2024 marks a decade since the adoption of the cornerstone EU Bank Recovery and Resolvability Directive, which required systemic EU banks to make themselves substantially resolvable by year-end 2023.  Now that the primary policy objective for dealing with failed systemic banks--moving from taxpayer bail-out to creditor bail-in in resolution--has largely been met, the pace of developments has reduced. However, we expect the policy framework and its implementation will continue to evolve, meaning resolution and resolvability will remain ratings topics for the foreseeable future.

We removed uplift for extraordinary government support from our ratings on systemic European and U.S. banks in 2015.  This is because we saw the prospect of last-minute taxpayer-funded equity injections in these jurisdictions as uncertain, following the implementation of resolution regimes. Since 2016, we have published an annual summary of resolution-related developments that affected European banks over the preceding 12 months. In these reports, we anticipate changes that could affect rating uplift related to additional loss-absorbing capacity (ALAC).

Following the collapse of Credit Suisse and some U.S. regional banks in 2023, policymakers made targeted changes to some European and U.S. resolution frameworks.  Still, we conclude that an aversion to bailouts remains in the U.S. and Europe and resolution offers a credible alternative path. Authorities used various tools to address systemic concerns, but direct bank solvency support to prop up failed institutions was not among them. Rather than backtrack on these reforms, authorities are doubling down on making resolution work. Therefore, resolution remains our central scenario for failing global systemically important banks (G-SIBs) in Europe and the U.S.

Some resolution tools remain unused.  We monitor closely authorities' efforts to further increase the predictability, reliability, and legal certainty of bail-in resolution—a tool that has not yet been used. We will consider implications for senior creditors of banks if the default prospects change due to authorities' broader planned use of resolution and banks' resource enhancement.

European And U.S. Crisis Management And Deposit Insurance (CMDI) Converge

The 2023 banking sector turmoil in the U.S. and, to a lesser extent, Europe raised numerous questions among policymakers and regulators. For example, are further changes necessary to the global and national banking regulation frameworks and if so, how would supervisors apply these changes? While key differences between U.S. and European banks' CMDI will likely remain--including the fact that pre-emptive solvency support remains legally possible in Europe, but not in the U.S.--the four changes below point to a modest convergence.

1 - Deposit guarantee scheme (DGS) coverage

After rapid outflows of uninsured deposits, policymakers pondered whether to expand their DGSs. In Europe, the DGS scope and size will likely remain fundamentally unchanged. The U.S. Federal Deposit Insurance Corporation (FDIC) continues to review DGS coverage. Potential changes will probably focus on offering different deposit insurance limits across account types. However, a change over the near term seems unlikely since it would likely require an act of Congress.

2 - Optimization of resolution planning for the largest banks

Bail-in-led resolution will remain the primary option for U.S. and European G-SIBs and European domestic systemically important banks (D-SIBs) if they fail. In Europe, these banks will also be required to provide alternative tools, such as business transfers, in case they lead to a better outcome in the specific circumstances of a bank's failure. European resolution authorities will work with overseas securities regulators to ensure that debt issued by European banks to overseas markets can be reliably bailed-in and remains compliant with local securities laws. In contrast with the U.S. and Europe, our view for 15 of the 19 banking jurisdictions we cover in Asia-Pacific is that systemically important private sector commercial banks will benefit from direct extraordinary government support in the unlikely event it was necessary. Of note, total loss-absorbing capacity (TLAC) regimes are well progressed in some of these jurisdictions.

3 - Expanded scope of resolution

U.S. regulation currently only requires G-SIBs to meet TLAC requirements. Regulators have now proposed to require any bank with more than $100 billion in assets to maintain debt levels that could absorb losses in the case of a resolution. They also proposed new requirements and guidance for resolution planning for these banks, aiming to reduce the potential systemic risk from the failure of even a regional bank. European regulators have already concluded that some midsize banks could pose systemic risk and therefore merit the use of resolution tools if these banks failed. Now, they go even further. U.K. regulators plan to broaden the use of resolution tools to small banks and aim to improve operational continuity preparedness to avoid deposit and service interruptions, as well as deadweight costs associated with liquidation. The EU CMDI proposal suggests that banks with systemic importance at a regional--not just a national--level could be subject to resolution. It also envisages a more routine use of FDIC-like purchase and assumption transactions--which are called "asset" or "share" transfers in the EU--for smaller banks, aided by funding from the DGS and resolution funds.

