Brussels, 06/06/2012 (Agence Europe) - On Wednesday 6 June 2012, the European Commission unveiled a draft directive on the restructuring or winding down of banks within the single market, avoiding as far as possible public bailouts and scenarios à la Northern Rock, Fortis and Dexia (see EUROPE 10627 and 10586). Carefully prepared prevention is much cheaper than repairing banks at the last moment, commented EU Internal Market Commissioner Michel Barnier, saying that it was time for taxpayers to stop bailing out banks. He said that between 2008 and 2011, the European Commission had approved some €4.5 trillion of state aid for banks, the equivalent of 37% of EU27 GDP.
The draft directive gives the competent authorities ways to intervene as far in advance of any crisis as possible, before difficulties emerge and risks turn into fully-blown financial crises. A three-stage process is being considered. In normal circumstances, banks would have to draw up living wills, setting out measures they would take if their balance sheets deteriorate. Banks would be allowed to sign inter-bank deals to avert crisis and national bank supervisors would be required to prepare restructuring plans setting out options for dealing with struggling banks.
Once banks are no longer able to meet funding requirements, the authorities would be allowed to require them to introduce their recovery measures according to a specified timeline. A special administrator may be appointed.
If neither of the first two stages is successful and if a bank going bankrupt is in the general interest, then the goverment would be allowed to take control of the bank. They would have a toolbox of potential measures, some of which would trample on shareholders' and lenders' prerogatives. The measures include going out of business (winding up the bank); creating a special bridging bank continuing non-toxic assets and basic bank services, which would then be sold off to another bank, while the toxic part of the bank would be liquidated under the relevant liquidation procedure; hiving off toxic assets into a bad bank, which would have to be done according to a certain procedure to allow it to be properly deleveraged; or a 'bail-in' to recapitalise the bank by diluting its shares, the writedown taking the form of reducing debt according to a hierarchy of debtors or converting debt into shares. On the latter point, the Commission believes that a certain percentage, perhaps 10%, of bank assets should necessarily be turned into shares that can be used for bail-in purposes. It will be up to member states to decide on the percentage.
No public cash would be allowed to be used for restructuring or winding up a bank until the bank has been though all the above restructuring processes.
First step towards a 'Banking Union'? The draft legislation was prepared a long time ago and is not designed for dealing with emergencies like the Spanish bank crisis, explained Barnier. It aims to provide a good system for the future. It is nothng like the ideas of bank unions or banking unions that have been mooted recently in an attempt to separate off bank crisis and the sovereign debt crisis. Banking Union would require the establishment of a single European bank supervisory body and a European bailout fund to deal with the tricky issue of who pays what when a cross-border bank goes under.
The president of the European Commission, José Manuel Durão Barroso, said the legislation adopted on Wednesday was an important step towards a banking union in the European Union, but without any harmonised insolvency laws, plenty of work remains to be done, as is shown by the question of how bank bailouts are to be financed. The Commission leaves it to the member states to decide that there should be a single system for bearing the cost of bailing out banks and guaranteeing the first €100,000 of individuals' savings. Forced to help each other out, national deposit guarantee schemes will be required to have funding of 1% of the deposits covered within ten years. The Commission says this will be enough if all the bail-in type systems are brought in. This suggestion may facilitate agreement on strengthening EU deposit guarantee rules, which are in deadlock over the question of funding (see EUROPE 10555). Barnier said that member states disagreed on the issue, but the proposals on the table were as ambitious as possible, although no doors had been closed to adjustments, as long as any further integration does not jeopardise the Single Market's credibility.
It will be up to the European Parliament, traditionally favourable to greater European integration, to give the draft proposals more teeth. “A real banking union will guarantee the Monetary Union's sustainability in the long-term. As co-legislator, our priority will be safeguarding the euro, our citizens' savings and purchasing power”, explained Jean-Paul Gauzès (EPP, France), in a press release calling for greater powers for the European financial supervision authorities. The head of the S&P party at the European Parliament, Hannes Swoboda of Austria, commented: “The proposal is insufficient to address the challenges the banking sector is facing today. banking union. This means that we need to strengthen supervision of the banks at EU level and the powers and means of action of the European Bank Authority. EU governments should also unblock a legislation to ensure that banking deposits of our citizens and businesses are properly covered in case of bank failure. The EU should work on allowing banks direct access to aid from the European Financial Stability Fund”. "With its proposal the Commission initiates the discussion how far creditors should participate in the losses of every bank within the all-new 'bail-in' measure, but the distinction between investors holding bonds and savers holding deposits has to be clearly made in the legislative process. We presume that we will be able to reach a quick agreement with the Council on the Deposit Guarantee Scheme Directive, which was not possible earlier this year. A parallel adoption of both dossiers seems to be the natural and desirable way for the European Parliament in the next months”, commented Wolf Klinz (ADLE, Germany), adding: "It's a pity that the Commission didn't go one step further and suggest possible changes to the banking structure in the EU.” (MB/transl.fl)