The Resolution Fund: Is behaviour of the contributing institutions affected by the applied methodology?

• Název práce v češtině: Fond pro řešení krize: Ovlivňuje aplikovaná metodika chování přispívajících institucí?
• Název v anglickém jazyce: The Resolution Fund: Is behaviour of the contributing institutions affected by the applied methodology?
• Klíčová slova: Fond pro řešení krize, Garanční systém finančního trhu, Jednotný záchranný fond, Bankovní unie, roční příspěvek, základní příspěvek, rizikový faktor, rezoluce, likvidace
• Klíčová slova anglicky: The Resolution Fund, the Financial Market Guarantee System, the Single Resolution Fund, the Banking Union, annual contribution, basic contribution, risk adjusting factor, resolution, liquidation
• Akademický rok vypsání: 2018/2019
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: Mgr. Magda Pečená, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 30.05.2019
• Datum zadání: 30.05.2019
• Datum a čas obhajoby: 10.06.2020 09:00
• Datum odevzdání elektronické podoby: 07.05.2020
• Datum proběhlé obhajoby: 10.06.2020
• Oponenti: Mgr. Hana Džmuráňová, Ph.D.

Seznam odborné literatury

Bibliography

Regulation (EU) No. 806/2014
Commision Delegated Regulation EU 2015/63

Howarth, David & Quaglia, Lucia, ‘The Steep Road to European Banking Union: Constructing the Single Resolution Mechanism’, Journal of Common Market Studies, s1, 52, pp. TBC (currently available as Early View, 10.1111/jcms.12178)

Schoenmaker, Dirk and Gros, Daniel, A European Deposit Insurance and Resolution Fund - An Update (September 12, 2012). CEPS Policy Brief No. 283. Available at SSRN: https://ssrn.com/abstract=2060137

Laštůvková, J. (2014). Liquidity management strategies in the Czech banking sector. MENDELU Working Papers in Business and Economics 47/2014. Mendel University in Brno. Cited from: http://ideas.repec.org/s/men/wpaper.html

Véron, Nicolas (2012) : Europe's single supervisory mechanism and the long journey towards banking union, Bruegel Policy Contribution, No. 2012/16, Bruegel, Brussels

Maria J. Nieto, Gillian G. Garcia, (2012) "The insufficiency of traditional safety nets: what bank resolution fund for Europe?", Journal of Financial Regulation and Compliance, Vol. 20 Issue: 2, pp.116-146

Boer, Lukas (2019) : Measuring the effect of foreign exchange intervention policies on exchange rates, DIW Roundup: Politik im Fokus, No. 128, Deutsches Institut für Wirtschaftsforschung (DIW), Berlin

Baxa, Jaromír & Šestořád, Tomáš (2019): “The Czech Exchange Rate Floor: Depreciation without Inflation?”, Czech National Bank: Working Paper Series 1

Předběžná náplň práce v anglickém jazyce

Research question and motivation

I am going to study the effects of the contributions into the Single Resolution Fund on interbank deposit market and the deposit market in general in the Czech Republic. EBU’s Single Resolution Mechanism has been established to prevent the banking sector from falling into a deep crisis as we witnessed during and after 2008. Concerning EBU, its resolution fund was founded in 2014 and in the following year, a fund for crisis solution was established in the Czech Republic and is supervised by the national bank (“Fond pro řešení krize” – FŘK). Differing from the deposit insurance fund mainly in the purpose of its existence, the resolution fund is operated to cumulate financial means to be able to help those institutions falling into troubles once needed. Hence, the resolution fund is a source of interventionistic instruments, usage of which is proposed by the ČNB if and only if the resolution action is both accomplishable and of public interest. The resolution fund does not cover refunding of insured deposits.

The yearly contribution into the FŘK is set as follows:

TAC = {[RF(target) - RF(actual)] / [2024 - t + 1]} * mae

(TAC…total annual contribution, RF(target)…target level of cash in the fund in 2024, RF(actual)…actual level of cash, t…fiscal year for which TAC is set, mae…coefficient of business cycle)


And then an individual contribution for each institution is calculated as follows:

B(n) = L - D + max{D(CRR); 0.75*D} - OF(CRR) - CD - IGT

(B(n)…the base for an institution, L…book value of the institution’s total liabilities, D…book value of the institution’s derivate liabilities, D(CRR)…regulatory value of total derivates, OF(CRR)…regulatory value of Tier2 capital, CD…total value of liabilities lower than EUR 100,000 per one person per one bank = value of insured deposits up to insured extent, IGT…total value of intra-group transactions regarding transferability and flexibility within the financial holding)


