Brussels, 09/07/2012 (Agence Europe) - On Tuesday 9 July 2012, EU27 finance ministers will examine proposals for improving economic governance in the eurozone.
They will hold a working breakfast at 9.00am to discuss the economic situation and bank recapitalisation and will then hold a preliminary debate on establishing a framework for bank recovery and resolution. They will also be briefed on negotiations with the European Parliament on changes to the EU rules on bank capital requirements.
Other points on the agenda include endorsement of the country-specific economic and budget policy recommendations for member states.
Economic governance - new legislation
The Cypriot Presidency will brief the Council on the process for reaching agreement with the European Parliament on two draft regulations on economic governance, namely a regulation to strengthen scrutiny of eurozone nations' budget plans, particularly those against which excess deficit proceedings have been opened, and a regulation to boost surveillance of eurozone nations experiencing financial turmoil or which have requested financial aid.
The two regulations were unveiled by the Commission in November 2011, following adoption of the “six-pack” of economic governance measures. The Council of Ministers issued general guidelines on the two new regulations on 21 February and the EP drew up its negotiating position in June.
The two draft regulations introduce tighter controls on national budget policies. Each year, member states have until 15 October to present their budget plans for the following year to the European Commission. There will be closer monitoring of member states against which an excess deficit proceeding is running to enable the Commission to get a better idea of the likelihood of their failing to correct their deficits on time. Member states facing financial turmoil or granted precautionary financial aid will be monitored more tightly than member states against which excess deficit proceedings are running.
France and Germany oppose the idea of introducing the “golden rule” into these two regulations, arguing that it was important to first discuss matters in the member state. Under Article 136 of the Treaty on the Functioning of the EU, a qualified majority of states in the eurozone is needed for the two regulations to be adopted by the Council, following consultation with the EP.
Bank capital requirements
The Cypriot Presidency will inform the Council of progress in talks with the European Parliament on the two draft proposals to change bank and investment company capital requirements, on which the Council issued general guidelines on 15 May. The new rules will replace the existing capital requirement directives with a regulation laying down prudential capital requirements to be respected by banks and a directive on access to deposit-taking activities, which transpose into EU law an international agreement reached by the G20 in November 2010. The Basel III Agreement reached by the Basel Committee increases the bank capital requirements, introduces a compulsory capital buffer and an optional contra-cyclical buffer, and lays down new liquidity and leverage requirements for banks.
The aim of the negotiations with the Parliament is to adopt the regulation and directive at first reading. Among the questions outstanding are a package of proposed flexibility measures, bankers' remuneration, crisis management, sanctions, a balance of powers between the authorities of the countries of origin and those of the host countries, corporate governance and the powers to be devolved to the European Banking Authority (EBA).
The Council's text lays down capital requirements and brings in initial liquidity requirements from 2013, in line with national provisions and, from 2015, a fully calibrated EU liquidity requirement. To resolve issues related to long-term funding, the Commission is called upon in the draft regulation to present a report no later than 31 December 2016 and, if need be, a legislative proposal on a stable funding requirement.
The Council's text also provides for the introduction of a leverage ratio from 1 January 2018, on the basis of a report to be presented by the Commission in 2016. The draft regulation requires banks and investment firms to hold common equity tier 1 (CET 1) capital of 4.5% of risk weighted assets, up from 2% applicable under current rules (CRD 2). The total capital requirement remains unchanged at 8%. The Council's draft defines CET 1 capital instruments using 14 criteria, already set out by Basel 3, and mandates the EBA to monitor the quality of instruments issued by institutions.
The draft directive brings in additional requirements for a capital conservation buffer of 2.5% CET 1, identical for all banks in the EU, and an institution-specific countercyclical capital buffer, as well as the possibility for member states to introduce a systemic risk buffer for the banking sector or one or more subsets of it. The CRD 4 proposals also strengthen governance and supervision requirements, provide for application of sanctions by supervisors if EU rules are breached and seek to reduce reliance by credit institutions on external credit ratings by encouraging internal ratings based approaches or internal models.
Bank recovery and resolution
The Commission will present its proposal for a directive establishing a framework for the recovery and resolution of credit establishments and investment companies. The Council may hold an initial exchange of views on the subject. The proposal, presented by the Commission on 6 June, aims to provide supervisory authorities with common tools and powers to tackle banking crises pre-emptively and resolve any financial institution in the event of insolvency, whilst minimising tax payers' exposure to the losses. The directive will provide a range of instruments for the supervisory authorities to use: preparation and prevention measures, early intervention and resolution powers and instruments. Among the main resolution measures are the following: - divestment of activities or some activities; - creating a bridge institution (temporary transfer of good bank assets to an entity under public control); - separation of assets (transfer of toxic assets to an asset management vehicle); - internal bail-in measures (imposition of losses, in order of seniority, on shareholders and unsecured creditors).
European semester
On the basis of a note by the Economic and Financial Committee, the Council will examine the approach followed for the European semester monitoring exercise. The outcome of this year's supervisory exercise is felt to be satisfactory overall, but the Council will look at any improvements which can be made. A full review of implementation is scheduled for October. Without further debate, the Council will also publish, in the framework of this year's European semester: - recommendations to each member state on the economic policies presented in its national reform programme; - opinions on the budgetary policies presented in member states' stability and convergence programmes; - and a specific recommendation on the economic policies of the Eurozone member states.
The Council will also publish explanations in cases where its recommendations or opinions differ from the Commission's proposals, in line with the “conform or explain” principle set in place last year in the framework of the EU legislative package on economic governance (“six-pack”). The European semester provides for the simultaneous supervision of the economic and budgetary policies, in line with common rules, over a period of six months every year. (LC/transl.fl)