ECON has published its draft report on the proposed Directive on a recovery and resolution framework for credit institutions and investment firms. The rapporteur distinguishes between the crisis of a single bank, caused by bad management, and a systemic crisis that triggers fear in the markets. In this latter case, the use of taxpayers’ money for the purpose of bank resolution would be justified to safeguard financial stability. The draft report introduces the following amendments:

  • separation of supervisory and resolution authorities;
  • when producing recovery and resolution plans, the focus should be on institution-specific issues rather than on scenario planning, as a systemic crisis unfolds unpredictably;
  • need for a clear distinction between the recovery and early intervention phase where control is still with the shareholders and the phase where this control shifts to the resolution authority;
  • need for a clear definition, tied to the fourth Capital Requirements Directive and Regulation (CRD4 and CRR), of the trigger point for early intervention;
  • avoidance of a resolution trigger linked to liquidity, and clarification that resolution can only be used where the institution is very close to insolvency;
  • the level of bail-in debt required should be measured against risk-weighted assets;
  • the industry should fund resolution ex-ante, to avoid moral hazard risks, and these amounts could be used to pay down public debt, with the state stepping in to provide the funds when required.

The rapporteur also introduces three additional resolution tools: guarantee of bank liabilities, capital injections and taking the failed institution into temporary public ownership. (Source: ECON Draft Report on Bank Recovery and Resolution)