4 - Extraordinary liquidity support

The Swiss government will codify the Swiss National Bank's (SNB's) new public liquidity backstop into ordinary law, thus allowing the SNB to lend to a solvent bank without collateral. We note that the SNB and the Bank of England (BoE) could remain the only central banks in the U.S. and Europe that benefit from this extra flexibility. In the European banking union, Italy needs to sign into law the European Stability Mechanism backstop to the Single Resolution Fund for it to become operational. However, this could mobilize only tens of billions of euros in extra lending capacity for the ECB--rather than the hundreds of billions it could require if some major banks failed. Even though authorities have acknowledged the merits of a larger backstop, a concrete proposal does not yet exist. Outside the banking union, we understand that liquidity backstops are not a policy priority in some Central and Eastern European countries, not least because policymakers currently consider resolution funds are sufficient for this purpose.

EU CMDI Proposal Will Progress

Work started on revisions to optimize the EU's CMDI framework well before the U.S. banking sector turmoil in March 2023.  Trilateral negotiations on the European Commission's (EC's) proposal, which was published in April 2023, will start soon among representatives of the EU Parliament, the European Council, and the EC. The proposal's main elements comprise:

• Revising and harmonizing the public interest assessment to include smaller banks in the crisis management framework;
• Enabling a more flexible use of national DGSs to fund resolution actions that lead to a market exit;
• Removing the DGSs' super-preferential position in the creditor hierarchy to facilitate the use of DGS funds, which is subject to a least-cost test; and
• A general depositor preference that would harmonize the EU creditor hierarchy with all deposit classes ranking above senior preferred bonds.

We expect these negotiations will take time due to material differences between the European Council's current position and the EC's initial proposal.  Several opponents to the current proposal criticize, among others, the cost to small banks of becoming resolvable, the cost to healthy banks of replenishing DGSs if these resources can be accessed more easily to recapitalize failing peers, and a potential undermining of institutional protection schemes.

We see the resolution of mid-sized Polish bank Getin Noble in 2022 as instructive.  In our view, it is a good example of how authorities may apply the resolution framework effectively and how an enhanced CMDI framework could make resolution simpler for failing midsize banks (see appendix 1). In our view, the CMDI proposal does not affect ratings, although the creation of general depositor preference could indirectly lead some banks to cut their subordinated buffers. Beyond CMDI, we see no strong political will to make further progress toward the completion of the banking union, specifically the creation of a European deposit insurance scheme.

Regulators Confirm Banks' Substantial Delivery Of Resolvability

Unlike their U.S. counterparts, EU and U.K. regulators envisage the use of resolution tools for swathes of the banking sector if those banks were to fail.  European Banking Authority (EBA) data show that 352 EU banks were earmarked for resolution at year-end 2023. Together, they account for about 80% of the EU banking system's risk-weighted assets (RWAs). This was a material increase compared with the 309 banks at year-end 2022, mainly resulting from small banks moving from presumed liquidation to resolution. Major banks continue to be targeted for bail-in, accounting for 44% of those 352 resolution banks and 94% of their combined RWAs.

European regulators appear comfortable with banks' progress toward becoming fully resolvable.  Most banks have already met the most straightforward element--debt issuance to meet their final minimum requirement for own funds and eligible liabilities (MREL). The Single Resolution Board (SRB) reported in July 2024 that the banks under its remit had completed this job. The SRB's concurrent third resolvability assessment noted banks' progress in three other areas: the estimation of liquidity needs in resolution and identification of sources of collateral, the generation of the valuation dataset, and the preparation for a sale-of-business and the restructuring post bail-in. The SRB is following up with banks to close the remaining gaps in these areas. A few very large banks still need to fine-tune their crisis communications and bail-in strategies. We expect banks will undertake proactive resolvability testing--including dry-runs, desktop exercises, and walkthroughs--to ensure that each bank's resolution strategy can be implemented effectively and timely.

The BoE confirmed in early August that the eight largest U.K. banks are substantially resolvable.  The BoE's first resolvability assessment in 2022 found that the sector was well-placed but had to address some specific deficiencies. This year's follow-up exercise concluded that banks were able to close many of these gaps. Due to U.K. banks' overall progress on resolvability, the BoE intends to postpone the next assessment by one year to 2027. In addition to firm-specific findings, the BoE identified thematic areas that require more work across the sector, including:

• The quality of data and management information used to support banks' decision-making in the event of resolution;
• The capacity to undertake timely and robust balance sheet valuations; and
• Restructuring planning, including scenario-based testing and assurance. The BoE said that it intends to focus on operational continuity in its next resolvability assessment.

