Brussels, 05/06/2012 (Agence Europe) - On Wednesday 6 June 2012, EU Internal Market Commissioner Michel Barnier unveiled highly awaited draft legislation on the management of failed banks (see EUROPE 10586), the final piece of legislation launched on the initiative of the G20, which will provide national supervisors with a tool box to use as far ahead of a bankruptcy as possible to prevent banks having to be bailed out by the public
European leaders are discussing the idea of setting up a “Banking Union” to boost Economic and Monetary Union (EMU) and the European Commission is not suggesting setting up an EU bank bailout fund or a European supervisor (see related article). A high-ranking EU official said that, although the European Summit has not set out a clear roadmap on boosting EMU, it makes no sense to delay the draft legislation because the cost of not having rules has already been seen for Dexia. He said an EU system for pooling bank bailout and/or deposit guarantee schemes would be a good idea and was sure that the Commission would go as far as possible under the existing setup.
The idea is to have an exhaustive, flexible and gradual approach, with measures taken as far upstream as possible, including a wide range of options, some of which are rather intrusive. The problems faced by banks and the different bank traditions in the member states require the new legislation to be flexible to allow supervisors to choose the best option for the particular circumstances of a failing bank.
The Commission's flexible approach covers a range of events. Normally, European banks would have to draw up living wills setting out restructuring options and would have to set up restructuring colleges that would include the national supervisors of the countries in which they do business. If a bank's solvency deteriorates, the national bank authority would be able to force it to introduce an action plan, renegotiate its debt with its lenders and introduce a new management team. If this is not enough to make the bank viable, then the bank would be restructured using the normal insolvency procedure as long as the bank is not too big to fail, or if it is, then by means of a restructuring programme. The Commission suggests harmonised procedures for national authorities to trigger restructuring.
Any struggling bank would first have to be restructured before it could receive public cash. The process will focus on keeping essential services, like deposits and payments, running. Four main “tools” are suggested, namely going out of business (without the shareholders' agreement); setting up a “bridge bank” to temporarily transfer business to a public body; setting up a “bad bank” for all toxic assets; and a “bail-in” whereby unprotected lenders would be affected.
“Bail-in”. The bail-in system has been subject to recent consultations and would apply by 2018 to all debts (bonds, additional Tier 1 and Tier 2 capital, subordinated debt and senior debt) in a hierarchical scale, but would not apply to individuals' deposits or covered bonds. In order to hold enough bail-in assets, banks would be allowed to issue special bonds to keep down costs. (MB/transl.fl)