15 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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| Department | Treasury
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| Basis of consideration | Minister's letter of 17 May 2013
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| Previous Committee Reports | (a) HC 86-vii (2012-13), chapter 7 (4 July 2012) and HC 86-xxx (2012-13), chapter 5 (30 January 2013)
(b) HC 86-xxx (2012-13), chapter 5 (30 January 2013)
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| Discussion in Council | Possibly 21 June 2013
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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
15.1 The financial crisis and, in particular, the high profile
banking failures revealed serious shortcomings in the existing
crisis management arrangements. Amongst its responses the Commission
proposed, in June 2012, 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 (£616,000),
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.
15.2 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.
15.3 In January we considered this proposal for
a second time, together with this Opinion from the European Central
Bank (ECB), document (b), published in November 2012. We recalled
that the Government broadly welcomed the Commission's draft Directive.
But we noted that:
- there were, in the Government's
view, a number of issues, some relevant to the ECB views, which
might be disadvantageous for the UK or for the effective operation
of recovery and resolution and which were yet to be addressed
in Council working group negotiations; and
- we were also aware that there was concern that
the period to be allowed for transposition of the bail-in provisions
was too long.
15.4 So we asked to hear, before considering
the proposal again, about further developments on these various
issues in negotiation of the draft Directive by the Council.
Meanwhile, the documents remained under scrutiny.[29]
The Minister's letter
15.5 The Financial Secretary to the Treasury
(Greg Clark) now says that:
- the Government thinks that
the Irish Presidency is likely to aim to reach a general approach
on the proposals at the ECOFIN Council on 21 June;
- while achievable, this goal is ambitious as there
are a number of outstanding issues where compromises still need
to be reached; and
- given the anticipated timetable, he hopes his
update will be sufficient to enable us to clear the draft Directive
from scrutiny.
15.6 In introducing detail of progress that has
been made on the main elements of the draft Directive the Minister
says that the Government has established constructive relationships
with the Presidency, other Member States and the Commission which
have helped to shape the proposals in a way that will enhance
the effectiveness of the recovery and resolution framework.
Recovery and resolution planning and preventative
powers
15.7 The Minister says that the Government has
continued to support inclusion of recovery and resolution planning
provisions, as well as the proposed preventative powers, and these
provisions are likely to be retained.
Early intervention
15.8 Reminding us that the Government had some
reservations about the implications of the Commission's proposed
intra-group financial support provisions and special manager tool,
the Minister tell us that, with the caveat that the negotiations
are still ongoing:
- the Government has considerable
support for securing secure appropriate safeguards, so that these
tools can operate without prejudice to any ring-fencing regime
that Member States might impose to enhance financial stability;
and
- it also has considerable support for its position
that the special manager tool would not be used on any institution
in the UK without the consent of UK authorities.
Resolution tools
15.9 Recalling that the Banking Act 2009 already
provides the Bank of England with the sale of business and bridge
institution tools and that in the 2012 Banking Reform White Paper
the Government outlined its preference for introducing a bail-in
tool through the draft Directive, the Minister says that:
- the Government therefore broadly
welcomed the Commission's proposed set of resolution tools;
- in particular, it has sought to ensure that the
bail-in tool is credible and effective across the EU, since this
is an important tool for the resolution of the most systemic banks;
- the Government takes the view that the EU bail-in
tool should provide national authorities with statutory bail-in
powers covering a broad scope of liabilities;
- this broad scope should be supplemented with
a Minimum Requirement for Eligible Liabilities, similar to the
Primary Loss Absorbing Capacity requirement recommended by the
Independent Commission on Banking (ICB); and
- while there are outstanding details relating
to the design of the bail-in tool still to be worked through,
in particular in relation to the degree of discretion available
to resolution authorities when they use it, the Government believes
that there is broad support for a credible bail-in tool.
Depositor preference
15.10 Noting that a key recommendation of the
ICB was implementation of insured depositor preference and that
the Commission's initial proposal would have prevented that, the
Minister comments that:
- there seems, however, to be
agreement amongst most Member States that insured depositors should
benefit from preference in the creditor hierarchy; and
- there is also a debate about whether preference
should be expanded to a broader set of depositors.
The role of the European Banking Authority (EBA)
15.11 The Minister says that Member States, including
the UK, continue to carefully consider the proposed role for the
EBA in the draft Directive and the issues remain under discussion.
The role of the EBA and the Commission in relation
to third countries
15.12 The Minister continues that the Government
has been carefully considering the implications of the proposed
roles for the EBA and the Commission in relation to Member States'
ability to establish appropriate cooperation arrangements with
third country authorities and that, at this stage of the negotiation,
it is hopeful of securing safeguards that will preserve sufficient
Member State competence in this area.
Resolution financing
15.13 Finally the Minister says that:
- resolution financing is proving
to be a challenging aspect of the negotiation;
- the issues are complex and the Government remains
sceptical about some aspects of the proposals; and
- it is, however, working to ensure a sensible
outcome that does not create moral hazard.
Conclusion
15.14 We note without surprise, as we would expect
no less, that the Government has "established constructive
relationships with the Presidency, other Member States and the
Commission".
15.15 Although the Minister gives us a helpful
account of where matters stand on this draft Directive, we do
not feel that we yet have sufficient assurance on the issues,
drawn to our attention previously, which may be disadvantageous
for the UK or for the effective operation of recovery and resolution.
Nor does the Minister address our point about whether the period
to be allowed for transposition of the bail-in provisions is too
long.
15.16 So, we do not wish yet to clear the draft
Directive from scrutiny. Rather, if the Irish Presidency decides
to try for a general approach at the 21 June ECOFIN Council, we
would like to have from the Minister before then a less tentative
account of improvements to the text of the proposals and a clear
statement as to the acceptability of the text to be proposed to
the Council.
15.17 Meanwhile, the documents remain under scrutiny.
29 See headnote. Back
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