Commission seeks views on possible EU framework to deal with future bank failures
10 Jan 2011 09:43 AM
Following the publication of a Communication on 20 October 2010 on a European crisis management framework for the financial sector (see IP/10/1353), the European Commission has recently launched a consultation on technical details underpinning that framework. Last weeks consultation should be read in conjunction with that Communication. The Commission intends to come forward with a legislative proposal for a comprehensive framework for dealing with failing banks before the Summer of 2011. The deadline for contributions to this consultation is 3 March 2011.
The possible options set out in this consultation would constitute a significant step for the EU in delivering the commitment made at the G20 summit in June 2010, by ensuring that authorities across the EU have the powers and tools to restructure or resolve (the process to allow for the managed failure of the financial institution) all types of financial institution in crisis, without taxpayers ultimately bearing the burden. They are also consistent with the principles for ensuring that resolution is a viable option for systemically important financial institutions that are being developed by the Financial Stability Board. This Consultation focuses on measures for banks and investment firms. The Commission will report by the end of 2011 on appropriate measures for other kinds of financial institution, including insurers and Central Counterparties.
Currently, there are very few rules at EU level which determine which actions can and should be taken by authorities when banks fail and, for reasons of financial stability, cannot be wound up under ordinary insolvency rules. This consultation seeks input on the technical details underpinning the policy issues identified in the Communication of 20 October 2010. These include
preparatory and preventative measures such as a requirement for recovery and resolution plans ('living wills') and powers for authorities to require banks to make changes to their structure or business organisation where such changes are necessary to ensure that the institution can be resolved, under the regime. These powers would be an important element in tackling banks that have been deemed too big, complex or interconnected to fail. Indeed, the objective is to ensure that the resolution tools can be used on all banks, irrespective of their size, complexity or systemic importance;
powers for supervisors to take early action to remedy problems before they get out of hand such as the power to change the managers; and
resolution tools which empower authorities to take the necessary action, where bank failure cannot be avoided, to manage that failure in an orderly way such as powers to transfer assets and liabilities of a failing bank to another institution or to a bridge bank, and to write down debt of a failing bank to strengthen its financial position and allow it to continue as a going concern subject to appropriate restructuring.
The overriding objective will be to ensure that banks can be resolved in ways which minimise the risks of contagion and ensure continuity of essential financial services, including continuous access to deposits for insured depositors. The framework should provide a credible alternative to the expensive bank bail-outs which have characterised the recent crisis. The consultation asks stakeholders their views on the effectiveness of these possible powers and tools.
Effective arrangements which ensure that authorities coordinate and cooperate as fully as possible in order to minimise any harmful effects of a cross-border bank failure. It is suggested to build on existing supervisory colleges, expanding them to include resolution authorities for the purposes of crisis preparation and management. The Consultation seeks views from stakeholders on the most appropriate framework to ensure an effective resolution of cross border groups.
Fair burden sharing by means of financing mechanisms which avoid use of taxpayer funds. This might include possible mechanisms to write down appropriate classes of the debt of a failing bank to ensure that its creditors bear losses. Any such proposals would not apply to existing bank debt currently in issue. It also includes setting up resolution funds financed by bank contributions. In particular the Consultation seeks views on how a mechanism for debt write down (or 'bail-in') might be best achieved, and on the feasibility of merging deposit guarantee funds with resolution funds.
The Commission welcomes responses to the policy objectives and the questions raised in this paper by 3 March 2011. Responses should be sent to the following email address: email@example.com
The technical details and the responses received will contribute significantly to the development of draft legislation for a comprehensive crisis management framework for banks and investment firms to be tabled before Summer 2011.
Finally, it’s the Commission's Communication of 20 October 2010 set out a roadmap of measures which will be considered in the longer term with a view to delivering a more integrated resolution framework better suited to integrated EU banking groups (see MEMO/10/506). Specifically, the Commission plans to examine the need for further harmonisation of bank insolvency regimes with a report by the end of 2012 and, alongside the review of the European Banking Authority in 2014, will assess how a more integrated framework for the resolution of cross-border groups might best be achieved. Those initiatives are not covered in this technical consultation, but would be subject to a separate consultation.
The financial crisis has provided clear evidence of the need for more robust bank intervention and resolution measures at national level, as well as the need to put in place arrangements better able to cater for cross-border banking failures. There have been a number of high profile banking failures during the crisis (Fortis, Lehman Brothers, Icelandic banks, Anglo Irish Bank) which have revealed serious shortcomings in the existing arrangements. In the absence of mechanisms to organise an orderly wind down, EU Member States have had no choice other than to bail out their banking sector. State aid to support banks has amounted to 13% of GDP.
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