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

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.

Legislative Update

Recovery and Resolution Directive

On 29 May 2013, the Presidency of the EU Council published its latest Compromise Proposal with respect to the Recovery and Resolution Directive (RRD).  Additions to the original legislative proposal are underlined and additions to the most recent compromise proposal (dated 15 March 2013) are marked in bold.

EU Banking Union

On 30 May 2013, the EU Parliament updated its procedure file relating to the establishment of the single supervisory mechanism (SSM).  It now appears that the SSM proposal will be considered at the Parliament’s plenary session to be held from 9-12 September 2013 instead of the 20-23 May session, as had previously been the case.

Bail-In by 2016?

On 21 May 2013, the European Parliament’s Economic and Monetary Affairs Committee (ECON) published a press release detailing its negotiating position with respect to certain elements of the proposed Recovery and Resolution Directive (RRD).

The negotiation position was approved by 39 votes to 6 and states that:

  • the “bail-in” scheme should be operational by January 2016 at the latest;
  • insured deposits (i.e. those below EUR 100,000) can never be subject to bail-in;
  • uninsured deposits (i.e. those above EUR 100,000), can only be subject to bail-in “as a last resort”;
  • funds from deposit guarantee schemes will not be capable of being diverted in order to help pay for bank resolution measures;
  • taxpayer money can only be used to guarantee liabilities or assets, take a stake in a failing bank or institute temporary public ownership and only after all capital has been written down to zero and taxpayer intervention is necessary in order to:
    • prevent “significant adverse effects on financial stability”; or
    • protect the public interest;
  • bank-financed resolution funds must be established at a national level and must have a capacity equal to 1.5% of the amount of deposits of the participating banks within 10 years of the entry into force of the RRD; and
  • resolution funds will not be obliged to lend to each other.

The press release notes that the EU Council must now adopt its negotiating position, after which trialogue discussions between the Council, the Commission and the Parliament will commence.

EBA Consults on Recovery Planning

Introduction

On 20 May 2013, the EBA published two consultation papers regarding draft Regulatory Technical Standards (“RTS”) regarding the:

The consultations follow the previous consultation published by the EBA on 11 March 2013 regarding draft RTS on the content of Recovery Plans (see this blog post for more detail) and remain open for comment until 20 August 2013.  Final versions of both RTS will be submitted to the European Commission within 12 months of the date on which the “Directive establishing a framework for the recovery and resolution of credit institutions and investment firms (the “RRD”) enters force, but may be amended after the consultation to take into account possible changes to the final RRD.

RTS on the Assessment of Recovery Plans

The draft RTS have been developed pursuant to Article 6(5) of the RRD.  Their main objective is to promote harmonisation across the EU regarding the assessment of recovery plans and to facilitate joint assessments of group recovery plans by different supervisory authorities.  They outline the three criteria that competent supervisors must take into account when reviewing individual and group recovery plans:

  • completeness;
  • quality; and
  • overall credibility.

Completeness

The degree of completeness of a recovery plan is to be assessed against the following (non-exhaustive) list of factors:

  • whether it covers all the information listed in Section A of the Annex of the RRD (“Information to be Included in Recovery Plans”);
  • whether it provides information that is up to date with respect to any material changes to the institution or group to which the recovery plan relates;
  • where applicable, an analysis of:
    • how and when an institution may apply for the use of central bank facilities; and
    • available collateral; and
    • whether the recovery plan has been tested against a range of scenarios.

In addition to the information set out above as it applies in a group context, the completeness of group recovery plans is assessed against the following matters:

  • the establishment of arrangements for intra-group financial support;
  • the identification of obstacles, if any, to the implementation of recovery measures within the group; and
  • the identification of substantial practical or legal impediments to:
    • the prompt transfer of own funds or
    • the repayment of liabilities or assets within the group.

Quality

The quality of a recovery plan is assessed against the following (non-exhaustive) list of factors:

  • clarity;
  • relevance of information;
  • comprehensiveness; and
  • internal consistency.

Overall Credibility

Individual Recovery Plans

Overall credibility in the context of individual recovery plans is essentially an assessment of the extent to which:

  • the implementation of a recovery plan would be likely to restore the viability and financial soundness of the institution in question; and

  • the plan or specific options could be implemented effectively in situations of financial stress and without causing any significant adverse effect on the financial system.

