Faculty of law blogs / UNIVERSITY OF OXFORD

The Impact of the Current ‘Inflation Crisis’


Christos V. Gortsos
Professor of Public Economic Law, National and Kapodistrian University of Athens and President of the Academic Board, European Banking Institute (EBI)


Time to read

3 Minutes

In November 2022, I submitted a Briefing Paper for the Committee on Economic and Monetary Affairs (ECON) of the European Parliament entitled: ‘Evolving key risks in the banking sector, and related priorities for the SRB: the impact of the current ‘inflation crisis (available from the European Parliament website or SSRN). Its aim was to discuss recent and current conditions relating to financial stability in the euro area amidst the inflation crisis and to address two related priorities for the Single Resolution Board (SRB).

The first point raised was that some of the (elevated) financial stability vulnerabilities present before the outbreak of the current inflation crisis still exist. This was highlighted in the 2022 Financial Stability Reviews of the ECB and the Global Financial Stability Report of the IMF. Furthermore, the Warning issued on 22 September 2022 by the European Systemic Risk Board (ESRB) ‘on vulnerabilities in the Union financial system’ identified ‘severe’ and ‘elevated’ systemic risks to financial stability, even though the euro area banking sector’s resilience was the basic scenario. In that respect and as far as the nexus ‘monetary policy­-financial stability’ is concerned, one of the new concerns to financial stability no longer stems from the very low level of official interest rates for a prolonged period, but from their sharp increase within a very short period of time, due to the tightening of monetary policy by the ECB as of mid-2022 to contain the persistently high inflation in the euro area.

It is in this context that the role of the SRB, as the hub within the Single Resolution Mechanism (SRM) in the Banking Union (BU), was then further discussed and assessed through the lens of its legislative mandate and the measures the SRB had taken during the last few years to operationalise the procedures relating to the assessment of credit institutions’ and groups’ resolvability (including the ‘preferred resolution strategy’)—in particular after the publication of its 2020 ‘Expectations for Banks’ document and the introduction of the horizontal ‘heat-map’ in relation to the resolvability assessment. The study mainly reviews the findings of the 2022 document on ‘SRB Resolvability of Banking Union Banks: 2021’, which contains the first heat-map on the resolvability of BU credit institutions. Based on its findings, large credit institutions have made sound progress on the resolution priorities set by the SRB, while all credit institutions have, inter alia, significantly improved their ability to absorb losses and recapitalise on the basis of the minimum requirement for own funds and eligible liabilities (MREL) they built-up. My study also discussed the remarks made in November 2022 by the (then) Chair of the SRB, Elke König, in relation to credit institutions’ compliance with the requirements set out by the SRB, the risks ahead, and the SRB focus on the full operationalisation of the preferred resolution strategies and on developing alternative strategies.  

The study concluded by remarking that, in November 2022, financial stability vulnerabilities were still elevated, mainly due to the deteriorating macroeconomic conditions (projected lower levels of growth and significantly higher levels of inflation, intensified by geopolitical tensions), the probability of large-scale cyber incidents and climate change-related risks—and this despite credit institutions’ benefits from short-term gains due to higher interest rates and margins. In this respect, it was highlighted that, even though the process of preparing for the resolution of BU credit institutions has significantly progressed, there are two interrelated material issues in relation to the priorities of the SRB amidst the current crisis.

The first relates to how easily and cost-effectively credit institutions can raise debt in capital markets to fully meet their MREL requirements by the end of 2023 (to the extent that they have not already done so), given the high level of interest rates. The second issue refers to the need for adjustment of preferred resolution strategies and the development of alternative ones for at least some credit institutions, considering the difficulties in meeting MREL targets under the current conditions. In this respect, the question is whether preferred resolution strategies providing for the application of the bail-in tool should be modified, for which credit institutions and groups, and in which direction.

Considering that the SRB is already developing alternative strategies, where feasible, the study remarked that, on the one hand,it’s unlikely for the largest BU credit institutions and groups to deviate from a favored resolution strategy that uses the bail-in tool. The critical threshold for which credit institutions fall within this perimeter remains unclear. On the other hand, in relation to other BU credit institutions and groups, I argued that the process relating to the preparation for resolution had significantly progressed; even though the track record from the cases dealt with by the SRB during the period 2017–2022 reveals that in most cases BU credit institutions that were determined as failing or likely to fail were not resolved but wound up through normal insolvency proceedings. Hence, it is to be expected that in the current context it is more likely that a sale-based resolution strategy would be chosen as an alternative to the application of the bail-in resolution tool—a solution I am much in favour of.

Some of the considerations raised in that study remain valid. However, it is noted that, in the meantime, the European Commission has published its new ‘legislative package’ on the amendment of the ‘Crisis Management and Deposit Insurance (CMDI) framework’ in April 2023. The package proposes significant amendments (inter alia) to the EU resolution framework. In addition, in its ‘Financial Stability Report’ of May 2023, published in the aftermath of the recent financial turmoil, the ECB considers that ‘the resilience of euro area banks has been noteworthy but should not give way to complacency’.

Christos V Gortsos is Professor of Public Economic Law at the Law School of the National and Kapodistrian University of Athens.


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