The de Larosière report concluded that a lack of consistent crisis management and resolution tools across the Single Market places Europe at a disadvantage vis-à-vis the United States and recommended that these issues should be addressed by the adoption at EU level of adequate measures. Accordingly the Commission adopted a Communication on an EU framework for crisis management in the banking sector in October 2009. The Commission’s aim is to put in place a framework that will allow a bank to fail, whatever its size, while ensuring the continuity of essential banking services, and minimising the impact of that failure on the financial system.
On 20 October 2010, the Commission issued a Communication, based on its public consultation, setting out in broad terms the elements it expects to propose next year in legislation. It states that the priority is to ensure national authorities have at their disposal common effective tools to resolve, at an early stage, bank crises, thus avoiding future calls on national taxpayers. (The Commission also sets out a roadmap to tackle, in the longer term, the creation of an EU level integrated crisis management framework.) The proposals as they stand are to be applied to all credit institutions (i.e., banks) and larger investment firms. The Commission will during 2011 look at what measures might be appropriate for other financial firms, such as insurance companies, investment funds and central counterparties.
The Commission priority proposals include:
- Early intervention powers. To allow national supervisors (under the Capital Requirements Directive) to force firms to take remedial actions, such as change of senior management or ceasing business activities identified as excessively risky. This will include amending the CRD to allow supervisors to impose measures not only if they breach the requirements of the CRD but in the situation where a firm is deemed as likely to fail to meet the requirements.
- Preventative measures/living wills. To ensure systemically significant firms may be closed down with minimum market disruption and contagion, i.e. no firm should be too big to fail; and
- Resolution tools. Encompassing the transfer of a part of a failing firm’s balance sheet to a temporary holder, without the consent of its shareholders, to allow the continuation of essential customer services, to the take-over of a failing bank by a sound one.
In addition, the Commission would like to see a structure in place that would require national authorities to co-ordinate and co-operate in a crisis to minimise the damage caused by a cross-border bank collapse. The Commission proposes that the existing supervisory colleges be used as the basis for resolution colleges, which would co-ordinate cross-border rescues/closures. The new European Supervisory Authorities would be given a co-ordinating role, though this should not impinge on the fiscal responsibilities of Member States.
On co-ordination with third countries, the Commission states that minimum mutual recognition of measures taken by national resolution authorities is required, based on common principles. (It places emphasis on the work of the G20 and the Financial Stability Board in this context.)
The Commission is also proposing the creation of national resolution funds paid for by banks. They argue that a credible alternative to government bail-out is needed to reduce moral hazard. Such funds should be phased in with contribution levels raised as the economy recovers.
A public consultation on the technical details of these proposals will be launched in December 2010 and the Commission is expected to issue formal proposals for legislation in Spring 2011. It will also release a report on the need for further harmonisation of bank insolvency regimes by the end of 2012 and as part of the review of the European Banking Authority in 2014 a report on how to deliver a more integrated framework for the resolution of cross-border groups.