On 5 December 2012, the European Central Bank (ECB) published its opinion on the EU’s draft directive establishing a framework for recovery and resolution of credit institutions and investment firms (the “Recovery and Resolution Directive” or “RRD”).
In general, the ECB fully supports the RRD, welcomes the fact that it is in line with the FSB’s “Key Attributes” document and believes that it should be adopted rapidly. It also encourages the EU to take further steps to implement an independent European resolution mechanism, which it views as one of the three banking union pillars. Beyond clarifying its general position, the ECB also made a number of more specific observations, a summary of which are provided below.
Definition of resolution
The ECB notes that “resolution” under the RRD involves, inter alia, restoring the viability of all or part of a failing institution. However, it is of the opinion that, if there is no public interest element to a proposed resolution action, the institution in question should not be resolved as a going concern and instead should be liquidated under normal national insolvency law. As such, the ECB is of the view that the RRD should be amended to clarify that the aim of resolution is not to preserve a failing institution, but to ensure the continuity of its essential functions.
Resolution conditions and the need for extraordinary financial public support
In the interests of “prompt and efficient resolution action”, the ECB believes that the relevant competent authority should have responsibility for determining whether an institution is failing or likely to fail (and thus has triggered the conditions for resolution). Moreover, this determination should be based solely on an assessment of the situation of the institution in question. It should not be based on an institution’s particular need for State aid, although the circumstances surrounding any grant of State aid would be relevant in assessing the institution’s general situation.
Involvement of central banks in recovery and resolution
In recognition of the role of central banks in promoting macro-prudential and financial stability, the ECB recommends that, where a central bank is not itself the resolution authority, the relevant competent authority and resolution authority engage in an “adequate exchange of information” with the central bank.
With respect to the use of the bridge institution and asset separation tools, the ECB believes that the RRD should clarify the fact that, where a central bank acts as a resolution authority, it will not assume any financing obligations with respect to either the bridge institution or the asset management vehicle created pursuant to the asset separation tool.
Involvement of national designated authorities in assessment of recovery plans
The ECB recommends that, when assessing recovery plans, competent authorities consult with competent national designated authorities (to the extent that they are separate entities).
Intra group financial support
The ECB considers that further investigation may be required into whether additional provisions are necessary in order to ensure the legal certainty and enforceability of voluntary intra-group financial support arrangements.
The bail-in tool and write down powers
The ECB believes that bail-in should be used predominantly for the resolution of institutions that have reached a point of non-viability. Any use of the tool to restore a failing institution to the position of a going concern should only be considered in “exceptional and justified” circumstances.
The ECB also notes that the RRD requires the European Banking Authority (EBA) to report to the EU Commission on the implementation of the requirement for institutions to maintain an aggregate amount of own funds and eligible liabilities expressed as a percentage of total liabilities. The ECB believes that further investigation, together with an impact assessment, should be conducted as to whether the minimum requirement should be expressed as a percentage of total liabilities or as a percentage of risk weighted assets – it being thought that the latter may represent a better measure of the riskiness of the assets of the institution in question.
The ECB further recommends that the EBA conduct an assessment of whether it would be beneficial to introduce a prohibition or limitation on the banking sector’s ability to hold instruments which are eligible for bail-in. It also suggests amending Article 38(2) of the RRD to make clear that all liabilities to members of the European System of Central Banks (ESCB) are explicitly excluded from the application of the bail in tool, on the basis that EXCB members are public bodies whose basic tasks require them to have exposures to institutions.
Financing of resolution
The ECB is concerned that the proposal to set up a European system of resolution financing arrangements will not solve all cross-border resolution issues. In particular, the current proposal for 27 national arrangements which can borrow from, and lend to, each other suffers from a lack on clarity with respect to details such as the rights and obligations of lenders and borrowers.
Deposit guarantee schemes (DGS)
The ECB supports the proposal that any available resources of a DGS should be available to finance resolution, but warns that this should not be allowed to compromise the core DGS function i.e. the protection of insured deposits.
In contrast to the proposed RRD, which requires Member States to ensure that DGS rank pari passu with unsecured non-preferred claims under national insolvency law, the ECB recommends that Member States should be allowed to establish preferential ranking of claims that the DGS has acquired by subrogation (i.e. after having paid out the amount corresponding to covered deposits). This, it believes, would help ensure that sufficient funding is always available to the DGS.
Disclosure of marketing materials
The RRD currently allows for a delay in publication of any public disclosure regard the sale of any part of an institution under resolution. The ECB recommends extending this power to facilitate a delay in the publication of any price sensitive information relating to publicly traded financial instruments of the institution under resolution.
Further harmonisation of recovery and resolution rules
The ECB supports the development of a recovery and resolution framework for systemically important non-bank financial institutions e.g. insurance companies and market infrastructures.