In our view, a lack of improvement in these areas would not represent material obstacles to a resolution action but could reduce its effectiveness.  The three areas above align with the EBA's recently published European Resolution Examination Report, which sets three priorities for EU resolution authorities and banks for 2025: the operationalization of their resolution tools, the implementation of liquidity strategies in resolution, and the creation of a management information system for valuation.

The Swiss Financial Market Supervisory Authority (FINMA) announced in March 2024 that the three Swiss D-SIBs are substantially able to implement their resolution plan.  That said, one bank has yet to complete its buffer build-out. FINMA had previously regarded UBS as substantially resolvable but will need to review UBS's updated plans to reflect the acquisition and integration of Credit Suisse.

ALAC Notching Remained Broadly Stable

We currently include one or more ALAC notches in our ratings on 57 banking groups headquartered in 17 European countries (see chart 1).  We include ALAC uplift in our ratings if we think a bank's resolution strategy, bail-in buffer, and other aspects of resolvability will likely support full and timely servicing of senior unsecured obligations, including senior preferred bonds. Appendix 2 provides data on European banks' ALAC ratios, thresholds, and rating uplift.

Chart 1

Our assessment of the effectiveness of each country's resolution regime has not changed over the past 12 months (see chart 2).  The extent of ALAC uplift in most European bank ratings also remained stable, but we took several positive rating actions:

• We raised the ratings on BPCE due to its decision to expand its buffer of senior nonpreferred debt, which, in turn, led us to increase ALAC uplift to two notches from one.
• We raised our ratings on Saxo Bank A/S as it expanded its subordinated debt buffers materially to meet its MREL as a systemically important Danish bank. We now include two ALAC notches in the ratings.
• We raised our ratings on Bank Polska Kasa Opieki S.A. as we now include one notch of ALAC uplift after it built its subordinated buffers.
• We introduced one notch of ALAC uplift into our ratings on Ceska Sporitelna, a.s. (Ceska). Although Ceska is a subsidiary of Austria-based Erste Group Bank AG (Erste), Erste's multiple point of entry resolution strategy means that Ceska and the other non-Austrian subsidiaries are outside the parental resolution subgroup. Its major rated Czech peers--Ceskoslovenska Obchodni Banka A.S. and Komercni Banka A.S.--are covered by the single point of entry resolution approaches of their parents—respectively, KBC Group N.V. and Société Générale.
• We affirmed our ratings on the two largest Liechtenstein-based banks. Even though the banks would likely become subject to a resolution action if they failed, we do not expect them to build sufficient subordinated buffers to merit ALAC uplift. Additionally, we have some residual doubts about the possible effectiveness of such a resolution action.
• We assigned resolution counterparty ratings to Bonum Bank PLC as we understand that regulators envisage a bail-in led resolution strategy for its parent POP Bank Group. That said, the group has insufficient subordinated liabilities to merit ALAC uplift.

Chart 2

Many rated European banks remain eligible for ALAC uplift under our rating methodology.  This is because we believe that, in the event of failure, they would become subject to a resolution process that would support full and timely payments to senior preferred creditors. Yet their subordinated loss-absorbing buffers currently fall short of our ALAC thresholds. Notably, these banks are based in Finland, Italy, Greece, and Cyprus. They typically already meet or substantially meet their MREL requirements with a mix of capital instruments and senior preferred debt. As a result, we expect that very few, if any, of them will gain ALAC uplift in 2025.That said, we continue to monitor MREL developments in Iceland and associated implications for local banks' potential ALAC uplift. Icelandic banks could choose to issue a meaningful amount of senior nonpreferred debt to bolster their MREL.

In general, we expect very few resolution-related rating actions over the next 12 months.  Selective changes remain possible if, for example, other systemic banks increase their ALAC buffers, or regulators reassess banks' systemic importance and revise the preferred resolution strategy or buffer requirement.

Appendix 1

Getin Noble resolution: A Polish case study that provides insights in the wider EU framework

Getin Noble was a midsize Polish bank, which had reported capital ratios well below the regulatory minimum from 2021. This was largely due to credit losses and litigation expenses on its portfolio of Swiss franc-denominated mortgages. Despite its long-standing troubles, Getin Noble benefited from continued deposit stability, which gave the authorities time to develop a workable plan.

On Sept. 30, 2022, the Polish Bank Guarantee Fund (BGF), which acts as both the deposit guarantee scheme and resolution authority for Polish banks, decided to trigger a resolution of the bank. The BGF opted to transfer Getin Noble's business to a new established bridge bank named VeloBank, except for some assets which were carrying significant Swiss franc-related risks and were therefore left behind. The resolution was completed smoothly over the course of a weekend and did not lead to any material deposit outflows. Importantly, the bank remained open and continued to service customers and effect payments during the resolution weekend.

