14 Financial services: crisis management
| (32108)
15375/10
COM(10) 579
| Commission Communication: An EU framework for crisis management in the financial sector
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| Legal base | —
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| Document originated | 20 October 2010
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| Deposited in Parliament | 26 October 2010
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| Department | HM Treasury
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| Basis of consideration | EM of 9 November 2010
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
14.1 The recent financial crisis and, in particular, the high
profile banking failures revealed serious shortcomings in the
existing crisis management arrangements. A Commission Communication:
An EU framework for cross-border crisis management in the banking
sector, published in October 2009, presented the Commission's
views on the development of a regulatory framework for stabilising
and controlling the systemic impact of a failing cross-border
bank.[40] A second Communication,
published in May 2010, set out the Commission's thinking on how
the financial sector could contribute to the cost of financing
the resolution of failing banks.[41]
The document
14.2 In this Communication the Commission outlines the main elements
of a new EU framework on prevention, crisis management and resolution
that will form the basis of a legislative proposal it is expected
to put forward by June 2011. The main intentions of this framework
include:
- prioritising prevention and preparation;
- providing credible resolution tools;
- enabling fast and decisive action, by putting
in place well defined powers and processes;
- reducing moral hazard;
- contributing to a smooth resolution of cross
border groups;
- ensuring legal certainty; and
- limiting distortions of competition.
14.3 The framework the Commission outlines:
- would cover all credit institutions
and investment firms (whose failure risks causing systemic instability),
irrespective of whether they operate cross-border or domestically;
and
- would be broad-ranging and
aimed to equip authorities with common and effective tools and
powers to tackle bank crises at the earliest possible moment and
avoid costs for taxpayers.
The Commission intends, by the end of 2011, to undertake
further work to assess what crisis management and resolution arrangements,
if any, are necessary and appropriate for other financial institutions,
including insurance companies, investment funds and central counterparties.
14.4 The measures the Commission suggests include:
- preparatory and preventative
measures, such as a requirement for institutions and authorities
to prepare for recovery (that is, dealing with serious difficulties
faced by a bank) and resolution plans to ensure adequate planning
for financial stress or failure;
- powers to take early action to remedy problems
before they become severe, such as powers for supervisors to require
the replacement of management and to require an institution to
implement a recovery plan or to divest itself of activities or
business lines that pose an excessive risk to its financial soundness;
and
- resolution tools, such as powers to effect the
takeover of a failing bank or firm by a sound institution, or
to transfer all or part of its business to a temporary bridge
bank, which would enable authorities to ensure the continuity
of essential services and to manage the failure in an orderly
way.
The overriding objective of the framework will be
to ensure that banks can fail without jeopardising wider financial
stability, such that no entity is considered "too big to
fail", meaning that:
- banks could be resolved in
ways which minimised the risks of contagion and ensured continuity
of essential financial services, including continuous access for
bank account holders to their accounts; and
- the framework would provide a credible alternative
to the expensive bank bail-outs witnessed during the financial
crisis.
14.5 The Commission also outlines proposals to move
beyond nationally focused crisis management and to put in place
effective cross border arrangements, which should ensure that
authorities coordinate and cooperate as fully as possible in order
to minimise any harmful effects of a cross-border bank failure.
The proposals are to:
- build on existing supervisory
colleges (groups of national supervisors) to set up resolution
colleges (where supervisors and national resolution authorities
would meet), for the purposes of crisis preparation and management;
- give coordination and support roles in crisis
situations to the new European Supervisory Authorities, in particular
the European Banking Authority, without impinging on the fiscal
responsibilities of Member States; and
- establish, as mooted in the Communication on
bank resolution funds, national resolution funds on the basis
of contributions paid by banks, to fund the cost of future resolution
measures and ensure that resolving a bank is a credible option.
The Commission asserts that the existence of common
financing mechanisms, which avoid use of taxpayer funds, should
enhance cross-border cooperation and facilitate advance planning
of how the costs of resolving a cross-border institution should
be shared.
14.6 Finally, the Commission sets out a roadmap of
measures which will be considered in the longer term with a view
to delivering a more integrated crisis management framework, better
suited, in particular, to integrated EU banking groups (that is,
banks operating at the EU level). As part of this roadmap, the
Commission plans:
- to examine the need for further
harmonisation of bank insolvency regimes with a report by the
end of 2012; and
- to assess, alongside the review of the European
Banking Authority in 2014, how a more integrated framework for
the resolution of cross-border groups might best be achieved.
