Banking Reform Bill Bulks Up

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:
  1. 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
  2.  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
  3. a decision notice is then issued, which may be appealed before a Tribunal
  4.   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:

  1. the regulator must determine that the bank is failing or is likely to fail
  2. it is not likely that any other action can avoid the failure
  3. 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.

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EU Council Proposal Highlights Future Direction of RRD

Introduction

On 20 June 2013, the Presidency of the Council of the EU published a note on the current “state of play” with respect to the Recovery and Resolution Directive (RRD), together with a compromise RRD proposal.  It also invited the EU Council to agree the compromise and mandate the Presidency to undertake negotiations with the EU Parliament with a view to reaching an agreement on the RRD as soon as possible.

The “state of play” summary focuses on the need to achieve an optimal balance between three interlinked elements of the RRD, dubbed the “Resolution Triangle”:

  • the design of the bail in tool;
  • minimum requirements for own funds and eligible liabilities (MREL); and
  • financing arrangements.

The Presidency has proposed a “mixed approach” to each ‘angle’ of the triangle, as set out below.

The Design of the Bail-in Tool (Article 38)

The Presidency is seeking to strike a balance between harmonisation and flexibility with respect to bail-in, proposing:

  • a limited discretionary exclusion for derivatives – this would only apply in particular circumstances and only where necessary to achieve the continuity of critical functions and avoid widespread contagion; and
  • a power for resolution authorities, available in extraordinary circumstances and limited to an amount equal to 2.5% of the total liabilities of the institution in question, to exclude certain other liabilities from bail-in where it is not possible to bail them in within a reasonable time, or for financial stability reasons.

Minimum Requirements for Own Funds and Eligible Liabilities (Article 39)

In recognition of the general consensus around the need for adequate MREL, but in an effort to marry the need for harmonisation in this area with the practical difficulty of defining an appropriate level of MREL (particularly with respect to different banking activities and different business models), the Presidency proposes that the MREL of each institution should be determined by the appropriate resolution authority on the basis of specific criteria, including:

  • its business model;
  • level of risk; and
  • loss absorbing capacity.

The concept of a minimum percentage of MREL for global SIFIs will not be pursued.

Financing Arrangements (Articles 92 and 93)

The key features of the Presidency proposal in this area are that:

  • Member States should be free to keep Deposit Guarantee Schemes (DGS) and resolution funds separate or to merge them; and
  • a resolution fund should have a minimum target level of:
    • 0.8% of covered deposits (and not ‘total liabilities’ of a Member State’s banking sector as suggested by some Member States) where kept separate from the DGS, or
    • 1.3% where combined with the DGS.

Other Issues

The Presidency proposes to maintain the current 2018 date for the introduction of bail-in, rather than bring that date forward to 2015 as suggested by some Member States.

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.

RRD to be finalised in Q2 2013

On 15 March 2013, the EU Council published the conclusions of its meeting held on 14 to 15 March.  Among the many issues discussed, the following are particularly relevant to the banking sector:

  • finalisation of the legislative process on the Single Supervisory Mechanism within the coming weeks is a priority;
  • agreement of the Bank Recovery and Resolution Directive (RRD) and Deposit Guarantee Scheme Directive must be achieved before June 2013; and
  • a legislative proposal on the Single Resolution Mechanism is to be submitted by the EU Commission by summer 2013 with the intention of adopting it during the current parliamentary cycle.

The Phantom of Banking Union

This is a link to an excellent opinion piece in the FT on the recent announcement regarding EU banking union.

The first steps towards banking union announced last week were widely lauded as representing a significant in-principle agreement.  The truth is that this principle was agreed two years ago.  Unfortunately, what happened last week was a failure of the political process to deliver the results logically required by the economic reality in Europe.

RRD to be agreed by June 2013

On 14 December 2012, the European Council published its conclusions regarding the steps necessary to complete economic and monetary union (EMU).  These include:

  • the need for the rapid adoption and implementation of the single supervisory mechanism (SSM);
  • the agreement on the terms of the Recovery and Resolution Directive (RRD) and the Deposit Guarantee Schemes Directive by June 2013; and
  • the rapid follow-up to the proposals of the Liikanen Group.

First Steps Towards Banking Union Agreed…

…with respect to 200 banks.

As the FT reported today, eurozone finance ministers agreed a plan for a common bank supervisor in the early hours of this morning.  Beginning in early 2013, the ECB will take responsibility for the supervision of banks – but only those having assets of more than €30bn, or representing more than a fifth of a state’s national output.  In addition, there are no explicit provisions governing timeframes in which the ECB is to assume responsibility for the EU’s biggest banks.

The single supervisor is seen as the first, and easiest, step in the three-stage process which will lead towards EU banking union, the other stages being the creation of a EU-wide common deposit guarantee scheme and a single European recovery and resolution framework.  An inability to confidently take this first step does not bode well for the future.  If banking union is to mean anything is must surely create a level playing field, not the two-tier regime threatened by the current political fudge.