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EU proposes measures to avoid future bank bail-outs.

The proposals adopted today by the European Commission for EU-wide rules for bank recovery and resolution aim to ensure that in the future authorities will have the means to intervene decisively both before problems occur and early on in the process if they do.

Furthermore, if the financial situation of a bank deteriorates beyond repair, the proposal ensures that a bank's critical functions can be rescued while the costs of restructuring and resolving failing banks fall upon the bank's owners and creditors and not on taxpayers.

The financial crisis highlighted that public authorities are ill-equipped to deal with ailing banks operating in today's global markets. In order to maintain essential financial services for citizens and businesses, governments have had to inject public money into banks and issue guarantees on an unprecedented scale: between October 2008 and October 2011, the European Commission approved E4.5 trillion (equivalent to 37% of EU GDP) of state aid measures to financial institutions. This averted massive banking failure and economic disruption, but has burdened taxpayers with deteriorating public finances and failed to settle the question of how to deal with large cross-border banks in trouble.

European Commission President Jose Manuel Barroso said, "The EU is fully delivering on its G20 commitments. Two weeks ahead of the summit in Los Cabos, the Commission is presenting a proposal which will help protect our taxpayers and economies from the impact of any future bank failure. Today's proposal is an essential step towards Banking Union in the EU and will make the banking sector more responsible. This will contribute to stability and confidence in the EU in the future, as we work to strengthen and further integrate our interdependent economies"

Internal Market Commissioner Michel Barnier said: "The financial crisis has cost taxpayers a lot of money. Today's proposal is the final measure in fulfilling our G20 commitments for better financial regulation. We must equip public authorities so that they can deal adequately with future bank crises. Otherwise citizens will once again be left to pay the bill, while the rescued banks continue as before knowing that they will be bailed out again."

Key elements of the proposal

A framework for resolution

The framework builds on recent efforts by several Member States to improve national resolution systems. It strengthens them in key respects and ensures the viability of resolution tools in Europe's integrated financial market.

The proposed tools are divided into powers of "prevention", "early intervention" and "resolution", with intervention by the authorities becoming more intrusive as the situation deteriorates.

1. Preparation and prevention:

First, the framework requires banks to draw up recovery plans setting out measures that would kick in in the event of a deterioration of their financial situation in order to restore their viability.

Second, authorities tasked with the responsibility of resolving banks are required to prepare resolution plans with options for dealing with banks in critical condition which are no longer viable (such as details on the application of resolution tools and ways to ensure the continuity of critical functions). Recovery and resolution plans are to be prepared both at group level and for the individual institutions within the group.

Third, if authorities identify obstacles to resolvability in the course of this planning process, they can require a bank to change its legal or operational structures to ensure that it can be resolved with the available tools in a way that does not compromise critical functions, threaten financial stability, or involve costs to the taxpayer.

Finally, financial groups may enter into intra-group support agreements to limit the development of a crisis and quickly boost the financial stability of the group as a whole. Subject to approval by the supervisory authorities and the shareholders of each entity that is party to the agreement, institutions which operate in a group would thus be able to provide financial support (in the form of loans, the provision of guarantees, or the provision of assets for use as collateral in transactions) to other entities within the group that experience financial difficulties.

2. Early intervention

Early supervisory intervention will ensure that financial difficulties are addressed as soon as they arise. Early intervention powers are triggered when an institution does not meet or is likely to be in breach of regulatory capital requirements. Authorities could require the institution to implement any measures set out in the recovery plan, draw up an action programme and a timetable for its implementation, require the convening of a meeting of shareholders to adopt urgent decisions, and require the institution to draw up a plan for restructuring of debt with its creditors.

In addition, supervisors will have the power to appoint a special manager at a bank for a limited period when there is a significant deterioration in its financial situation and the tools described above are not sufficient to reverse the situation. The primary duty of a special manager is to restore the financial situation of the bank and the sound and prudent management of its business.

3. Resolution powers and tools

Resolution takes place if the preventive and early intervention measures fail to redress the situation from deteriorating to the point where the bank is failing or likely to fail. If the authority determines that no alternative action would help prevent failure of the bank, and that the public interest (of access to critical banking functions, financial stability, integrity of public finances, etc.) is at stake, authorities should take control of the institution and initiate decisive resolution action.

Harmonised resolution tools and powers, together with the resolution plans prepared in advance for both nationally-active and cross-border banks, will ensure that national authorities in all Member States have a common toolkit and roadmap to manage the failure of banks. The interference in the rights of shareholders and creditors which the tools entail is justified by the overriding need to protect financial stability, depositors and taxpayers, and is supported by safeguards to ensure that

2012 CPI Financial. All rights reserved.

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Publication:CPI Financial
Date:Jul 2, 2012
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