Thirtieth Report of Session 2012-13 - European Scrutiny Committee Contents


5   Financial services: recovery and resolution

(a)

(34012)

11066/12

+ ADDs 1-2

COM(12) 280

(b)

(34560)

17849/12


Draft Directive establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010

European Central Bank Opinion on a draft Directive establishing a framework for the recovery and resolution of credit institutions and investment firms (CON/2012/99)

Legal base(a) Article 114 TFEU; co-decision; QMV

(b) —

Document originated(b) 29 November 2012
Deposited in Parliament18 December 2012
DepartmentHM Treasury
Basis of consideration(a) Minister's letter of 26 January 2013

(b) EM of 9 January 2012

Previous Committee Reports(a) HC 86-vii (2012-13, chapter 7) (4 July 2012)

(b) None

Discussion in CouncilNot known
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested

Background

5.1  The 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.[32] A second Communication: Bank resolution funds, 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.[33] In a third Communication: An EU framework for crisis management in the financial sector, published in October 2010, the Commission outlined the main elements of a new EU framework on prevention, crisis management and resolution that would form the basis of a legislative proposal it was expecting to put forward by June 2011.[34]

5.2  In June 2012 the Commission presented this draft Directive, document (a), for the recovery and resolution of credit institutions and investment firms with a client asset base of at least €730,000 (£584,000), referred to in this chapter as "institutions", and financial holding companies, referred to in this chapter, together with institutions, as "financial institutions". The draft Directive, based on minimum harmonisation, would:

  • apply to national and EEA financial institutions;
  • require Member States to ensure that their national supervisory and resolution authorities have a minimum set of common tools and powers which would enable them to avert and, where necessary, manage the orderly failure of a financial institution;
  • give Member States' resolution authorities powers to resolve branches of institutions based in third countries in certain circumstances; and
  • provide an underpinning for improved cooperation and coordination between relevant Member State supervisory and resolution authorities.

5.3  The proposals in the draft Directive, taken together, seek to preserve financial stability, limit taxpayer exposure and improve the functioning of the single market, reducing moral hazard and perceptions of an implicit state guarantee for financial institutions. It covers the following areas:

  • recovery and resolution planning;
  • preventative powers;
  • early intervention;
  • resolution;
  • cross-border group treatment, relations with third countries and the role of the European Banking Authority (EBA); and
  • financing arrangements.

5.4  When we considered this proposal, in July 2012, although we heard that the Government broadly welcomed the Commission's draft Directive, we also learnt of a number of issues in the text on which the Government had reservations. So we asked, before considering the proposal again, to hear about the Government's further consideration of the draft Directive and developments in negotiation of the proposal by the Council. Meanwhile, the document remained under scrutiny.[35]

The new document

5.5  In this Opinion, document (b), the European Central Bank (ECB) says that:

  • it fully supports the development of a recovery and resolution framework and the removal of obstacles to effective crisis management at financial institutions, noting that all financial institutions should be allowed to fail in an orderly manner, safeguarding the stability of the financial system as a whole and minimising public costs and economic disruption;
  • for this purpose the development of common support tools to manage the failure of financial institutions — such as recovery and resolution plans, bridge bank, bail-in, sale of business and asset separation tools — is crucial;
  • it welcomes that these proposals are developed in line with the internationally agreed key attributes of effective resolution regimes for financial institutions;[36] and
  • it calls for the rapid adoption of the Directive.

5.6  The ECB's specific observations are that:

  • on resolution aims, the proposed Directive should clarify that the aim of resolution is not to preserve financial institutions as such, but to ensure the continuity of their essential functions;
  • on conditions for resolution, the responsibility for determining whether an institution is failing or likely to fail should be allocated to the competent authority and that determination should be based only on an assessment of the prudential situation of an institution;
  • on involvement of central banks, where the central bank is not itself the resolution authority, the competent authority and the resolution authority should engage in an adequate exchange of information with the central bank;
  • on intra-group financial support, implementation of these voluntary agreements into national legal systems may be problematic — further reflection may be needed on whether additional provisions are warranted to ensure the legal certainty and enforceability of intra-group transactions;
  • on bail-in, it welcomes the development of a bail-in to absorb losses, notes the bail-in mechanism should be designed to be in line with internationally agreed key attributes of effective resolution[37] and supports introduction of bail-in from 2018 at the latest;
  • on resolution financing, it welcomes that the proposed Directive enables authorities to put the burden of resolution financing on an institution's shareholders and creditors, suggests that there is benefit to additional resolution financing sources, but takes the view that the proposal to set up a EU system of financing arrangements is ambitious and will not solve important cross-border resolution issues, such as coordination and burden sharing; and
  • on the use of deposit guarantee schemes in resolution financing, suggests that the proposed Directive should more clearly define the role of deposit guarantee schemes in resolution financing and should not compromise the core function in protecting covered deposits, notes that it would require Member States to ensure that, under national law governing normal insolvency proceedings, deposit guarantee schemes rank pari passu with unsecured non-preferred claims, indicates that this is inconsistent with allowing Member States to establish depositor preference for deposits covered by deposit guarantee schemes and notes that six Member States have already established such a regime.

