‘Liquidity and Resolution’ discussed in our latest online seminar
On 8 February, the Florence School of Banking and Finance organised an online seminar on the topic of ‘Liquidity and Resolution’, focusing on the tension between these two factors. By definition, once a resolution scheme is adopted, a recapitalised bank that has absorbed losses will be solvent and should have better access to funding. However, liquidity stress is expected at the point of resolution. Given that analysts and creditors will likely require time to re-assess the financial position of the resolved bank, the return to market funding will be a slightly longer process.
Resolution authorities have a key role to play to restore market confidence and access to private market funding in case of resolution. Enhancing banks capabilities to restore liquidity at the point of resolution represents a crucial task in resolution planning activities. In some cases, a temporary public funding may be necessary when an immediate return to the market is not fully possible. In that regard, the central banks and the Single Resolution Fund would be instrumental for the success of a resolution action.
This online seminar featured a presentation by lead speaker Dominique Laboureix, Director of Resolution Planning and Decisions and Member of the Single Resolution Board, who introduced the powers and tools of the resolution framework and their relations with bank liquidity issues. Then, he discussed how these evaluations are included in resolution planning, considering the role of central banks liquidity and the need of a public backstop. The presentation was closed by a comparison of the approaches of the US and the UK in this aspect.
Mr Lavoureix’ presentation was followed by a comment by Michael Hesketh, Principal Banking Expert at the European Stability Mechanism, who sketched the current framework for public sources of liquidity, highlighting possible options to increase liquidity support.
The debate was moderated by Patrick Honohan, former Governor of the Central Bank of Ireland and Honorary Professor of Economics at Trinity College Dublin and Nonresident Senior Fellow at the Peterson Institute for International Economics.