3 Financial services
| (31056)
15049/09
+ ADDs 1-3
COM(09) 561
| Commission Communication: An EU framework for cross-border crisis management in the banking sector
|
| Legal base | — |
| Document originated | 20 October 2009
|
| Deposited in Parliament | 29 October 2009
|
| Department | HM Treasury |
| Basis of consideration | EM of 12 November 2009
|
| Previous Committee Report | None
|
| To be discussed in Council | Not known
|
| Committee's assessment | Politically important
|
| Committee's decision | For debate in European Committee B
|
Background
3.1 In its Communication for the Spring 2009 European Council,
Driving European Recovery, the Commission noted a perceived need
for a framework for cross-border crisis management in financial
services.[8] That European
Council concluded, amongst other matters, that:
"It is equally important to further advance work on building
a comprehensive cross-border framework for the prevention and
management of financial crises. The European Council invites the
Commission to make concrete proposals for how the European System
of Financial Supervisors[9]
could play a strong coordinating role among supervisors in crisis
situations, while fully respecting the responsibilities of national
authorities in preserving financial stability and in crisis management
in relation to potential fiscal consequences and fully respecting
central banks' responsibilities, in particular with regard to
the provision of emergency liquidity assistance."[10]
The document
3.2 The Communication, and an accompanying staff working document,
presents the Commission's views on the development of a regulatory
framework for stabilising and controlling the systemic impact
of a failing cross- border bank. The Commission says that the
recent crisis has exposed the absence of an effective EU crisis
management framework for cross-border banks, presents an overview
of the problem, proposes policy objectives and invites comments
on a number of potential policy responses, with 25 specific questions,
by 20 January 2010.
3.3 The Commission says that a new framework would
complement the new supervisory architecture — the proposed
European Systemic Risk Board[11]
would provide an early warning system for system-wide risks, while
the new European Banking Authority (one of the proposed European
Supervisory Authorities) would coordinate supervisory responses,
channel information and ensure that risk warnings are followed
up. The objectives are to:
- give national supervisors a
common tool kit to identify problems early and to intervene to
restore the health of the institution or group, or to prevent
further decline; and
- make it possible for cross-border banks to fail
without serious disruption to banking services or contagion to
the financial system as a whole.
3.4 The Commission covers three themes:
- early intervention, covering
actions by supervisors to restore the stability and financial
soundness of an institution when problems are developing, together
with intra-group asset transfer between solvent entities for the
purpose of financial support;
- resolution, covering measures taken by national
authorities to manage a crisis in a banking institution, to contain
its impact on financial stability and, where appropriate, to facilitate
an orderly winding up of the whole or parts of the institution;
and
- insolvency, covering reorganisation and winding
up measures.
3.5 On early intervention, the Commission identifies
a series of potential measures, including preparation of firm-specific
contingency and resolution plans (sometimes called "living
wills") and intra group asset transfers — for which
no EU authorisation regime currently exists. On bank resolution,
it highlights a diversity of national resolution frameworks that
hamper effective coordinated action where a bank operates in several
jurisdictions. The Commission suggests that this is one reason
why Member States have tended to ring-fence the national assets
of a cross-border group in a crisis and have applied national
rather than group-wide solutions. It suggests that a EU framework
for bank resolution, based on agreed and common objectives, should
ensure that losses fall primarily on shareholders and junior and
unsecured creditors rather than on governments and tax payers.
3.6 The Commission continues that:
- a EU framework would have to
resolve issues relating to shareholder rights and creditor and
counterparty rights in bank resolution procedures;
- it proposes an approach that strikes a balance
between protecting the legitimate interests of shareholders and
the ability of resolution authorities to intervene quickly and
decisively to restructure a failing institution or group and which
includes safeguards for creditors, such as compensation mechanisms
which ensure no creditor is worse off than it would have been
had the bank been wound up under the applicable insolvency law;
- there are two possible two approaches for moving
beyond nationally-focussed crisis management — a framework
for coordinating measures at national level or more far-reaching
measures, to provide for the integrated resolution of group entities
in different jurisdictions by a EU resolution authority;
- private sector solutions are necessary if the
costs of bank failure are not to be borne by taxpayers;
- experience suggests that private sector solutions
may not always be available;
- there is a need to develop principles setting
out how financial burdens should be shared between Member States
where resolution measures are applied to a cross- border group;
and
- it suggests exploring the feasibility of using
existing deposit guarantee schemes to fund resolution measures.
