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

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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.