Global

Details

  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 5/28/2013

Recovery and Resolution – speeding up… 

Progress on the EU's Recovery and Resolution Directive (RRD) has reached a pivotal stage after a key vote by MEPs and technical consultations issued by the European Banking Authority (EBA).

MEPs vote through recommendations

MEPs in the ECON Committee have voted through their proposals which include requirements for a resolution fund, bail-in capital and EBA mediation of cross-border disputes. MEPs will now open up their discussions with Finance Ministers, while positions are broadly aligned there is likely to be disagreement over position of uninsured depositors in the creditor hierarchy. MEPs also want the use of bail-in capital to begin sooner than proposed by the Commission so starting from January 2016 – two years earlier than expected.


With Finance Ministers expected to discuss again on the 21 June there could enough of an agreement in place for rules to be finalised over the summer.

EBA gets ready for next stage

The European Banking Authority (EBA) has launched two Consultations, running to 20 August 2013, on Draft Regulatory Technical Standard (RTS) related to:


  • the assessment process of recovery plans by competent supervisors; and
  • the range of scenarios to be used in those plans.

These specify the range of scenarios when testing recovery plans but gives responsibility to firms to devise and national supervisors the job of testing. The EBA require at a minimum that firms cover scenarios including:


  • one covering a system-wide event;
  • one covering an idiosyncratic event; and
  • one covering a combination of both types of events.

EU-level rules

Once agreement is reached between MEPs and Finance Ministers the EBA has 12 months to finalise the RTS.


The main resolution measures within the Directive would include:


  • the sale of (part of a) business;
  • establishment of a bridge institution (the temporary transfer of good bank assets to a publicly controlled entity);
  • asset separation (the transfer of impaired assets to an asset management vehicle); and
  • bail-in measures (the imposition of losses, with an order of seniority, on shareholders and unsecured creditors).

Resolution funding and deposit guarantee schemes

The Directive would require member states to set up ex-ante resolution funds to ensure that the resolution tools can be applied effectively. Under the presidency's latest compromise proposal, these national funds would have to reach, within 10 years, a target level of at least 0.5% of covered deposits of all the credit institutions authorised in their country. To reach the target level, institutions would have to make annual contributions based on their liabilities, excluding own funds, and adjusted for risk. Member states would be free to choose whether to merge or keep separate their funds for resolution and deposit guarantee schemes (DGSs). In both cases, the combined target level would be the same. The European Council's general approach on a proposed directive on DGSs, agreed in June 2011, sets its target level at 0.5 percent of covered deposits. Lending between national resolution funds would be possible on a voluntary basis.


Under current plans countries will have to set up a fund to reach a target level of at least 0.5% of covered deposits of all the credit institutions within 10 years, choosing whether to combine existing schemes and DGS.

Bail-in

Since events in Cyprus, there is broad consensus on the use of bail-in capital but remains uncertainty over the treatment of uninsured deposits. Discussion with Finance Ministers is currently focused on:


  • Harmonised approach: A limited number of defined exclusions from bail-in and insured depositor preference (i.e. DGSs would be bailed in after other senior unsecured creditors). Uninsured deposits (i.e. deposits above EUR 100,000) would be automatically bailed in.
  • Discretionary approach: With limited flexibility for national resolution authorities to exclude liabilities for financial stability reasons or to ensure continuity of banks' critical functions. Discretionary exclusions could apply to uninsured deposits, in particular those held by individuals or SMEs, and to short-term debt as well as to liabilities arising from derivatives or from participation in payment, clearing and settlement systems with a remaining maturity of less than one month.
  • Mixed approach: Uninsured depositor preference (i.e. they would be bailed in, but after other senior unsecured creditors) and a combination of defined and discretionary exclusions.

Under the current proposal, member states would have to introduce the bail-in instrument by January 2018. However, some member states have suggested bringing the date forward to January 2015.

Implications for firms

Important to continue with the watching brief – many firms will have been preparing, but watch out for last minute changes.


The link to the banking union resolution authority and deposit guarantee scheme will be critical – we don't think the resolution agenda can really settle until these points are resolved.


For more information, please contact:

Jon Hogan

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