The Government's view
14.7 The Financial Secretary to the Treasury (Mr
Mark Hoban) tells us that the Government supports measures that
ensure Member States have minimum resolution toolkits to reduce
the cost of bank failure and therefore welcomes the Commission's
work to ensure that all Member States have common credible tools
and powers to intervene quickly to avert or manage the failure
of a bank.
14.8 In further comment the Minister says that:
- the Government supports the
recognition that the EU framework will provide sufficient flexibility
for Member States to decide the legal means by which resolution
powers are exercised;
- the Commission outlines that further work is
needed on triggers for intervention and the Government awaits
this further work, noting that the Commission is considering a
mix of qualitative and quantitative triggers;
- the UK has a special resolution regime to deal
with crises in the banking system, proving the authorities with
the resolution tools that the Commission is keen to extend to
all Member States;
- it will therefore be a priority to ensure that
the EU framework is aligned with these UK tools and powers;
- the Government supports efforts to improve coordination
in the event of a cross border failure — the Commission
proposes resolution colleges, as well as possible group level
resolution by the home resolution authority, in accordance with
the pre-prepared group resolution plan;
- the Government believes it is crucial the EU
framework allows flexibility for national authorities to act quickly
to deal with bank failure — experience from the recent crisis
suggests that this leans against elaborate and bureaucratic mechanisms;
- it will be important for the Commission to clarify
how resolution colleges, if different to Cross-Border Stability
Groups, would sit alongside them and global crisis management
groups, and what role finance ministries would have in these groups;
- the Government believes that finance ministries
need a discrete and complementary role, alongside regulatory and
resolution authorities, in responding to emerging financial crises
and in instances where public money is at risk;
- it supports the recognition that national authorities
will remain responsible for crisis management, in order to reflect
national characteristics, such as the shape of the local banking
market and legal systems;
- it notes that the role of the European Banking
Authority in the framework is still to be determined, but notes
also that any role must be consistent with the recently agreed
Regulations establishing the European Supervisory Authorities;
- it supports proposals to strengthen the range
of preventative and early intervention supervisory powers —
there needs to be a robust common framework for the application
by authorities of a broad range of powers, including the ability
to require additional loss absorbency and to reduce the risks
posed by large and complex financial institutions;
- it strongly supports the proposed role for recovery
and resolution plans as a key diagnostic tool. It will be important,
however, to ensure that the EU approach complements the ongoing
work to implement these plans at the international level;
- it notes that the Commission intends to bring
forward proposals to extend the crisis management framework to
include large investment firms and develop a debt write down tool
(commonly referred to as bail-in);
- it believes that further work is needed on the
appropriateness of applying resolution tools to investment firms;
- it notes, on bail-in, that while ongoing Commission
interest is welcome, it is important that this work is framed
within wider international consideration of this policy in the
Financial Stability Board and G20;
- on bank resolution funds, the Government reminds
us that it drew our attention to significant technical concerns
when we were considering that Communication and says that it has
outlined its concerns in various EU fora;
- the Government therefore welcomes the Commission's
intention to reflect upon the role of deposit guarantee schemes
in contributing to resolution costs (with safeguards to prevent
funds being misused to protect uninsured creditors) and to explore
synergies with deposit guarantee schemes; and
- unlike resolution funds, deposit guarantee funds
exist to back and charge for explicit guarantees provided to depositors
— a number of Member States already have such a preventative
ability in their schemes and this may provide a way of ensuring
private funding for a resolution.
Conclusion
14.9 The question of effective crisis management
in the financial services sector is important and we are grateful
to the Minister for his extensive explanation of the Government's
views on the Commission's proposals for a future EU framework.
We have no questions to ask at this stage and clear the document.
However we, like the Government, will need to look at the issues
raised now when a legislative proposal emerges.
40 (31056) 15049/09 + ADDs 1-3: see HC 5-iii (2009-10),
chapter 3 (9 December 2009), HC 5-xi (2009-10), chapter 2 (24
February 2010 and Gen Co Debs, European Committee B, 2
March 2010, cols 3-20. Back
41
(31646) 10394/10: see HC 428-i (2010-11), chapter 70 (8 September
2010). Back
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