5 Financial services: recovery and
resolution
| (a)
(34012)
11066/12
+ ADDs 1-2
COM(12) 280
(b)
(34560)
17849/12
—
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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)
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| Legal base | (a) Article 114 TFEU; co-decision; QMV
(b) —
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| Document originated | (b) 29 November 2012
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| Deposited in Parliament | 18 December 2012
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| Department | HM Treasury
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| Basis of consideration | (a) Minister's letter of 26 January 2013
(b) EM of 9 January 2012
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| Previous Committee Reports | (a) HC 86-vii (2012-13, chapter 7) (4 July 2012)
(b) None
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| Discussion in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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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
Ibid. Back
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