequences from the CMDI proposal.  However, we believe the creation of a general depositor preference could indirectly lead some banks to cut their subordinated buffers (see "How The EU’s Bank Crisis Management Reforms Could Affect Ratings," published April 25, 2023). It remains unclear whether the proposal will be implemented as recommended and in what time frame. There has been strong opposition in some quarters, highlighting, among other issues:

• The cost to small banks of becoming resolvable;
• The cost to healthy banks of replenishing deposit guarantee schemes if such schemes can be accessed more easily to recapitalize failing peers; and
• A potential undermining of institutional protection schemes.

It looks challenging for European legislators to shape and pass final legislation before the Parliament's current term ends in mid-2024.

Regulators see banks making solid progress toward resolvability.  European regulators appear generally comfortable with banks' progress toward becoming fully resolvable. Most recently, the SRB reported in September 2023 that the majority of banks have already met their minimum requirement for own funds and eligible liabilities (MREL) but had more work to do on operational preparedness. It identified the mobilization of liquidity and collateral in resolution, as well as separability and restructuring capabilities, as the main areas requiring further attention, partly because the SRB has set later deadlines for completion of these workstreams.

As of March 31, 2023, the SRB reported that 24 resolution entities under its remit had an aggregate €20.5 billion shortfall against their final MREL targets (including the combined buffer requirement), of which €5.6 billion comprised subordinated instruments. We see this as a manageable amount, considering that the final targets are generally applicable from January 2024. There is a later deadline for certain banks, including 14 of the 24 resolution entities with a shortfall. Greek banks accounted for €8.7 billion of the shortfall, all of which is in the form of unsubordinated instruments. Debt market conditions have been turbulent amid rapidly tightening monetary policy and volatility in the Swiss and U.S. banking sectors, but have stabilized somewhat over the last few months (see chart 1).

Chart 1

The SRB has identified liquidity support for resolved banks as an area of the EU resolution toolkit that needs work.   The Swiss central bank made significant emergency funding available to Credit Suisse to stabilize its liquidity position. Other central banks, such as the BoE, have similarly supportive policies in place. Central banks' capacity to offer such facilities typically hinges on governments first providing them with guarantees or indemnities. This assurance can be fairly straightforward to arrange in a single country but is more complex in the eurozone, where member states may haggle over the allocation of responsibility between them.

The Single Resolution Fund--with almost €80 billion of cash on hand--is a ready source of liquidity for eurozone banks, which could be amplified by a loan from the European Stability Mechanism. Still, this is unlikely to provide sufficient resources to restore market confidence in the event of the resolution of a single large systemic bank, let alone several. An agreement to unlock funding support from the European Central Bank--beyond its standard emergency liquidity facilities--would make a huge difference to the amount of liquidity available to eurozone banks in a resolution, and also to the credibility of the overall resolution framework.

Recent Bank Situations Shed Light On Potential Use Of Resolution Powers

The resolution over the past 12 months of two European banks provides further insight into the ways in which authorities can use their powers.

Getin Noble Bank S.A.:   After Poland's resolution authority determined in September 2022 that Getin Noble was failing or likely to fail, it wrote down the bank's equity and subordinated debt to zero and transferred the majority of the balance sheet to a bridge bank. The resolution authority has stated that the bridge bank is a temporary stabilization measure and will be sold or wound down; it initiated the sale process in June 2023.

A notable feature of this resolution action was that Poland's national resolution fund and deposit guarantee scheme contributed to the capitalization of the bridge bank, despite constraints in the EU's Bank Recovery and Resolution Directive (BRRD) that the CMDI reforms are intended to ease. These contributions were facilitated by a sizable investment from the eight largest commercial banks in the system.

The European Commission approved the resolution fund and deposit-protection-fund contributions under EU state aid rules, and additionally concluded that the use of these resources was compatible with the BRRD. The Commission concluded that the resolution fund was very unlikely to incur a loss, due to its super-senior ranking in the residual Getin Noble entity, but a loss cannot be entirely ruled out. Under the BRRD, the Commission needed to be satisfied that at least 8% of Getin Noble's total liabilities and own funds (TLOF) would be covered by the bank's former creditors (the written down equity and subordinated debt) plus the equity injection from the eight commercial banks. The Commission duly found that these measures together represented 9.8% of the bank's TLOF. The Commission also considered the 5% BRRD limit on the use of the resolution fund to have been satisfied because the fund's net contribution was expected to be zero due to the very low likelihood of a loss.

