When the European Commission published its proposed Recovery and Resolution Directive (RRD) in June 2012, the approach to recapitalising a failing bank without using taxpayers' funds looked deceptively simple. Creditors of the failing bank (not just holders of subordinated debt, but a wider set of unsecured and uninsured creditors) would have their claims written down. And if this was not sufficient (for example where a bank was funded mostly by insured retail depositors), then the national Deposit Guarantee Scheme (DGS) would have to pay the bill, then pass the cost on to other local banks.
This has since been complicated by moves towards Banking Union. The ECB will become responsible for banking supervision in the Banking Union area, and there are some signs of movement towards a single resolution fund. But not, so far, a single DGS...
Why does this matter for the RRD? Because – as graphically illustrated by the nationalisation of SNS REAAL by the Dutch government – there are constraints on the willingness of the authorities to wipe out the creditors of a failed bank (other than the holders of equity and subordinated debt) and/or to transfer the cost of recapitalisation through the national DGS to other local banks (who are both highly concentrated and themselves in a fragile position). Hence the attractiveness of tapping into a Banking Union-wide resolution fund, ultimately paid for by banks across the Union (rather than by local creditors and other local banks).
But moving towards this as part of a resolution strategy would require two major amendments to the RRD:
- dropping the (local) DGS as a source of recapitalisation funds; and
- turning the resolution fund into a major source of funding rather than a short-term and limited mechanism to smooth the path towards a creditor and DGS-funded resolution.
It will therefore be interesting to see how the RRD is revised to reflect the combination of Banking Union and the real life case study from the Netherlands.
Meanwhile, the European Banking Authority (EBA) is consulting on a draft regulatory standard under the Recovery and Resolution Directive (RRD) on the content of recovery plans. The EBA is pressing ahead, despite the delays to the RRD. The consultation runs to 11 June, and follows the EBA's Discussion Paper in May 2012 on a template for recovery plans.
There is nothing surprising here – some of the proposals simply repeat what is already in the draft Directive, while others draw on the work of the FSB and of national authorities (including the UK) on recovery planning.
One general point is that it is difficult to assess the impact of these proposals without knowing:
- how the EBA and national authorities will establish the stress scenarios from which banks are expected to be able to recover;
- how national authorities will interpret these proposals in terms of the level of detail required from banks; and
- how national authorities will apply proportionality.
The EBA sets out four key components of a recovery plan – governance, strategic analysis, communication, and preparatory measures. Most of the proposed regulatory standard relates to the strategic analysis component.
At the same time, European institutions are examining the recovery and resolution agenda for non-banks. The European Commission published this month a summary of responses (PDF 93 KB) to its October 2012 consultation on RRPs for non-banks.
The key responses are summarised below:
- Systemic risk is confined to NTNI activities;
- Must ensure consistency with international developments (wait for, and do not go beyond, the IAIS).
- The current framework is sufficient (run-off and transfer tools, plus enhanced supervisory powers under Solvency II).
- Banking resolution tools are not needed, and will not work for insurance.
- Focus should be on recovery, not resolution.
- Further harmonisations at EU level are not needed.
Financial market infrastructure responses:
- Broad agreement on need for specific measures for the recovery and resolution of FMIs, and that this should follow the same outline as for banks.
- CCPs are most in need of being subject to an EU-wide resolution and recovery framework.
- A need to recognise the differences between the risks in CCPs and CSDs, and adapt requirements and tools accordingly.
- CCPs themselves are cautioning on the need to await international developments and take into account stringent operating standards imposed through EMIR.
Public institutions, trade unions and consumer groups:
- Traditional run-off and transfer tools should be developed further, especially for larger cross-border groups and where engaged in NTNI activities.
- Some support was expressed for further study of resolution tools that could better protect policyholders in the event of a failure.
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