Brussels, 15/04/2014 (Agence Europe) - The European Parliament officially approved the interinstitutional agreement on the bank resolution mechanism (SRM) on Tuesday 15 April in its final sitting before the European elections (see EUROPE 11060).
The MEPs also approved the BRRD directive harmonising national bank resolution schemes and introducing the principle of bail-ins in the EU, whereby shareholders and lenders are required to pay their share of bank collapse costs before any public money is forthcoming. The MEPs also endorsed a new directive to boost national savings (deposit) guarantee schemes.
Greek Foreign Minister Evangelos Venizelos said that the speedy introduction of banking union sends the clear message to everyone who ever doubted the European Union and its ability to learn from the crisis and it is a far too important matter to let the economy decide. Internal Market Commissioner Michel Barnier made similar comments, stating that the three inter-connected items of legislation were building a new regulatory and stability structure after the EU was struck by the financial crisis in 2008 that smashed growth, accentuated the sovereign debt crisis and caused economic, social and political problems that are still ongoing. The president of the European Parliament, Martin Schulz (of Germany), said: “This is a decisive step to break the link between bank debt and sovereign debt”, which is one of the reasons why banking union is being set up.
SRM. On Tuesday, the Greek Presidency issued a political statement on behalf of the Council of the EU in which the countries participating in banking union pledge to ratify as soon as possible the intergovernmental agreement on which the common bank resolution fund (SRF) will be based. If it is not ratified on time, there will be delays in the process of mutualising the fund.
On 1 January 2015, involvement in the bank resolution mechanism (SRM) will be compulsory for all countries involved in the bank supervision mechanism (SSM) in the eurozone at first (see EUROPE 11043). SSM gives the European Central Bank power to directly supervise the eurozone's 130 or so “too-big-to-fail” banks, starting in November 2014.
A bank resolution board based in Brussels will comprise representatives of national competent authorities and will be responsible for drawing up resolution plans for banks covered by SSM. It will have “evocation power” over all 6,000 banks in the eurozone, although local and regional banks will remain under the control of the national authorities. If a bank collapses, it will be for the national authorities to implement a resolution plan in line with national rules and regulations.
Based on an intergovernmental agreement for the first eight years, as demanded by Germany, the bank resolution fund (SRF) will be set up in 2016 and have intervention capacity of some €55 billion by 2023, provided by the banks themselves. The bank contributions will initially go into national compartments at the SRF, which will then be gradually pooled over eight years (40% in 2016, a further 20% in 2017 and 10% a year in the remaining years).
If more than €5 billion is requested from the SRF to wind up a single bank, then the plenary sitting (and not the executive sitting) of the resolution board will have decision-making powers. The plenary sitting will have the power to allow the SRF to borrow from the markets if necessary.
The SRF will be allowed to raise capital on the money markets. The eurozone nations have pledged to provide a joint backstop by 2016, although Germany refuses to countenance the idea of the eurozone's permanent bailout fund, the European Stability Mechanism (ESM), playing a role here.
The power to decide when a bank has failed shall mainly be in the hands of the ECB. In general, the European Commission will be the body that endorses resolution plans. The Council of Ministers will only be allowed to issue objections to a plan, particularly if the Commission revises the planned contribution form the SRF. The process of endorsing a bank wind-up plan must be completed in 48 hours or less.
BRRD. “Until now there has been no rule on how to handle the failure of a bank at EU level nor at national level in many cases. The new legislation stipules what needs to happen when a bank needs to be resolved in an orderly fashion with a minimum impact on tax payers and financial stability. It establishes 'the bail-in' principle which means that banks' shareholders and creditors will be the first to face the losses of a bank failure”, commented Gunnar Hökmark (EPP, Sweden), the EP's rapporteur on the BRRD directive.
The new EU rules will be applied by the bank resolution board for countries that are part of banking union, and by national bank resolution bodies in the remaining member states. They require banks to draw up living wills with the competent authority, which would be implemented in the event that the bank collapses.
Resolution funds must be set up in countries that are not part of banking union. Banks will contribute to the funds in accordance with their risk profile. The devil is in the detail and a battle is looming over the calculation methods for deciding how much each bank must pay, when the European Commission unveils implementing legislation later this year. National compartments at the SRF will be allowed to lend money to each other.
The bail-in provisions introduce a hierarchy in 2016 of investors whose savings are to be raided if the bank goes bust. Firstly, shareholders, then other lenders to the bank, which will have to cover at least 8% of the total debt of the bank in question before any public money can be forthcoming (from either the bank resolution fund financed by the banks or from state coffers). The last to be required to cough up will be unprotected bond-holders and private savings of above €100,000.
Once a bail-in has reached at least 8% of the bank's debts, flexibility may be introduced to allow countries to bail out the bank as circumstances require without any further raids on private investors. The directive lays down strict rules for the use of taxpayers' money through a “government stabilisation tool” or “preventative recapitalisation” (see EUROPE 11058).
According to figures published by the European Parliament, bail-ins would amount to up to €142 billion for Barclays, €102 billion for Santander and €100 billion for Société Générale.
DGS. The EP also endorsed the new rules to boost savings guarantees (see EUROPE 10987). Whatever the circumstances, savings of below €100,000 for individuals, placed in any of the 8,000 banks in the EU (in others words 80% of total deposits) will not be raided if the bank goes under. High “temporary savings” of above this amount, due, for example, to the sale of a house, will be fully guaranteed.
Even within banking union, national savings guarantee funds financed by the banks will co-exist alongside the European deposit guarantee system (DGS). “We didn't agree on the amounts”, said Peter Simon (S&D, Germany), EP rapporteur on the issue, delighted that the agreement covers twice as much money as expected. The aim is for the DGS to have 0.8% of covered savings after a ten-year phase-in period. National savings guarantee funds will be allowed to lend to each other.
When a bank goes bust, the timing for individuals to recover their guaranteed savings will go from 20 working days at present to 7 working days in 2024 (15 in 2019 and 10 in 2021). (MB)