Silicon Valley Bank UK Ltd. (SVBUK):   The BoE placed SVBUK in resolution in March 2023 after the collapse of the U.S. parent triggered a deposit run. The BoE used its powers to write down SVBUK's AT1 and AT2 securities and transfer its equity to HSBC for £1.

An interesting aspect of the SVBUK resolution is that the BoE initially intended to place the bank in insolvency, with the national deposit protection scheme paying out insured balances and the remaining balance sheet entering a work-out process. However, HSBC stepped forward as a willing buyer over the resolution weekend and it also emerged that various technology and life science firms held sizable uninsured deposits at SVBUK. Accordingly, the BoE ultimately determined that the use of its stabilization powers was in the public interest and winding up SVBUK would not have met its resolution objectives to the same extent. This change in stance indicates the subjective nature of resolution decisions and the capacity for regulators to take a pragmatic approach.

In the wake of the SVBUK resolution, a focus for the BoE has been how to ensure customers have access to their deposits in nonsystemic banks if there are no acquirers for the entire entity. The BoE initially floated the idea of raising the deposit insurance limit but its attention appears to have turned to facilitating the transfer of deposit books to stronger banks. Like other European regulators, the BoE will likely publish a specific proposal once the Financial Stability Board has announced its recommendations on this theme.

ALAC Support In Our Ratings Has Been Mostly Steady For The Past Year

We include ALAC uplift in our ratings when we think a bank's resolution strategy, bail-in buffer, and other aspects of resolvability are likely to support full and timely servicing of its senior unsecured obligations, including senior preferred bonds. We include one or more notches of uplift for ALAC in our ratings on 53 banking groups headquartered in 16 European countries (see chart 2 and the Appendix).

Chart 2

Our assessment of the effectiveness of each country's resolution regime has not changed over the past 12 months (see chart 3). The extent of ALAC uplift in most European bank ratings has also been stable but we took selective rating actions, partly due to certain midsize banks' progress toward resolvability (see "The Improving Resolvability Of Europe's Midsize Banks Offers Greater Protection To Senior Creditors," published Dec. 7, 2022).

Chart 3

Notable rating changes included: 

• Raising the ratings on De Volksbank and Argenta Spaarbank due to an increase in ALAC uplift to two notches from one. This reflected our increased confidence that the banks' preferred sale-of-business resolution strategies would be effective in protecting senior creditors (see "Dutch De Volksbank Upgraded To 'A' On Improved Clarity Around Sale Of Business Resolution Strategy; Outlook Stable," published on Oct. 26, 2022, and "Belgian Argenta Spaarbank Upgraded To ‘A’ On Improved Clarity Around Sale Of Business Strategy; Outlook Stable," published on Oct. 25, 2022).
• Similarly, we raised our long-term rating on Bankinter and affirmed the ratings on six other Spanish banks as we gained confidence in their sale-of-business resolution strategies (see "Various Actions Taken On Spanish Midsize Banks Amid Progress On Resolvability," published Nov. 25, 2022).
• We raised the ratings on Commerzbank, SBAB Bank, Jyske Bank, and Crelan due to an increase in ALAC uplift to two notches from one as the banks built up their subordinated MREL buffers (see "Swedish SBAB Bank AB Upgraded To 'A+/A-1' On A Stronger Bail-Inable Debt Buffer; Outlook Stable," published Feb. 17, 2023, "Commerzbank AG Upgraded To 'A-/A-2' On Stronger Bail-In-Able Debt Buffer; Outlook Stable," published March 23, 2023, "Jyske Bank And Jyske Realkredit Upgraded To 'A+' From 'A' On Sustainably Higher Bail-Inable Debt Buffer; Outlook Stable," published July 21, 2023, and "Crelan S.A. Upgraded To ‘A-’ On Bail-In-Able Debt Buffer Constitution; Outlook Stable," published Sept. 19, 2023).
• We affirmed our rating on Deutsche Pfandbriefbank, which includes one notch of ALAC uplift, on the expectation that, in the event of failure, the bank would be subject to a resolution action that would likely leave senior preferred creditors paid on time and in full (see "Deutsche Pfandbriefbank 'BBB+/A-2' Ratings Affirmed On Confidence In Resolution Strategy, Capital Buffer; Outlook Stable," published Nov. 29, 2022).
• We introduced one notch of ALAC uplift to the rating on Swiss Raiffeisen Group's core operating entity due to the buildup of its bail-inable buffer and our expectation that the regulator would regard the bank as resolution ready (see "Raiffeisen Schweiz Genossenschaft Upgraded To 'AA-/A-1+' On Effective Resolution Strategy; Outlook Stable," published April 4, 2023). We took the same action on mBank--a separate resolution subgroup within the Commerzbank group--since it had built its subordinated buffers (see "Rating Actions On Three Polish Banks Reflect Differing Provisioning Needs Following ECJ Ruling," published on June 27, 2023).

