70 Financial services: bank resolution
funds
| (31646)
10394/10
COM(10) 254
| Commission Communication: Bank resolution funds
|
| Legal base | —
|
| Document originated | 26 May 2010
|
| Deposited in Parliament | 2 June 2010
|
| Department | HM Treasury
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| Basis of consideration | EM of 14 June 2010
|
| Previous Committee Report | None
|
| Discussion in Council | None planned
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
|
Background
70.1 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.[302]
In an October 2009 Communication, An EU framework for cross-border
crisis management in the banking sector, and an accompanying
staff working document, the Commission's presented its views on
the development of a regulatory framework for stabilising and
controlling the systemic impact of a failing cross-border bank
— it aimed to ensure that Member States have common tools
that can be used in a coordinated manner to allow prompt action
in the event of major banking failures, protecting the financial
system, avoiding costs to taxpayers and ensuring a level playing
field. In particular, the aim was to ensure that orderly failure
is a credible option for any bank, irrespective of size or complexity.
One of the three themes in the Communication was a discussion
of 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.[303]
The document
70.2 In this Communication the Commission:
- sets out its thinking on how the financial sector could contribute
to the cost of financing the resolution of failing banks; and
- explains how it sees bank resolution funds fitting within
the broader framework of measures designed to strengthen the future
EU framework for crisis prevention and management.
The Commission:
- supports establishing a network of national resolution funds,
funded by an ex ante levy on banks;
- believes such funds should be used to finance
the costs of resolving failing banks, which would minimise reliance
on taxpayer funds for bail-outs and allow banks to be wound down
in an orderly manner without causing wider contagion; and
- notes that the Communication does not deal with
levies or taxes which aim to recoup public funds committed during
the crisis, or to tackle excessive risk-taking or speculative
activity.
70.3 The Communication covers four key themes:
- an EU approach to bank resolution
funds;
- financing bank resolution funds;
- scope and potential size of funds; and
- governance of bank resolution funds.
On an EU approach to bank resolution funds the Commission:
- proposes that, as a first step,
Member States should establish a system based around a harmonized
network of national funds linked to a set of coordinated national
crisis management arrangements;
- suggests these arrangements be seen as a first
step and be reviewed by 2014 with the aim of creating EU integrated
crisis management and supervisory arrangements, as well as an
EU Resolution Fund in the longer term;
- asserts that failure to adopt an EU approach
on bank resolution funds could result in the unilateral imposition
of domestic levies and thus risk competitive distortions between
national banking markets and potentially lead to overlapping of
levies for cross-border banks; and
- asserts that different approaches to private
sector financing mechanisms may create obstacles to efficient
handling of crises or use of resolution tools and may render agreement
on the sharing of costs more complex, if not impossible.
70.4 On financing bank resolution funds the Commission
believes ex-ante levies could be based on several indicators
of bank risk, such as assets, liabilities, profits and bonuses
— on balance it feels that liabilities would be more appropriate
in determining the amounts that may be needed to resolve a bank.
For the scope and size of fund expenditure the Commission proposes
that the levy should apply to banks and investment firms. But
it does not take a firm position on the target size for funds,
noting that they should be designed in the context of other planned
regulatory reforms affecting the financial sector. On governance
of bank resolution funds the Commission proposes that they should
remain separate from the national budget and be dedicated only
to resolution costs. And it will make further proposals on how
coordination between funds, in a cross-border resolution scenario,
would work in practice.
70.5 The Commission intends to publish a Communication
in Autumn 2010, which will set out concrete policy options on
crisis management, including funding options, and expects to propose
legislation for crisis management and resolution funds in early
2011.
The Government's view
70.6 The Financial Secretary to the Treasury (Mr
Mark Hoban), noting that this document is closely linked to work
flowing from the Commission's Communication, An EU framework
for cross-border crisis management in the banking sector,
says on wider crisis management policy, that the Government:
- welcomes the Commission's efforts
to ensure that all Member States can coordinate actions and have
the appropriate tools for intervening quickly to avert or manage
the failure of a bank;
- supports, therefore, measures
that ensure Member States have minimum resolution toolkits to
reduce the cost of failure;
- advocates firm-specific recovery and resolution
plans, as a means of enabling supervisors to better understand
large and complex firms and identify in advance potential barriers
to resolution;
- holds that 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;
- holds that it is important that EU proposals
facilitate rather than hinder appropriate action by national authorities;
and
- awaits the Commission's forthcoming Communication,
in Autumn 2010, on crisis management for further detail on the
Commission's plans.
70.7 Turning to resolution funds, the Minister says
that the Government has a number of concerns about the Commission's
plans to establish a network of national resolution funds in the
EU. He comments that the Government:
- believes that establishing
resolution funds will reinforce the "too important to fail"
problem and entrench moral hazard in countries with global banks;
- thinks it would be difficult as things stand
in practice not to use funds to protect creditors, that is, for
bail-outs, as Member States need to do further work to strengthen
their resolution regimes and toolkits;
- notes, that although the Commission links the
discussion on bank levies directly with the objective of establishing
ex-ante resolution funds, the current EU and international
debate on bank levies is actually cast more widely, with other
equally relevant objectives for and opinions on the role of bank
levies that merit further and more serious consideration;
- believes it is important that EU consensus on
levies is consistent with discussion at the international level,
given that many major EU banking groups are global in reach;
- believes a network of national resolution funds
should be seen as part of a wider package of options for reform
of financial regulation, has urged the Commission to link the
analysis on resolution fund costs with the wider cumulative impact
assessment of all regulatory reforms;
- has pledged to introduce a bank levy, and indicated
that proceeds will go into general taxation, while noting that
the destination of proceeds in other countries is a matter for
them to determine, given that fiscal responsibility ultimately
lies with Member States with accountability to national parliaments;
and
- intends to continue to advance these arguments
in both European and international fora as this debate develops.
70.8 The Minister tells us also that the responsible
UK authorities — the Bank of England, the Financial Services
Authority — wrote to the Internal Market and Services Commissioner
on 9 June 2010 offering opinions and expressing technical concerns
in relation to the Commission's proposals for a network of national
resolution funds. He comments that, given the fast moving pace
of the EU debate on resolution funds and the speed with which
the Commission wanted to invite ECOFIN and European Council endorsement
of its ideas ahead of the Toronto G20 meetings on 26-27 June 2010
and despite lack of time for a full discussion, the Government
felt it was necessary to submit this joint letter then. It was
intended to ensure the UK authorities had an opportunity to maximise
influence on this discussion at an early stage given the importance
of these issues to the programme of financial regulatory reform
at domestic, EU and international level.
Conclusion
70.9 The Commission's developing ideas on bank
resolution funds are important, and in some aspects unwelcome.
So, whilst we clear this document, it is likely that we will in
due course recommend the Commission's forthcoming Communication,
on concrete policy options on crisis management, including funding
options, and any proposed legislation for crisis management and
resolution funds, for debate.
302 (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
303
(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 Stg Co Debs, European Committee B, 2 March 2010, cols.
3-20. Back
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