Since the contributions were first charged and the banks in the EBU had to transfer their fees, severe temporary impact on the interbank deposit rate has been observed – interbank deposits’ rates fall dramatically in case of maturity on the last day of the fiscal year and normalize immediately on the day after. As the calculation of the fee is currently based primarily on the whole balance sheet of the bank, tendencies and incentives to optimize have occurred – the fee is set based on the end-of-year figures of the bank and therefore, motivation to avoid reporting high balances has filled the liquidity management teams across the sector. Either getting rid of liquidity or charging the clients for the additional cost, banks are trying to avoid high fees payable to the Single Resolution Fund. This lets several peculiar phenomena come to the light and the most paradoxical one before all is that due to all of fore-mentioned, banks seek opportunities to eliminate high cash balances that would be reported at the moment of the fee calculation. It shall also be noted that it stands as a direct consequence of the ČNB’s monetary policy during 2013 – 2017. Intervening massively against the exchange rate of the domestic currency, ČNB made the market suck cash – thus, few years later, leaving the players in the sector in necessity of dealing with the problems of high degree.

The research is going to look in broader detail whether the method of the fee calculation is efficient and reasonable, how do the banks deal with the situation currently (in most cases, the relationship parent company-subsidiary has the main role) and possibly suggest more research questions or some basics of the revision of the current system. Specifically, I am going to look at the ALM and IPLM practices of the banks that shall be obtainable from the quarterly published reports. I would like to try to utilize the banks’ tariffs imposed on excessive deposits which are placed into the banks too late to let them get ready for the resolution fund fee value in calculation of the approximate cost that is transferred onto the clients every year. I would also like to have a look at how the fee is calculated, explore the main principles and goals of the regulation and suggest improvements that may lower the negative impact of the fee that banks have to pay.

I am of a strong conviction that this question features eminent importance since it has been observed that general rules and directives and the duty of paying the fee into the resolution fund brings uncertainty, unexpected fluctuations and market distortion. Regulation and its philosophy are deeply rooted in trying to prevent dangerous situations and in attempts to increase overall safety and predictability of the whole sector as well as the Single Resolution Mechanism. In case of the Single resolution fund we can see the opposite has been taking place. The fact that there are duties distorting the market that are backed by the laws and regulation is alarming.

Unsurprisingly, banking sector transfers the incurred costs onto their clients partially and that features two major issues – the clients are exposed to negative effects of the regulation themselves, have no means to protect themselves and no choice if their liquidity has to be stored in a bank. In addition to that, it is very paradoxical that in the heavily regulated sector where protection of the consumer happens to be the major aim of almost every regulatory amendment and directive, a method causing clients to be charged for deposits in excess of the standard conditions and leaving the consumer of the banking services on no other choice than paying the cost of the resolution mechanism development can be proposed and implemented.

Contribution

Surprisingly, there is practically no academic literature published on the specific topic since the Czech Republic is the only venue featuring such distortion. On the other hand, the problem this thesis is going to work with first appeared (at considerable significance) at the end of 2017, thus there has probably not been either enough time or data for proper analysis and conclusions. With the end of year 2019, I believe there will be robust enough evidence to state the trends, problems and suggest improvements to the whole thing.

I believe studying the current system of how the contribution into the resolution fund is calculated and the effects it features may bring useful insight into the problem as a whole and suggest possible ways of continuation in dealing with the drawbacks it has. Of course opposing the legislation and regulation even through constructive and approachable improvement possibilities suggestions is generally very time consuming and requiring once the desired outcome shall be reached in future, but being aware of the current problems and the fact they are transferred onto the clients, my conviction of the issue’s necessity is quite firm and I am going to try to find and possibly depict possible at least partial solutions that might eliminate the negative effects of the all fore-described at least partially.


Methodology

The thesis is going to use data from ARAD, Czech banks’ quarterly reports (the number of them is going to be considered – for now I suppose all of them is certainly too many, but sticking with the systemically important banks only would be limiting), Czech banks’ tariffs and pricing-lists and some specific macro-data of the Czech National Bank once the thesis will have proceeded to adequately advanced stage on which search for supplementary and utilizable data is purposive. Forward rates of the derivate markets – especially CZK-based FX swap – is going to be studied in order to specify the effects of the resolution fund fee exactly. One of the aims of the thesis is also quantification of both capitalization of the rate fluctuation and the cost transferred onto the client, which is going to be determined from the banks’ pricing lists and assumed volumes of the subjective deposits.

Outline

The thesis is going to have three main parts:
- Effect of the resolution fund fee on the specific interbank deals rate
- Cost of the effects and who pays for it
- Deficient regulation and suggested improvements