What Has Happened?

On 6 June 2012, the European Commission published its proposals for a Directive aimed at creating common tools for national authorities to deal with bank crises at national level as well as a framework for tackling cross-border crises. The Commission distinguishes between measures for:

  • prevention;
  • early intervention; and
  • resolution.

Many concepts are similar to those already in place, or proposed, in the UK.

Recovery and Resolution Plans (RRPs)

The preparation of RRPs (also known as "living wills") is among the preventative measures that the Commission puts forward. This note looks at this element of the Commission’s proposals. While there are many parallels with the UK Financial Services Authority's (FSA) draft rules, there are differences in both scope and content. FSA put on hold its final rules on RRPs so that it could incorporate any change needed for its rules to be compatible with the Commission’s proposed EU-wide minimum standards.

Who Do the Proposals Apply To?

The Commission’s proposals distinguish between “recovery plans”, which financial institutions must prepare, and “resolution plans”, prepared by resolution authorities.

The Commission proposes that all credit institutions and investment firms will fall within the scope of “financial institutions” that will need to prepare recovery plans and provide information for the authorities’ resolution plans. The Commission will consider extending the rules to market infrastructures of systemic importance in future. The “detailed explanation of the proposals” published alongside them clarifies that the firms affected will be the same as those caught under the Capital Requirements Directive. The Commission’s proposals therefore extend to deposit-taking and e-money institutions, and to MiFID investment firms except for the “article 3 exempt firms”, which are authorised only to provide investment advice and/or receive and transmit orders from investors without holding clients’ money or securities. This is markedly wider than FSA’s proposals, which cover only deposit-taking institutions and BIPRU 730k firms with gross assets exceeding £15 billion. The proposals do, however, allow for simplified obligations in respect of RRPs to be applied to institutions whose failure would have a smaller impact.

What Do the Proposals Require from Financial Institutions and Resolution Authorities?

As far as recovery plans are concerned, Section A of the Annex to the proposals (the Annex) lists the items of information they must include. The competent authority has the power to require the institution to take any measure to remove deficiencies or impediments to the recovery actions and options described in the plan.

Section B of the Annex lists the items of information that resolution authorities may request from institutions for drawing up and keeping resolution plans up to date. Resolution plans will set out options for applying the different resolution tools available and a demonstration of how critical functions would be spun off and preserved.

Resolution authorities will also assess the resolvability of institutions and groups bearing in mind the matters identified in Section C of the Annex. If an institution does not correct potential substantive impediments to resolvability, resolution authorities may impose proportionate measures to achieve resolvability.

How Do These Proposals Apply to Cross-Border Groups?

Groups that are subject to consolidated supervision will need to prepare a recovery plan for the whole group and for each institution forming part of the group. Together with the information required from an individual plan, a group recovery plan may also include arrangements for intra-group support, which is permissible if certain conditions set out in the Commission’s proposals are met. The consolidating supervisor will pass on the plans to the authorities with competence over the subsidiaries and to the European Banking Authority (EBA). The consolidating supervisor and other competent authorities, forming a college of supervisors, will make a joint decision on the assessment of the plan and on whether to require further measures from the institution.

As it is also the case for recovery plans, resolution plans for groups must include both a plan at the level of the parent and plans for the individual subsidiaries and branches. Institutions subject to consolidated supervision will send all the group’s information to the group level resolution authority, which will then pass on this information to the subsidiaries’ resolution authorities. This “resolution college” will have to reach a joint decision on the drawing up and maintenance of resolution plans.

Both group recovery and resolution plans must strive towards coordination and consistency when carrying out measures across different group entities.

For a resolution college to adopt a measure improving resolvability, the group level resolution authority and EBA will send to all relevant resolution authorities a report on impediments to resolvability, and later communicate any measure proposed by the parent institution. The resolution college would then try to reach a joint decision.

What Will EBA’s Role Be?

EBA will develop draft technical standards specifying:

  • further items of information to be included in recovery plans;
  • procedures for the provision of information by institutions to the resolution authorities;
  • scenarios and matters against which recovery plans, resolution plans and resolvability will be tested; and
  • the measures that resolution authorities may require to remove impediments to the resolvability of an institution.

EBA may help supervisory and resolution colleges in reaching joint agreements. If the colleges cannot reach a joint decision on group recovery and resolution plans and on measures to address impediments to resolvability, the group level authority can make its own decision. In that case, any other of the authorities concerned that disagrees with the decision may refer the issue to EBA.

Do These Proposals Affect the Timing of FSA’s Living Wills Initiative?

Member states of the European Union will be given until 1 January 2015 to start applying the Directive. However, we expect that the FSA will push ahead with the deadlines it set in May for UK regulated firms to present their living wills. FSA expects to present final rules in autumn 2012.