The legislative package on reducing financial risks tabled by the European Commission in November 2016 (see EUROPE 11674), which has been the source of many differences of opinion in Europe, has also attracted criticism from the other side of the Atlantic.
In a letter to the American Secretary of the Treasury, Steven Mnuchin, on Tuesday 31 October, two of the largest American banking lobbies express grave concerns at the 'banking resolution' plank of the package, criticising the introduction of powers to suspend payment obligations before and after the resolution of the bank.
Readers may recall that the 'BRRD' directive on banking resolution already contains provisions allowing certain payment obligations to be suspended for up to two working days. The modification proposed by the Commission brings in two additional stay instruments preventing investors from selling their debt instruments in a struggling bank, one to be triggered in the early intervention phase for up to five working days and the other in the resolution phase, also for up to five working days.
The two signatory organisations of the letter, The Clearing House and The Securities Industry and Financial Markets Association, consider that such a long freeze on a bank's payment obligations - up to 12 working days if all instruments were used - could compromise financial stability in the US and wider world.
They argue that the possibility of this suspension would be automatically pro-cyclical: it would encourage the creditors and European banks to run away at the first sign of trouble, thereby risking speeding up the default of the bank whilst increasing the systemic consequences in the EU and the world. Significant reduction of cross-border activities, fragmentation of the global financial markets and reduction in opportunities for market players are all possible consequences of this proposal, they consider.
This increased risk may be reflected in the American rules and affect the viability of operations with European banks, the organisations warn. Under the legislation in force in the US, American banks may be required to hold more regulatory capital and liquidity to absorb risks related to transactions with EU banks if the resolution scheme ushers in a greater risk on banks' counterparties.
“These effects would begin day one from the mere introduction of these powers into EU law, regardless of whether EU regulators ever actually use the stay powers”, they stress.
These instruments, which were called for by the Ecofin Council in its conclusions of 17 June 2016, have the specific support of EU member states that already authorise this type of suspension in their national insolvency legislation, such as Germany.
It is vital that the circumstances in which the European regulators may use these instruments are set out “objectively and precisely” to minimise any arbitrary judgment, the European Federation of Savers and Users of Financial Services (Better Finance) told EUROPE on Friday 3 November. It argues that this decision-making process should furthermore involve savers' representatives and, above all, not be carried out in isolation from the other global jurisdictions. This would “only generate mistrust towards EU financial institutions and push EU citizens as financial services users to seek protection for their savings elsewhere”, it adds.
In his draft report published at the end of September, the European Parliament's rapporteur on the dossier, Gunnar Hökmark (EPP, Sweden), proposed to shorten the suspension period to two working days for each of the instruments. Implicitly referring to this reduction, the American lobbies explain that it would not be enough to remove the highlighted risks altogether.
Not planning to stop at outlining their concerns, the organisations urge Mnuchin to alert the American Financial Stability Oversight Council to the dangers presented by this European proposal and to raise the matter in the forthcoming regulatory dialogue between the US and the EU. (Original version in French by Marion Fontana)