3.7 On insolvency, the Commission highlights the
differences in national insolvency procedures and suggests that
cooperation between national insolvency authorities is often uneasy
and imperfect. It proposes options ranging from a binding framework
for cooperation and information exchange between relevant parties
to more far-reaching approaches, such as treating the group as
a single enterprise for insolvency purposes through a harmonised
insolvency regime for banks. It also suggests the possible coordination
of national proceedings by a 'lead administrator'.
The Government's view
3.8 The Financial Services Secretary to the Treasury
(Lord Myners) says that the Government welcomes the Commission's
efforts to ensure that all Member States can coordinate their
actions and have the appropriate tools for intervening quickly
to avert or manage the failure of a bank. He notes that the Government
has introduced a special resolution regime, through the Banking
Act, to deal with crises in the banking system — it provides
the authorities with the tools that the Commission is chiefly
concerned to introduce throughout the EU.
3.9 The Minister tells us that the regime covers:
- powers for the Bank of England
to transfer a failing bank's business to a private sector purchaser
and to transfer a bank's business to a publicly controlled bridge
bank to pave the way for a private-sector sale;
- temporary public ownership;
- new insolvency procedures to help fast payout
to eligible depositors or transfer of their accounts to another
financial institution; and
- the bank administration procedure, to support
the Bank of England's power to transfer part of a failing bank's
property to a bridge bank or private purchaser.
3.10 The Minister comments that:
- the Government, therefore,
supports proposals that Member States should have minimum and
compatible resolution toolkits to reduce the cost of failure;
- the Government also advocates firm-specific contingency
and resolution planning and a review of supervision of cross border
branches;
- the responsibility for such arrangements falls
on national authorities in order to reflect national characteristics,
such as the shape of the local banking market and legal systems
— it is important to ensure that EU proposals facilitate
rather than hinder appropriate action by national authorities;
- a few of the Commission's proposals go further
than the present UK arrangements, such as enabling supervisors
to appoint a representative with the particular objective of restoring
the financial situation of an institution — this will require
careful study; and
- the Commission highlights the difficulty of harmonising
insolvency law, as this touches on property rights, contract law
and commercial law, and questions whether a more integrated or
harmonised regime is desirable.
Conclusion
3.11 Clearly an EU framework for cross-border
crisis management in the banking sector has important implications
for regulation and supervision of financial services. We recommend
that the document should be debated in European Committee B, when
Members might explore what such a framework should, and perhaps
should not, contain.
3.12 If the Government intends to respond to the
Commission's invitation for comments we would wish to see that
response at least a fortnight before the date set for the debate.
8 (30474) 7084/09 + ADD 1: see HC 19-xii (2008-09),
chapter 1 (25 March 2009), HC 547 and Stg Co Debs, European
Committee, 29 June 2009, cols. 3-24. Back
9
That is the proposed European Supervisory Authorities - ((30952)-(30954)
13652/09-13654/09: see HC 19-xxviii (2008-09), chapter 6 (21 October
2009), HC 19-xxx (2008-09), chapter 2 (4 November 2009) and HC
5-i (2009-10), chapter 2 (19 November 2009). Back
10
See http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/108622.pdf.
Back
11
(30950) 13648/09: see HC 19-xxviii (2008-09), chapter 6 (21 October
2009), HC 19-xxx (2008-09), chapter 2 (4 November 2009) and HC
5-i (2009-10), chapter 2 (19 November 2009). Back
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