Another speech on the Single Supervisory Mechanism (SSM) from the European Central Bank (ECB) this time by ECB President, Mario Draghi, titled “The future of Europe” was presented in Frankfurt on 22 November 2013. Continue reading
The ECB has published its legal opinion on the Single Resolution Mechanism (SRM), a short summary follows:
- The SRM should include all EU credit institutions
- Resolution should only be triggered by a supervisory assessment of “failing or likely to fail”
- The SRM should not require new legislation, Article 114 of the Treaty should suffice as a legal basis
- The ECB supports early implementation of the bail-in tool (currently 2018)
- Resolution financing must be provided by the Single Bank Resolution Fund. The ECB proposes a “temporary, fiscally neutral backstop” to the SBRF in the form of a credit line supplied by Member States, but recoupable from the financial industry
- The ECB seeks representation as an observer in all plenary and executive meetings of the Single Resolution Board
The opinion voices its full support for the SRM which it views as a necessary complement to the Single Supervisory Mechanism, although it considers it crucial that the responsibilities of supervisory and resolution authorities are kept distinct. The ECB regards a fully-functioning single supervisory mechanism as a vital precondition for the establishment of the SRM, it therefore strongly supports adoption of the SSM legislation during the Parliament’s current term. This being the case, the ECB voices its support for the SRM to become effective as of 1st January 2015.
The 32 page opinion contains little that is unexpected; it is notable though, for its bullish tone on scope and timing of implementation. Perhaps it may be unwise to rely on delay.
The Single Resolution Mechanism (SRM) proposed by the EU Commission in July has suffered a fresh blow (see this blog for SRM background). On 7 October 2013, an opinion from the European’s legal service sheds serious doubt on the legality of giving a new agency wide discretion to close troubled banks under EU treaties, potentially undermining a key element of the resolution proposal.
The 26-page document warns of the pitfalls involved in giving a body too many powers and in particular states that “The legal service considers that the powers which would be conferred by the proposal of the board…need to be further detailed in order to exclude that a wide margin of discretion is entrusted to the board”. The legal opinion may cause the EU Commission to rethink the proposal, causing more delays. The first stage of the proposal which involves the European Central Bank directly supervising 130 top euro zone lenders has already been delayed to the end of 2014. The SRM which forms one of the building blocks of the EU Banking Union now needs backing of member states to become law.
H.M. Treasury yesterday published 86 proposed amendments to the Banking Reform Bill. The bill is due to enter its committee stage in the House of Lords on the 8th October 2013. The proposed amendments were widely-flagged and broadly mirror the 11th March 2013 recommendations of the Parliamentary Commission on Banking Standards. Highlights are as follows:
- Payments: the introduction of a wholly new and distinct payment systems regulator, the intention being to stimulate competition by facilitating access to payment systems for new market participants, as well as decreasing the costs of account portability. A special administration regime to deal with cases where a key element in a payment fails or is likely to.
- Misconduct: an extension of the FSMA approved persons regime. If passed, the amendments will allow the regulators to: make the approval subject to conditions or time-limits, extend time limits for sanctions against individuals, impose “banking standards rules” on all employees , and to hold senior managers responsible for regulatory breaches in areas which they control. PCBS chairman Andrew Tyrie, (perhaps confusing Ford Open Prison with Guantanamo), had previously advocated putting “guilty bankers in bright orange jump suits”; as widely expected, the proposals introduce criminal sanctions for reckless misconduct in the management of a bank.
- Electrified ring-fence: proposed new powers to formalise and streamline the “electrification” power introduced at the Commons report stage. The electricity in the ring-fence is the regulator’s power to compel separation of a banking group which breaches the boundary between retail and investment banking. The effect of the new powers is to make the ring-fence into a “variable-voltage” device. Under the proposal, the regulator will:
- issue a preliminary notice, the affected party will have a minimum of 14 days to reply and 3 months to make necessary changes to its behaviour/structure
- failing this and with the consent of the Treasury, a warning notice will then be issued, itself triggering a minimum of 14 days for representations by the affected party
- a decision notice is then issued, which may be appealed before a Tribunal
- a final notice is issued which set s a dead line by which a bank must separate its activities
The whole process will take approximately 14 months and the various notices will be issued in accordance with general FSMA principles.
