Regulatory Update

Credit supply in the wake of distressed bank acquisitions

The impact of distressed bank acquisitions on lending to businesses remains a subject of interest for policymakers and researchers alike. This paper provides valuable insights into the effects of such events by examining the case of Banco Popular, a major Spanish bank that collapsed in 2017 and was resolved under Europe's new post-Great Financial Crisis framework for managing bank failures.

The study reveals that the sale of business tool can have a stabilizing effect on lending to businesses. The analysis highlights how the success of this approach depends on the acquiring bank's financial strength and strategy. If the buyer is well capitalised and focused on preserving customer relationships, a sale of business bank resolution can limit the economic impact of a bank failure. This underscores the importance of having strong banks and effective resolution tools to manage crises without relying on public funds.

The research also sheds light on how the acquiring bank strategically reallocated credit within its broader portfolio, shifting away from more capital-intensive exposures. By preserving lending relationships and prioritizing support for riskier inherited borrowers most exposed to competing banks' retrenchment, the acquiring bank was able to mitigate the disruption caused by the failed bank's collapse. The study's findings have implications for policymakers seeking to design effective resolution tools that can protect the economy during times of crisis.

Why it matters

The impact of distressed bank acquisitions on trade finance is a pressing concern for policymakers and industry professionals alike. The recent study on the effect of sale-of-business bank resolutions on lending to businesses highlights the importance of having strong banks and effective resolution tools to manage crises without relying on public funds.

When a failing bank is acquired by another institution, it can have a significant impact on credit supply to businesses. However, the success of this approach depends on various factors, including the acquiring bank's financial strength and strategy. The study found that well-capitalised and focused acquiring banks can limit the economic impact of a bank failure by preserving lending relationships and prioritising support for riskier inherited borrowers.

The findings of this study have significant implications for trade finance and documentary banking, as they suggest that effective bank resolution tools can help mitigate the disruptions caused by bank failures. This is particularly important in today's globalised economy, where trade finance plays a critical role in facilitating international transactions. By understanding how sale-of-business resolutions can shape credit allocation, policymakers and industry professionals can work together to develop more effective strategies for managing bank failures and preserving credit supply to businesses.

Key points

* The impact of distressed bank acquisitions on lending to businesses is a critical area of study, with research highlighting the potential benefits of sale-of-business (SoB) resolutions in stabilizing credit supply. * Selling a failing bank to another institution can limit the economic disruption caused by a bank failure, particularly when the acquiring bank prioritizes preserving customer relationships and supporting riskier borrowers. * The success of SoB resolutions depends on the financial strength and strategy of the acquiring bank, with well-capitalized institutions better equipped to manage the transition and minimize disruptions to lending. * Effective sale-of-business resolutions can help preserve credit allocation by strategically reallocating credit within the broader portfolio of the acquiring institution, shifting away from more capital-intensive exposures. * The preservation of lending relationships and support for riskier inherited borrowers is a key mechanism through which SoB resolutions stabilize credit supply in the wake of distressed bank acquisitions. * By understanding how sale-of-business resolutions shape credit allocation, policymakers can better design effective resolution tools to mitigate the economic impact of bank failures and promote financial stability.

Institutional context

The recent years have seen a significant increase in distressed bank acquisitions, particularly in the European Union. The European Banking Authority (EBA) has been actively involved in monitoring and resolving these cases under the post-Great Financial Crisis framework for managing bank failures. This framework has led to the development of new tools, such as the sale of business tool, which aims to minimize disruptions to lending and the economy.

The European Central Bank (ECB) has also played a crucial role in shaping the regulatory landscape through its guidance on bank resolution and the implementation of the Single Resolution Mechanism (SRM). The SRM is designed to provide a coordinated approach to resolving banks that fail, with the aim of minimizing systemic risk. The ECB's guidance emphasizes the importance of preserving credit relationships and maintaining access to funding for businesses.

The ongoing regulatory efforts are part of a broader institutional framework aimed at strengthening financial stability in the EU. The European Commission has been working on updates to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), with a focus on enhancing bank resilience and improving the effectiveness of resolution tools. These developments underscore the growing recognition of the need for more effective regulatory frameworks to manage bank failures and minimize their impact on the economy.

Practical considerations

For practitioners, the key practical consideration is understanding the potential impact on their lending practices and customer relationships in the event of a distressed bank acquisition. This requires close monitoring of the acquiring institution's financial health, strategic priorities, and approach to managing inherited borrowers.

Institutions should also be aware that the success of a sale-of-business resolution can depend on the acquirer's ability to preserve credit relationships with existing customers, particularly those with higher credit risk profiles. This may involve working closely with the acquiring bank to understand their strategy for reallocation of credit within their portfolio and ensuring that these arrangements align with the institution's own lending policies.

Furthermore, practitioners should be prepared to adapt their risk assessment and underwriting practices in response to changes in market conditions and the acquirer's priorities. This may involve revising credit scoring models or adjusting loan terms to reflect the new ownership structure and any changes to the acquiring bank's risk appetite. Effective communication with customers and stakeholders is also critical, as the resolution process can have a significant impact on their financial stability and business operations.

Source: BIS Research Papers