European Scrutiny Committee Contents

70 Financial services: bank resolution funds



COM(10) 254

Commission Communication: Bank resolution funds

Legal base
Document originated26 May 2010
Deposited in Parliament2 June 2010
DepartmentHM Treasury
Basis of considerationEM of 14 June 2010
Previous Committee ReportNone
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionCleared


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.


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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2010
Prepared 22 September 2010