EU Banking Union in the Balance?

If it were needed, proof positive once again that politics and economics don’t always mix is this link to an article published today in the FT.  It discusses the split developing within the EU between Brussels, Paris and the European Central Bank (ECB) on one hand, and Germany on the other.  The subject of the split is the future direction of EU banking union, specifically the design of the Single Resolution Authority, which together with the Single Supervisory Mechanism and the Common Deposit Guarantee Scheme, represents the three pillars of EU banking union.

The article describes the “German vision” for banking union – one of gradual integration where Member States remain largely responsible for supervision (albeit with coordination between national authorities) and wholly liable for costs (so as to protect the German taxpayer).  This contrasts with the EU vision for banking union which demands the creation of a centralised “heavyweight bank executioner” and implies a surrender of sovereignty with which Germany is uncomfortable.

If one considers that a single EU authority is a necessary step in relation to the supervision of credit institutions from birth and throughout life, it seems logical to conclude that a single authority should also govern them in their death.  Despite this, apparently logic has no place in this discussion and no compromise is in sight.  Add to this the fact that reformers are up against the deadlines of looming elections in Germany and at an EU level as well as a change of commission and EU banking union seems to be as far away as ever.

EU Council publishes final compromise SSM text

On 25 April 2013, the Council of the EU published the final compromise texts of a regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and the proposed regulation amending Regulation 1093/2010 (which established the European Banking Authority).  Together these texts establish the EU single supervisory mechanism (SSM).

Broadly, under the new regime, the European Central Bank (ECB) will assume responsibility for the supervision of “significant” credit institutions, with “less significant” credit institutions to remain subject to regulation by national supervisors.  “Significance” is to be based on the following criteria:

  • size;
  • importance for the economy of the EU or any participating Member State; and
  • significance of cross-border activities.

In addition, any credit institution will be regarded as “significant” if:

  • it has total assets of EUR 30 billion or more; or
  • the ratio of its total assets to the GDP of the participating Member State of establishment exceeds 20% (unless the total value of its assets is below EUR 5 billion); or
  • the ECB considers it to be of significant relevance; or
  • it has requested or received public assistance directly from the European Financial Stability Facility or the European Stability Mechanism;
  • it ranks amongst the three most significant credit institutions in a participating Member State.

The ECB will assume responsibility for, inter alia:

  • authorisations and withdrawal of authorisations;
  • the administration of certain activities currently carried out by home state regulators, such as the establishment of branches in non-participating Member States;
  • the assessment of applications for the acquisition and disposal of “qualifying holdings” (i.e. involving 10% or more of capital or voting rights);
  • the regulation of own funds requirements, securitisations, large exposure limits, liquidity, leverage, and reporting and public disclosure of information on those matters;
  • the enforcement of governance arrangements, risk management processes, internal control mechanisms, remuneration policies and internal capital adequacy assessment processes;
  • conducting supervisory reviews and stress testing;
  • consolidated supervision where parent companies are established in participating Member States; and
  • supervisory tasks in relation to recovery plans, early intervention and structural changes required to prevent financial stress or failure (but excluding any resolution powers).

Consideration of RRD Delayed Again

On 25 April 2013, the EU Parliament published an update to its procedure file confirming that its consideration of the Recovery and Resolution Directive (RRD) will now take place at the plenary session scheduled for 21 to 24 October 2013.  Previously it had been indicated that the RRD would be discussed at the plenary session to be held from 9 to 12 September 2013.

FCA Update on RRP and CASS

On 26 April 2013, the FCA published Policy Development Update No 157.  This summarises the anticipated publications dates for various pieces of regulatory guidance.  Of note are the following:

  • a policy statement (PS12/5) to CP11/16 on recovery and resolution plans, due for publication in Q2 2013;
  • a policy statement to part 2 of CP12/22 on the client assets regime (multiple client money pools), due for publication in Q2 2013 (had previously been noted as “TBD”); and
  • a policy statement to CP12/20 on client money rules for insurance intermediaries, due for publication in Q3/Q4 2013.

HM Treasury to Extend Special Administration and Resolution Regimes

On 25 April 2013, HM Treasury published a consultation paper on the introduction of a Special Administration Regime (SAR) for inter-bank payment systems (such as Bacs, CHAPS, Continuous Linked Settlement, CREST, LCH Clearnet Ltd, Faster Payments Service and ICE Clear Europe), operators of securities settlement systems (CREST being the only example in the UK) and key service providers to these firms (e.g. IT and telecommunications providers).  Responses are requested by Wednesday 19 June 2013.

The SAR would be a variant of a normal corporate administration and would be modelled on the special administration framework used in the utilities industries and the investment bank SAR.  However, it would be modified to allow the Bank of England to exercise control of the SAR process, to enable a special administrator to transfer all or part of the business to an aquirer on an expedited basis, and to facilitate the enforcement of restrictions on early termination of third party contracts.  Under the SAR, the special administrator would have the overarching objective of maintaining the continuity of critical payment and settlement services in the interest of UK financial stability. “Non-CCP FMI”, such as exchanges and trade repositories, and entities already covered by resolution powers for central counterparties (such as LCH and ICE) would be excluded from the regime.

On 25 April 2013, HM Treasury also published a statement confirming the fact that, before the end of the summer, it will consult on the extension of the special resolution regime (SRR) established under the Banking Act 2009 to group companies, investment firms and UK clearing houses.

US “megabanks”: Too-big-to-fail or just too big to survive?

This is a link to an article which appears in yesterday’s FT which describes a bill introduced into Congress by Sherrod Brown (Democrat) and David Vitter (Republican) under which banks with more than USD 500 billion in assets would be required to meet a new capital requirement of 15%.  At this stage, it seems that the prospects of the bill becoming law are slim, but ultimately only time will tell.

HM Treasury Accepts Initial Report on Investment Bank SAR

On 23 April 2013, HM Treasury published the initial report prepared by Peter Bloxham on the special administration regime for investment banks (SAR).  The independent review makes a number of immediate recommendations, which include:

  • The SAR should continue to have effect; 
  • The introduction of a mechanism to facilitate the rapid transfer of customer relationships and positions, where feasible; 
  • The bar date mechanism should be broadened to include client monies; 
  • The statutory objective in relation to client assets should be modified to include a reference to the “transfer” of assets to another institution in addition to the option of the “return” of client assets; 
  • SAR administrators should be permitted to make distributions of client assets during the period after the bar date process has commenced; 
  • Limited specific immunities to be introduced for SAR administrators; 
  • Good practice recommendations for firms, the FSA, and other institutions;
  • A number of recommendations relating specifically to the work of the Financial Services Compensation Scheme (FSCS).

The report also sets out further areas to be reviewed as part of a second phase of work which will be co-ordinated with the FSA’s review of its Client Assets Rulebook.  A final report is expected by the end of July 2013.  

HM Treasury made a further announcement in a written statement to the House of Commons on 23 April 2013, accepting the main recommendations of the report.  The Treasury agrees that SAR should be retained and accepts that amendments to that regime will be necessary in order to fulfil its objectives.