Brussels, 06/01/2011 (Agence Europe) - The European Commission has launched a public consultation exercise that will run until Thursday 3 March over the EU's future crisis management system for the collapse of banks. Based on a report published in October 2010 (see EUROPE 10236), the consultation will feed into the Commission's preparations for draft legislation to be unveiled before the summer holidays. New EU rules are not expected until 2014. Issues to be discussed include the option of bank shareholders and creditors absorbing losses if a bank has to be restructured, and the option of national bank resolution funds being used to finance the new EU crisis management system.
When it comes to crisis management, national supervisors will have a range of mechanisms for dealing with bankrupt banks and financial companies with a view to ensuring financial stability, ensuring continuity in key retail banking services and protecting the taxpayer. In a press release, EU Internal Market Commissioner Michel Barnier commented: “Banks will fail in the future and must be able to do so without bringing down the whole financial system. A clear framework to manage cross-border banking crises is an essential complement to our work on supervisory and bank reforms.”
Believing that preventative measures have to be taken, the Commission has mooted the idea of banks making living wills and submitting them in advance to bank supervisors. In fat years, banks would prepare living wills that would stipulate which restructuring arrangements could be used in event of a crisis, explained an EU official. When they detect problems, national bank supervisors would have the power of changing a bank's commercial model, forcing it out of business and/or capitalising some of its capital debts.
“Haircuts.” Interested parties will be quizzed about the idea of national supervisors forcing bank shareholders and bank creditors to absorb financial loss (described as “haircuts”) if a bank is bailed out. The above-mentioned EU official said that the Commission wants to ensure that creditors bear an appropriate level of the losses. If haircuts are decided upon, then the nature of the losses involved would need to be specified. Such measures would only apply to debt offerings issued after the new EU rules come into force.
Funds. In order to finance the range of bailout measures available to supervisors, the Commission says it is planning to suggest the creation of special national funds to be set up ahead of any crisis from contributions from banks and investment funds, which would be required to provide a percentage of their assets minus Tier 1 capital and individuals' savings under the deposit guarantee threshold. The idea is therefore that the funds would be a percentage of total eligible assets and would need to be set up by 2010. The Commission is considering the introduction of a risk criterion to determine how much each bank would contribute and is also looking into the option of merging the said funds with national savings guarantee funds which, in some member states, already have bank bailout powers.
The current consultation exercise will be looking at the first stage in the process of setting up an EU crisis management system. Later, the Commission will suggest EU rules for the bankruptcy of lending institutions and investment funds. It believes that the final stage in the process will be the establishment of a joined-up bank bailout system, possibly with the creation of an EU authority with binding powers in this domain. (M.B./transl.fl)