Brussels, 27/06/2013 (Agence Europe) - On Thursday 27 June, the Ecofin Council reached agreement in principle on the draft directive on national bank resolution schemes. The rules, known to industry in advance, will provide for an orderly restructuring of a failing bank. As a last resort, the European Stability Mechanism (ESM) will be able to intervene to provide capital to banks in the eurozone bank supervision system (see EUROPE 10873 and 10875).
Irish Finance Minister Michael Noonan said the agreement was an important step in breaking the vicious circle between banks and sovereign debt.
The draft directive agreed upon envisages two types of intervention, on an exceptional basis, by the ESM for failing banks. Firstly, the ESM could be used if member states decide to request its intervention after a certain percentage of the bank's losses have been absorbed by shareholders and lenders to the bank in question. Such intervention would take place only after the country's bank resolution fund (financed by the financial industry) had run out of cash and would, Noonan explained, be “indirect”. Under strict conditions, ESM cash would be sent to the country of origin of the failing bank, which would transfer the loan to the bank and itself be liable for repayment of the loan. When the flexibility granted to countries has been fully exhausted, the ESM would be able to directly recapitalise a bank under the rules laid down by the Eurogroup last week (see EUROPE 10872). This would weaken the link between bank problems and sovereign debt.
“The ESM was put in place for a number of purposes. It was always envisaged it would be used for bank recapitalisation in certain purposes”, explained Noonan. French Economy Minister Pierre Moscovici said it didn't make much sense to have a direct recapitalisation system for banks with the ESM on the one hand and then exclude the ESM from flexibility on the other. EU Internal Market Commissioner Michel Barnier said that recapitalisation from the ESM in the eurozone would be possible, but would only take place on an exceptional basis.
The aim of the draft directive is to prevent bank restructuring and, where such a restructuring is needed, to provide for an orderly provision of capital or liquidation, mobilising initially private investors in a bail-in (rather than public authorities through a bailout). From 2008 to 2010, the public purse in the EU27 had to shell out €1.6 billion (13% of GDP) to bail out the banks.
As a preventative measure, every bank will have to submit a recovery plan to the national bank supervisory authority, a plan that would be updated each year, and explain what measures would be made in the event of a deterioration in the economic climate. Each national bank surveillance authority would need to prepare a resolution plan listing action that bank would have to take in the event of restructuring, stipulating a minimum loss absorption level (MREL) for each bank, depending on the type of bank, before the European Commission unveils harmonised rules in this domain in 2016.
Bail-ins. “Now we go from ad hoc bail-out rules to structured and clearly defined bail-in rules”, said Noonan, regretting that the rules hadn't been available for the Irish bank bailout. Cyprus is in everyone's minds and the ministers have decided on the following hierarchy for raiding private cash to restructure a bank: shareholders, junior and senior bond-holders and then savers with more than €100,000 (firstly big companies, then small and medium-sized companies and then individuals). Come what may, savings of below €100,000 would be covered by savings guarantee systems. Covered bonds and inter-bank loans maturing in up to seven days would be exempt from bail-in, but not derivatives.
Upon request from France and Sweden, discretionary power has been granted to member states to alter the private investors whose savings can be raided if necessary, depending on the circumstances and type of bank. This flexibility would apply in exceptional circumstances, such as fear of a bank crisis spreading, and would only apply once 8% of eligible instruments have been raided (Sweden has negotiated special rules), and the European Commission would need to be notified of such a measure in order to assess it under the EU state aid rules.
If this flexibility is used, member states would be able to require other private investors to shell out or could make use of cash from other financial arrangements, like national bank resolution schemes or the ESM. Any intervention from a bank resolution fund in this connection may not exceed 5% of the bank's total asset.
Margrethe Vestager, Danish Economy Minister, said: “It's a balanced compromise. The way that you earn flexibility that road also goes through bail in. It sends a sound and healthy signal that bail-in is the main rule”.
National resolution funds. Each member state would have to set up a national resolution fund to be financed in advance by the financial industry. Within ten years, the funds would need to have at least 0.8% of total deposits covered by the fund, and financing would be needed from all financial institutions licensed operate in that country. If a country decides to merge its bank resolution and savings guarantee fund, then the merged fund would have to have at least 1.3% of the deposits covered. National bank resolution funds would be allowed to lend to a similar fund in another country (on a voluntary basis).
Bank resolution funds would be allowed to provide temporary aid, temporary guarantees, and buy assets or provide capital if a bad bank is set up. Compensation could be paid to shareholders and lenders if their losses from a bail-in are greater than what they would have had to pay in the event of a standard resolution process.
The agreement at the Ecofin Council paves the way for the opening of inter-institutional talks with the European Parliament, where a committee issued an opinion last month (see EUROPE 10849), with a view to final agreement being reached by the end of 2013. Gunnar Hökmark (EPP, Sweden), the EP rapporteur, commented in a press release: “The most important point from my perspective is that taxpayers can also be protected in a systemic crisis. When public funds are drawn upon, one must secure the highest probability of recouping the money invested. It is also significant to clarify under what circumstances supervisory authorities are to intervene”.
SRM. The member states' common position on bank resolution also paves the way for the European Commission to unveil draft legislation to set up a European bank resolution fund (SRM), part of banking union. In an interview with French business newspaper Les Échos on Thursday 27 June, the president of the Commission, José Manuel Durão Barroso, said that, legally, the mechanism for failing banks has to be attached to a European institution and the Commission feels that it is the Commission itself that would be a credible option because it is the Commission that has power over state aid and has already intervened in recent European bank restructuring processes. He said the new mechanism would be based on a collective body that would prepare decision, a body in which the ECB would be a participant, along with the relevant national authorities, not ruling out a change to the EU treaties in time in order to set up a special bank resolution institution. (MB/transl.fl)