Various Documents considered by the Committee - European Scrutiny Committee Contents

14 Financial services: crisis management



COM(10) 579

Commission Communication: An EU framework for crisis management in the financial sector

Legal base
Document originated20 October 2010
Deposited in Parliament26 October 2010
DepartmentHM Treasury
Basis of considerationEM of 9 November 2010
Previous Committee ReportNone
To be discussed in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionCleared


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.


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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