We do not expect a material number of resolution-related rating actions over the coming 12 months. However, rating changes are possible if, for example, certain banks increase their ALAC buffers. Various European banks are eligible for ALAC uplift under our rating methodology because we believe that, in the event of failure, they would be subject to a resolution process that would support full and timely payment to senior preferred creditors, but their subordinated loss-absorbing buffers currently fall short of our ALAC thresholds. A recent European Banking Authority survey of 159 banks' funding plans showed an intention to continue the net positive issuance of ALAC-eligible MREL instruments (that is contractually or structurally subordinated gone-concern debt; see chart 4). If these plans are implemented, more bank ratings could become eligible for ALAC uplift.

Chart 4

Appendix

Table 1

Table 2

Related Research

• Crelan S.A. Upgraded To ‘A-’ On Bail-In-Able Debt Buffer Constitution; Outlook Stable, Sept. 19, 2023
• Swiss Public Liquidity Backstop Has Limited Implications For Hybrid Ratings, Sept. 18, 2023
• Jyske Bank And Jyske Realkredit Upgraded To 'A+' From 'A' On Sustainably Higher Bail-Inable Debt Buffer; Outlook Stable, July 21, 2023
• Rating Actions On Three Polish Banks Reflect Differing Provisioning Needs Following ECJ Ruling, June 27, 2023
• Resolution And Banking System Support Regimes: Research By S&P Global Ratings, May 17, 2023
• How The EU’s Bank Crisis Management Reforms Could Affect Ratings, April 25, 2023
• Crisis Management Observations From Recent European And U.S. Banking Sector Volatility, April 19, 2023
• Raiffeisen Schweiz Genossenschaft Upgraded To 'AA-/A-1+' On Effective Resolution Strategy; Outlook Stable, April 4, 2023
• Commerzbank AG Upgraded To 'A-/A-2' On Stronger Bail-In-Able Debt Buffer; Outlook Stable, March 23, 2023
• European Bank AT1 Hybrids In A Post-Credit Suisse World, March 21, 2023
• Swedish SBAB Bank AB Upgraded To 'A+/A-1' On A Stronger Bail-Inable Debt Buffer; Outlook Stable, Feb. 17, 2023
• The Improving Resolvability Of Europe's Midsize Banks Offers Greater Protection To Senior Creditors, Dec. 7, 2022
• Deutsche Pfandbriefbank 'BBB+/A-2' Ratings Affirmed On Confidence In Resolution Strategy, Capital Buffer; Outlook Stable, Nov. 29, 2022
• Various Actions Taken On Spanish Midsize Banks Amid Progress On Resolvability, Nov. 25, 2022
• Dutch De Volksbank Upgraded To 'A' On Improved Clarity Around Sale Of Business Resolution Strategy; Outlook Stable, Oct. 26, 2022
• Belgian Argenta Spaarbank Upgraded To ‘A’ On Improved Clarity Around Sale Of Business Strategy; Outlook Stable, Oct. 25, 2022
• The Resolution Story For Europe's Banks: The Final Push To Resolvability, Sept. 30, 2022