On June 6, the European Commission published a legislative proposal for a Directive introducing a recovery and resolution framework covering deposit-taking banks and certain other large financial institutions.
The aim of the proposed Directive is the introduction of a comprehensive set of measures aimed to ensure that financial regulators have the necessary powers to take action to address developing problems at banks. The key elements of the proposal are prevention and preparation, early intervention, credible resolution tools and co-operation among national regulators. An increased role for the European Banking Authority is also envisaged.
- Prevention and preparation. Banks and regulatory authorities will be required to draw up recovery and resolution plans on how to deal with financial stress or failure at group level and also for individual group entities. Regulators will be able to require banks to take appropriate measures including changes to corporate and legal structures designed to reduce the likelihood of threats to financial stability and costs to taxpayers.
- Early intervention. There will be enhanced powers for regulators to intervene before a bank’s problems become critical and its financial situation deteriorates irreparably. These will include powers to dismiss management and appoint a special manager, to convene shareholders’ meetings to adopt urgent reforms, and to require a bank to draw up a plan for restructuring its debt.
- Credible resolution tools. These will include the power for regulators to sell or merge weak or potentially failing banking businesses, to set up a temporary entity to operate key functions, to separate good and bad assets and to convert to shares or write down the debt of failing banks.
- Co-operation among national regulators. Mechanisms will be established to facilitate co-operation among national regulators to co-ordinate resolution measures in relation to cross-border banking groups.
The Commission estimates that the proposed Directive will come into effect in 2015.
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