SRM- Mexican standoff Euro-style

The Conference of Presidents Group have held intensive talks with their EP negotiators on the state of SRM play. The result is firmly-worded missive sent today from their own current President, Martin Schulz, to Commission President Manuel Barroso, summary translations in bold italic: Continue reading

RRD Compromise Text Published

On 22 December 2013 the Council of the EU published a note attaching the final compromise text of the proposed Recovery and Resolution Directive (RRD) agreed with the European Parliament.  Agreement in trialogue had previously been reached on 11 December 2013.

On 20 December 2013, the Permament Representatives Committee (COREPER) of the Council of the EU also published a press release confirming that it had approved (on the Council’s behalf) the compromise text agreed with the Parliament.  The text of the RRD now needs to be formally adopted by the EU Parliament and the Council.

Single Resolution System- closer to being resolved

MEP’s voted on the 17th to establish their position on critical details of the single resolution system. During yesterday’s Parliamentary hearing, ECB President Mario Draghi said, Continue reading

EU Banking Reform Legislation Expected January 2014

On 11 December 2013, the European Commission published a press release containing remarks made by Michel Barnier, European Commissioner for Internal Market and Services on EU banking structural reform.  Mr Barnier stated that the legislative proposal on EU banking reform will be presented at the beginning of January 2014.  Following the recent publication of the Volcker Rule on 10 December 2013, the Commission will also look at the details of this new rule (see this blog post for more details).  For certain banks deemed too big to fail, he explained that the EU banking reform proposal will consider separation, calibration and treatment of the risks taken by these banks.

Trilogue Agreement Reached on RRD

On 12 December 2013, the European Commission published a press release announcing that on 11 December 2013, Parliament and Council Presidency negotiators reached political agreement in trilogue on the proposed Recovery and Resolution Directive (RRD). The Directive will enter into force on 1 January 2015 and will introduce the bail-in principle which will apply from 1 January 2016. The Directive now needs official approval by the Parliament and Council of the EU at first reading. Continue reading

ECB President on SSM

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

ECB thumbs up for the SRM

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.

Council Deals Blow to SRM

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.

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.

RRD Pushed Back Yet Again

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.