The Government's view of the new document

5.7  In his Explanatory Memorandum the Financial Secretary to the Treasury (Greg Clark) says that the Government broadly welcomes the ECB's opinion on the proposed Directive. Reminding us that the Government takes the view that this proposal should contribute towards reducing reliance on public support when a financial institution fails and help break the self-perpetuating link between the banking and sovereign crises, the Minister comments that:

  • it is essential that all Member States equip their authorities with a common set of credible tools and powers to avert, and where necessary, manage the failure of a systemic institution in an orderly manner, especially in a cross-border context;
  • the Government supports the inclusion in the draft Directive of recovery and resolution planning provisions and so welcomes the ECB's endorsement of the development of common support tools to manage the failure of financial institutions;
  • the Government is, however, still carefully considering the implications of the proposed intra-group financial support provisions and notes the ECB's view that these arrangements may be difficult to implement;
  • the Government supports the proposed set of minimum resolution tools, in particular bail-in, to allow resolution authorities to manage the failure of a financial institution in an orderly manner and it welcomes the ECB's endorsement of the bail-in tool;
  • the Government considers that Member States should have appropriate resolution financing mechanisms and shares the ECB's opinion that resolution costs should in principle be borne by shareholders and creditors; and
  • it shares the ECB's assessment that the proposed Directive is inconsistent with allowing Member States to prefer covered deposits under their national insolvency law.

The Minister's letter

5.8  With his letter the Minister responds to our request of July 2012 for information about the Government's considered view of the draft Directive, document (a), and developments in negotiation of the proposal. He first draws our attention to the December 2012 European Council urging the Council and the European Parliament to agree on a Recovery and Resolution Directive before June 2013 and says this remains a priority piece of legislation, which the Government understands the Irish Presidency is looking to push forward in the first quarter of 2013. The Minister then gives us an update on key elements of the draft Directive, as follows.

Planning, preventative powers and early intervention tools

5.9  The Minister says that:

  • the Government has continued to support the proposed recovery and resolution planning provisions, as well as the proposed preventative powers to remove identified impediments to resolution, as these are key foundations for any recovery and resolution framework; and
  • it has, however, continued to question the need for some of the early intervention tools (intra-group financial support and special manager) and has raised concerns that their use may actually lead to greater distress within the financial institution facing financial difficulty.

Resolution tools

5.10  The Minister tells us that:

  • the Government has broadly welcomed the proposed set of resolution tools, including the bail-in tool, to allow resolution authorities to manage failure of a systemic financial institution in an orderly manner;
  • it has been working with EU partners to ensure that the resolution tools are usable, based on its recent experience of resolving financial institutions and that the design of the bail-in tool is credible; and
  • there is general support for the inclusion of the tools in the Directive, but there are still technical challenges to overcome.

Role of the European Banking Authority (EBA)

5.11  The Minister says that:

  • Member States, including the UK, have been carefully considering the proposed provisions that extend the EBA's role into resolution, as well as whether the proposed EBA binding technical standards (BTSs) go beyond that necessary to enhance the single market (that is, the principle of proportionality); and
  • Member States are also evaluating whether some of the proposed BTSs should be removed, or where the provision relates to firm specific action, whether EBA guidance might be more appropriate.

Depositor preference

5.12  The Minister continues that:

  • the Commission proposes to rank the UK's Deposit Guarantee Schemes pari passu with unsecured non-preferred claims in insolvency;
  • this would limit any benefits that depositor preference would be able to provide (for example, reducing state liability during resolution); and
  • the Government understands that there are a number of Member States that have also already introduced depositor preference to a varying degree and it is seeking to better understand their negotiating position.

Resolution financing

5.13  The Minister says that:

  • the Government remains concerned that a resolution fund, which would be established under the European System of Financing Arrangements provisions of the draft Directive, would generate moral hazard and undermine the credibility of the resolution tools, including bail-in; and
  • it considers that the Commission's proposal to oblige Member States to lend to each others' resolution funds, as well as its proposal to mutualise the cost associated with resolving a cross-border group could have significant fiscal risks.

Conclusion

5.14  We are grateful to the Minister for the information he gives us about the draft Directive and his comments on the ECB views of the proposal. We note that there are, in the Government's view, a number of issues, some relevant to the ECB views, which may be disadvantageous for the UK or for the effective operation of recovery and resolution and which are yet to be addressed in Council working group negotiations. We are also aware that there is concern that the period to be allowed for transposition of the bail-in provisions is too long. So before considering the proposal again we should like to hear about further developments on these various issues in negotiation of the proposal by the Council. Meanwhile, the documents remain under scrutiny.




32   (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

33   (31646) 10394/10: see HC 428-i (2010-12), chapter 70 (8 September 2010). Back

34   (32108) 15375/10: see HC 428-viii (2010-12), chapter 14 (17 November 2010). Back

35   See headnote. Back

36   See the Financial Stability Board's 'Key Attributes of Effective Resolution Regimes', available at http://www.financialstabilityboard.org/publications/r_111104cc.pdf. Back

37   IbidBack


 
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