Bail-in: the introduction of a bail-tool as initially mandated by the European BRRD and recommended by the domestic ICB and PCBS. The Banking Act of 2009 will be amended to include a “stabilisation option” (bail-in), covering banks and investment firms and to be applied by the bank of England as lead resolution authority. The conditions for its use are identical to those of the Special Resolution Regime:
- the regulator must determine that the bank is failing or is likely to fail
- it is not likely that any other action can avoid the failure
- The BoE determines that application of the bail-in power is in the public interest
The bail-in option includes the right to modify existing contracts for the purpose of mitigating the liabilities of a bank under resolution. There are a number of liabilities which will be excluded from the provision: client money, FSCS protected deposits, employee pension schemes, payment system liabilities, debts to a creditor who is critical to the bank’s daily functioning etc.
In short- the electric ring-fence is reconnected to the mains and bail-in is set to become a reality. These and other less fundamental proposed amendments represent a significant extension of regulatory powers. It remains to be seen if they will be rigorously and consistently applied to their full extent.
On 20 September 2013, the EU Parliament updated its procedure file on the Recovery and Resolution Directive (RRD). It seems that the RRD proposal will now be considered at the Parliament’s plenary session scheduled for 3 to 6 February 2014, rather than the session scheduled for 18 to 21 November 2013, as was previously the case.
On 16 July 2013, the EU Presidency published a compromise proposal amending the EU Commission’s previous compromise proposal (dated 19 June 2013) relating to the Recovery and Resolution Directive (RRD).
As detailed in Annex 2 to the document, the main changes address issues such as:
- the scope of the bail-in tool; and
- resolution financing arrangements.
On 10 July 2013, the EU Commission proposed a Single Resolution Mechanism (SRM), a complement to the Single Supervisory Mechanism (SSM) and one of the building blocks of EU Banking Union. The SRM is designed to ensure that the resolution of a failing bank can be managed efficiently with minimal costs to taxpayers and the real economy.
The proposed SRM would apply the substantive rules of the Recovery and Resolution Directive (RRD). The EU’s Council of Finance Ministers reached agreement on a general approach to the RRD on 27 June and the EU Parliament’s Committee on Economic and Monetary Affairs adopted its report on 20 May. Negotiations between the Council and the European Parliament are due to start soon with the aim of reaching final agreement on the RRD in autumn 2013. At its recent meeting, the EU Council of Ministers set themselves the target of reaching agreement on the SRM by the end of 2013 so that it can be adopted before the end of the current European Parliament term in 2014. This would enable it to apply from January 2015, together with the RRD.
Under the SRM:
- the European Central Bank (ECB) would signal when a bank in the euro area or established in a Member State participating in the Banking Union was in severe financial difficulties and needed to be resolved;
- a Single Resolution Board, consisting of representatives from the ECB, the EU Commission and the relevant national authorities, would prepare the resolution of a bank;
- a Single Bank Resolution Fund, funded by contributions from the banking sector and replacing national resolution funds, would be set up under the control of the Single Resolution Board;
- on the basis of the Single Resolution Board’s recommendation, or on its own initiative, the EU Commission would decide whether and when to place a bank into resolution and would set out a framework for the use of resolution tools and the Single Bank Resolution Fund; and
- under the supervision of the Single Resolution Board, national resolution authorities would be in charge of the execution of a resolution plan.
On 3 July 2013, the EU Parliament updated its procedure file on the Recovery and Resolution Directive (RRD). It seems that the RRD proposal will not now be considered until the Parliament’s plenary session scheduled for 18 to 21 November 2013, rather than the session scheduled for 21 to 24 October 2013, as was previously the case.
On 27 June 2013, the EU Council published a press release confirming an agreed position with respect to the Recovery and Resolution Directive (RRD) and calling on the EU Presidency to start trilogue negotiations with the EU Parliament with a view to adoption of the RRD at first reading before the end of 2013.
The press release focuses on three areas:
- Resolution funds; and
- Minimum loss absorbing capacity.
It does not contain much in the way of detail beyond that widely reported over the last week. However, it is perhaps noteworthy that only inter-bank liabilities with an original maturity of less than seven days are to be excluded from the scope of the bail-in tool.