Today, the European Commission (EC) released its plans for a new framework governing crisis management in the financial sector that "sets out the policy orientations the [EC] intends to pursue on the basis of the work done to date on crisis management and resolution, with a view to presenting legislative proposals in Spring 2011.” The framework includes preventative and remedial measures designed to ensure that “banks can fail without jeopardizing wider financial stability.”
The outlined framework contains three primary components:
- Preventative Measures: Supervisory powers would be reinforced by strengthening standards and providing for more intrusive assessments and additional on-site examinations. Bank-specific “living wills” would be required to determine how the failure of a bank would be resolved.
- Early Intervention Measures: Supervisors’ authority to intervene at an early stage would be expanded with new powers, including the power to require implementation of a failing bank’s recovery plan, prohibit the payment of dividends, temporarily appoint special management, replace managers or directors or require the sale of certain segments of a bank’s business.
- Resolution Measures: Supervisors would also have additional powers that could be exercised when a bank reaches a point at which there are no realistic prospects of a timely recovery. Supervisors would be empowered to, for example, force the sale of business segments without the consent of shareholders, require the transfer of some or all of the bank’s business to a temporary “bridge bank,” separate toxic assets by transferring them to a separate entity and write off troubled debt or convert troubled debt to equity.
According to the accompanying frequently asked questions, government aid by EU Member States to support banks in the current crisis has amounted to 13% of GDP. To avoid taxpayer contributions in future crises, as originally proposed in May, future resolution measures would be pre-funded by banks.