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.

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FMLC Provides Additional Commentary on RRD

On 25 October 2013, the Financial Markets Law Committee (FMLC) published a second discussion document on the EU Commission’s General Approach to the proposed Recovery and Resolution Directive (RRD).

The document is generally supportive of the changes made within the General Approach, but highlights a few remaining areas of concern with respect to legal uncertainty, including those set out below:

  • Bail-in: The RRD does not provide a set of principles to guide a resolution authority’s choice as to whether to convert debt to equity or whether to write-down debt.  In addition, contractual bail-in provisions may not operate in the same way as statutory bail-in provisions;
  • Valuation:  It is unclear on what basis the valuation (which must be independent) is to be carried out, notwithstanding that Article 30 of the RRD provides that the valuation should be fair and realistic.  This drafting ambiguity gives rise to legal uncertainty as to the status of a resolution action which is taken when a valuation at the proscribed standard has not been carried out, owing to practical difficulty or impossibility; and
  • General Resolution Powers:  Articles 56(1)(h) and 56(1)(l) of the RRD give a resolution authority the power to cancel or amend the terms of “debt instruments”.  However, this definition is wider than that of “capital instruments” – the term used to describe the instruments that are eligible to be ‘bailed-in’.

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.

EU Council Publishes new RRD Proposal

On 16 July 2013, the EU Presidency published a compromise proposal amending the EU Commission’s previous compromise proposal (dated 19 June 2013) relating to the Recovery and Resolution Directive (RRD).

As detailed in Annex 2 to the document, the main changes address issues such as:

  • the scope of the bail-in tool; and
  • resolution financing arrangements.

RRD Pushed Back Again

On 3 July 2013, the EU Parliament updated its procedure file on the Recovery and Resolution Directive (RRD).  It seems that the RRD proposal will not now be considered until the Parliament’s plenary session scheduled for 18 to 21 November 2013, rather than the session scheduled for 21 to 24 October 2013, as was previously the case.

EU Council Agrees Approach to RRD

On 27 June 2013, the EU Council published a press release confirming an agreed position with respect to the Recovery and Resolution Directive (RRD) and calling on the EU Presidency to start trilogue negotiations with the EU Parliament with a view to adoption of the RRD at first reading before the end of 2013.

The press release focuses on three areas:

  • Bail-in;
  • Resolution funds; and
  • Minimum loss absorbing capacity.

It does not contain much in the way of detail beyond that widely reported over the last week.  However, it is perhaps noteworthy that only inter-bank liabilities with an original maturity of less than seven days are to be excluded from the scope of the bail-in tool.