 ‘Restoration of viability and financial soundness’ is assessed against the following (non-exhaustive) factors:

  • the level of integration and consistency of the recovery plan with the general corporate governance and risk management framework of the group;
  • whether the recovery plan contains a sufficient number of plausible and viable recovery options;
  • whether the recovery options included in the recovery plan address the scenarios identified;
  • whether the timescale to implement the options is realistic and has been taken into account in the procedures designed to ensure timely implementation of recovery actions;
  • the level of the institution`s or group`s preparedness;
  • the adequacy of the range of scenarios of financial distress against which the recovery plan has been tested;
  • the adequacy of the testing carried out using the scenarios of financial distress;
  • the extent to which the recovery options and indicators are verified by the testing carried out using scenarios of financial distress;
  • whether the assumptions and valuations made within the recovery plan are realistic and plausible.

‘Effective implementation’ is assessed against the following (non-exhaustive) factors:

  • whether the range of recovery options sufficiently reduces the risk that obstacles to the implementation of the recovery options or adverse systemic effects arise due to the recovery actions of other institutions or groups being taken at the same time;
  • the extent to which the recovery options may conflict with the recovery options of institutions or groups which have similar vulnerabilities and which might implement options at the same time;
  • the extent to which implementation of recovery options by several institutions or groups at the same time could negatively affect the impact and feasibility of recovery options.

Group Recovery Plans

Overall credibility in the context of group recovery plans is essentially an assessment of the extent to which:

  • the implementation of a recovery plan would achieve the stabilisation of the group as a whole, or any institution of the group; and
  • the plan identifies whether, within the group, there are:
    • obstacles to the implementation of recovery measures; and
    • substantial practical or legal impediments to the prompt transfer of own funds or the repayment of liabilities or assets.

‘Stabilisation’ is assessed against the following (non-exhaustive) factors:

  • the extent to which the group recovery plan can achieve stabilisation of the group as a whole and any institution of the group;
  • the extent to which arrangements included into the group recovery plan ensure coordination and consistency of measures between institutions within the group; and
  • the extent to which the group recovery plan provides solutions to overcome:
    • obstacles to the implementation of recovery measures; and
    • substantial practical or legal impediments to a prompt transfer of own funds or the repayment of liabilities or assets.

RTS specifying the range of scenarios to be used in recovery plans

These draft RTS have been developed pursuant to Articles 5(5) and 5(6) of the RRD.  They specify the range of scenarios to be designed by financial institutions when testing their recovery plans.  The overriding principle is that scenarios should be based on the events that are the most relevant to the institution or group in terms of activity, size, interconnectedness, business, funding model, etc.  Institutions are responsible for selecting an appropriate number of relevant scenarios (taking account of the principle of proportionality within the RRD) and national supervisors are responsible for assessing the adequacy of the chosen scenarios.  Each distress scenario should be based on events that are exceptional but plausible and would threaten to cause the failure of the institution or group if recovery measures were not implemented in a timely manner and should cover:

  • a system wide event;
  • an idiosyncratic event; and
  • a combination of system wide and idiosyncratic events.

Each distress scenario should also include an assessment of the impact of the events on at least each of the following aspects of the institution or group:

  • available capital;
  • available liquidity;
  • business model;
  • profitability;
  • payment and settlement operations; and
  • reputation.

EU Council Publishes Compromise Proposal on RRD

On 16 May 2013, the Presidency of the Council of the EU published a compromise proposal relating to the Recovery and Resolution Directive (RRD).

Additions to the original EU Commission proposal are underlined and additions to the most recent compromise proposal dated 14 February 2013 are shown in bold.

Further Guidance on Bail-in

On 14 May 2013, the Economic and Financial Affairs Committee of the EU Council published a press release following a debate on the proposed Recovery and Resolution Directive (RRD).  The discussion focused on the design of the bail-in tool, identified as a central issue.  A summary of the key points include:

  • General agreement on the scope for bail-in and a limited list of defined exclusions;
  • General agreement that the level of loss absorbing capacity must be adapted to match the scope of exclusions;
  • Agreement amongst most Member States that the deposit guarantee schemes (for deposits under EUR 100.000) should benefit from depositor preference (i.e. last category of assets to be bailed in);
  • Overall support for deposits over EUR 100.000 to also benefit from depositor preference (with some reservations towards preference given to large corporate deposits);
  • The need for a balance between a harmonised approach to bail-in and limited national flexibility in its application;
  • Country-specific concerns regarding euro area vs. non-euro area issues should be addressed.

The Council is expected to reconvene on 21 June, with the hope of reaching an agreement on the directive.