Brussels, 12/12/2013 (Agence Europe) - In the evening of Wednesday 11 December, the Lithuanian Presidency of the Council of the EU, the European Parliament and the European Commission reached agreement in trialogue on new rules for the restructuring and resolution of failed banks (BRRD).
Welcoming the agreement, EU Financial Services Commissioner Michel Barnier said that it was crucial for restoring confidence in the European financial sector that failing banks can be wound up in a predictable and effective manner with as little use of public funding as possible. The European Parliament's rapporteur on this issue, Gunnar Hökmark (EPP, Sweden), said that shareholders and lenders should cover the losses when banks go bankrupt rather than taxpayers.
National resolution funds. The authorities will have to ensure that banks have taken the necessary preventative measures to avert bankruptcy and banks must contribute cash to a resolution fund. Each country's fund must have 1% of guaranteed savings by 2025. The funds will only be used after shareholders and other investors in the bank have contributed through the bail-in system.
Bail-ins. Bail-ins will come into force on 1 January 2016 rather than 1 January 2018, as demanded by the European Parliament. They mean that shareholders, bond-holders and account holders' investments will be raided if a bank goes under. The investors would have to contribute at least 8% of the bank's assets before any public funding could be used for the banks. When the 8% or more has been provided from bail-ins, the resolution fund could contribute up to 5% of the bank's assets. Philippe Lamberts (Greens/EFA, Belgium) says that, if these rules had been in place in 2008, they would have saved all banks bar six, without the need for taxpayers' money. Savings of up to €100,000 will be guaranteed, along with the accounts of small businesses and physical persons granted preferential treatment whereby their accounts would not be raided ahead of “guaranteed” accounts. For Cyprus, the first country to experiment with raiding accounts in a bail-in, a significant proportion of the accounts converted into bank capital were owned by small businesses, which lost around €1 billion in total (some 6% of Cypriot GDP). Barnier said the new rules would finally put an end to big bailouts of banks and the negative consequences for taxpayers.
Preventative recapitalisation and flexibility. In a few exceptional cases, some investors in a bank might be spared, but only after a bail-in of 8% of the bank's assets has been carried out and if the European Commission gives the go-ahead. For a cross-border bank or in the event of disagreement among resolution authorities in charge of the bank in question, then the European Parliament was to grant the European Banking Authority the power to decide. The provision has been removed, regretted Lamberts, commenting: “national authorities will be able to deviate from the burden sharing plans established in advance of resolutions”.
In other exceptional cases, it will be possible for a member state to make a preventative recapitalisation of viable banks for which stress tests have revealed capital shortfalls, but only when bail-ins of at least 8% of the bank's assets have been done. Public preventative recapitalisation will only be allowed as a last resort if the bank is unable to raise cash itself on the money markets. The compromise with the EP in this domain is that here too, the European Commission must give prior agreement.
In the first six months after the directive is introduced (on 1 January 2015), the EBA will issue guidelines on preventative recapitalisation. Preventative recapitalisation will be allowed until 2018, when the Commission will assess whether it needs to be extended. The Lithuanian Presidency noted: “It is possible to use the Deposit Guarantee Scheme in resolution, but only with sufficient safeguards to preserve it for its direct purpose, to compensate the covered deposits in case of bank bankruptcy”.
The BRRD agreement should pave the way for the trialogue to agree on the deposit (savings) guarantee fund directive. It has been decided that the resolution funds must not be merged with the savings guarantee funds. The BRRD legislation must still be approved at the technical level by the Coreper, probably next week, and then adopted by the European Parliament in plenary.
Single Resolution Mechanism. A general approach to the bank resolution mechanism is expected to be found next week by the EP's economic and monetary affairs committee and the member states at the Ecofin Council. It is hoped that negotiations will then follow in January 2014. (EL/transl.fl)