Brussels, 14/10/2010 (Agence Europe) - Prevention is better than cure. With this adage in mind, EU Internal Market Commissioner Michel Barnier will set out on Wednesday 20 October 2010 his vision of a European crisis-management system for dealing with failed banks or too-big-to-fail financial institutions (see EUROPE 10209). He will present a range of measures which national supervisory authorities can use to restructuring troubled banks before they crash. He will call for the setting up of a network of national restructuring funds that operate according to harmonised rules. The idea of an integrated system under an EU restructuring and with an EU restructuring fund (an idea the European Commission is keen on) will be studied at the same time as the 2014 review of the rules governing the new European Banking Authority (EBA). The first batch of draft legislation will be published in the spring of next year.
In order to prevent the emergence of problems, the financial institutions in question will be able to draw up restructuring plans setting out action they would take if facing problems like a cash-flow crisis, the raising of insufficient capital or being unable to reduce risks. Public bailout would not be an option. Supervisors would draw up restructuring plans for each of the institutions covered by the new crisis amazement system. The plans would incorporate information like a bank's legal structure, the nature of counterparties, debt levels and so on. National supervisory authorities would have the power to force banks to sell off certain assets, boost capital and liquidity and even to change their legal structure. Recognising that such measures would be 'highly intrusive,' the Commission will draft an appeals mechanism for banks feeling they have been unfairly treated.
When would such measures be triggered? The directive covering banks' capital requirements will be amended to give supervisory authorities the power to take action when it looks like a bank might go under (rather than only when a bank has actually failed). The Commission lists factors that could trigger such preventative action, such as forecasts of significant losses, unbalanced balance sheets (greater liabilities than assets) and inability to do certain types of business (make payments and repay loans, for example).
The second phase of the crisis management system is an early warning system. When applying a particular bank's restructuring plan, a national supervisory authority would be able to ban the payment of dividends and force some bank directors to retire. A special manager might be appointed to take over the company, in which case 'shareholders' rights would not be affected,' explains the Commission, because shareholders would have to agree to any decisions by the manager beforehand. The Commission is also planning to work on a special mechanism for complex financial institutions that would include rules on evaluating the financial value of debt.
European coordination. The provision of preventative rules and early warning mechanisms for national supervisors will require coordination at EU level of national action in the event of threatened failure of a pan-European bank. The Commission is promoting the idea of a 'coordination framework' based on harmonised rules and the duty of national supervisor to work together. Restructuring colleges will be set up for cross-border banks along the lines of the existing supervisory colleges. The EBA will be involved in the work of the restructuring colleges and will have the power to scrutinise cross-border aspects of crisis management measures.
National bank restructuring funds. As for funding the European crisis management system, the Commission simply restates its earlier view, calling for a network of national funds rather than a bank levy that would go straight into Member States' coffers. The funds would be only be used for restructuring, such as splitting off the bad (toxic) bits of a bank from the non-toxic part of a bank. Access to the funding would be strictly limited to avoid moral risk and would be accompanied by suitable restructuring. The financial industry will have to provide most of tithe necessary funding in advance of any crisis. The Commission hopes that a harmonised system will be introduced across the EU to decide on how much each bank should pay and thereby avoid creating an uneven playing field in Europe. The setting of the amount to be paid by each bank will also depend on the other financial reforms being prepared (like the Basel III Directive on capital requirements) and the potential provision of funding from other sources (like national savings guarantee systems). (M.B. trans fl)