The newly established VeloBank was owned partly by the BGF itself, and partly by the System for the Protection of Commercial Banks S.A., an entity created and jointly financed by the eight largest banks in Poland. Getin Noble's available stock of equity capital and subordinated debt at the point of failure were insufficient to absorb all the associated losses and sufficiently recapitalize the bank. The BGF was reluctant to bail-in the bank's uninsured depositors but, under EU law, could not unlock the Polish resolution fund until shareholders and creditors had taken losses equivalent to at least 8% of total liabilities and own funds. The BGF succeeded in securing this necessary extra contribution from the eight largest Polish banks. From the banks' perspective, investing in VeloBank was probably more favorable than facing the financial consequences of the alternative--namely the liquidation of Getin Noble triggering a payout to insured depositors, with a subsequent need to replenish the BGF funds. The resolution scheme put together by the BGF was reviewed and approved by the EC.

A bridge bank is a temporary solution, pending a shift of ownership into the private sector, for example via the sale of the business to another entity. After almost two years of negotiations, on Aug. 1, 2024, the BGF announced the sale of VeloBank to a consortium led by the private equity firm Cerberus. The new owners injected a total of Polish złoty (PLN) 1.06 billion (about €250 million) as part of the transaction (PLN375 million for the purchase price and PLN690 million for the further recapitalization of the entity). This transaction concluded the resolution process. Getin Noble was effectively resolved, without affecting taxpayer funds or Polish financial stability.

This was the fourth resolution scheme implemented in Poland since 2020. Contrary to the first case--a small cooperative bank--Polish authorities did not suspend Getin Noble's operations and did not bail-in any depositors. They found a pragmatic solution, with the blessing of the EC, to provide the necessary funding to the resolution scheme. This was despite Getin Noble's dire situation and the lack of capital or subordinated resources to cover for the losses.

The Getin Noble case is a typical example of a failing midsize bank for which resolution is preferable to liquidation, but where the bank's subordinated financial resources are insufficient to fund the resolution. For such cases, the CMDI proposal offers the possibility to use DGS funds to provide bridge financing to meet the 8% threshold and facilitate the market exit. In the Getin Noble case, this would have significantly simplified the setup of the resolution scheme, although Polish authorities, Polish banks, and the EC found a pragmatic workaround.

Appendix 2

Table 1

Table 2

Related Sector Research

• Bank of England Sees Further Resolvability Progress From U.K. Banks, Aug. 6, 2024
• Credit FAQ: The Next European Commission's Policy Choices: A Credit Perspective, July 17, 2024
• Banking Turmoil: Global Regulators Reflect And React, June 26, 2024
• The Role Of Bank AT1 Hybrid Capital One Year On From The 2023 Banking Turmoil, June 26, 2024
• Swiss Federal Council Plans To Strengthen The Country's Too-Big-To-Fail Banking Framework, May 29, 2024
• U.K. Proposal Would Unlock Resolution Funding For Small Banks , March 5, 2024
• U.S. Regulatory Proposals For Large Bank Resolutions Could Result In Higher Ratings On Bank Subsidiaries, Oct. 10, 2023
• The Resolution Story For Europe's Banks: Making The Regime Fit For Purpose, Oct. 4, 2023
• How The EU's Bank Crisis Management Reforms Could Affect Ratings, April 25, 2023

Related Entity-Specific Research

• Bank Polska Kasa Opieki Upgraded To 'A-' On Additional Loss-Absorbing Capacity; Outlook Stable, Sept. 13, 2024
• BPCE Upgraded To 'A+' On Increased Senior Non-Preferred Issuance To Boost Loss-Absorbing Capacity; Outlook Stable, July 15, 2024
• Bonum Bank Assigned 'BBB+/A-2' Resolution Counterparty Ratings; 'BBB/A-2' Ratings Affirmed; Outlook Positive, June 28, 2024
• Saxo Bank A/S Upgraded To 'A-' On Increasing Resolvability; Outlook Stable, March 28, 2024
• Liechtenstein-Based LGT Bank AG And VP Bank AG Ratings Affirmed On Resolution Strategy Evolution, Jan. 24, 2024
• Bank Polska Kasa Opieki Outlook Revised To Positive On ALAC Buildup; Senior Non-Preferred Notes Rated 'BBB', Nov 14, 2023
• Ceska Sporitelna 'A/A-1' Ratings Affirmed; Outlook Negative; Senior Non-Preferred Ratings Lowered To ‘BBB+', Oct. 17, 2023
• There's No Easy Way Out Of Getin Noble's Troubles, May 6, 2022