The progress report drawn up by the Estonian Presidency of the Council of the EU on the member states’ work on reducing and sharing financial risks shows that the former is making far swifter progress than the latter.
This is what the ambassadors of the member states to the EU will conclude on Friday 1 December. This long-standing project will be discussed at ministerial level at the Ecofin Council of Tuesday 5 December, before being put before the forthcoming Bulgarian Presidency of the first half of 2018.
According to several documents of which EUROPE has had sight, the legislative package on risk reduction presented in November 2016 has been discussed at 14 expert meetings at technical level since the beginning of July, whilst the legislative proposal to bring in a European Deposit Insurance System (EDIS), with a view to completing Banking Union in the Eurozone, has been discussed by the national experts at the Council just three times.
Unlike the proposal on EDIS, compromise proposals have been submitted to the delegations on the ‘risk reduction’ package, which is made up of prudential measures (capital requirements, liquidity, etc.) and measures relating to the resolution and recovery of banks.
The Estonian Presidency has carried out discussions concerning several key political issues that have emerged. These include a provision in the second pillar of the 'CRD/CRR' package, authorising supervisors to impose additional capital requirements for micro-prudential purposes and on a case-by-case basis. This provision has come up against stiff opposition from many countries, the Presidency notes, well aware of the need to build more flexibility back into the use of the supervisory measures in question.
Should a maximum level be introduced to the bank capital buffer for banking groups (O-SII) with a systemic impact at the level of a member state and, if so, how high should it be? The Estonian Presidency is proposing to set this at between 3% and 3.5%, with the option of going further if the Commission agrees. A similar question has been raised for the subsidiaries of these groups.
Work has also made progress on the introduction into European legislation of liquidity standards (‘net stable funding ratio’, or NSFR) and of a prudential standard concerning the market risk (‘fundamental review of the trading book’, or FRTB). On the second point, discussions are focusing on setting a transitional period - to be four years, according to a suggestion by the Presidency - for the phasing-in of the requirements so that the required increases in bank capital can be staggered.
Calibrating the minimal requirements (MREL) of own funds that can be mobilised in the event of bank resolution is another hotly disputed dossier. For instance, should the MREL requirements be linked to the rule of the ‘BRRD’ directive imposing a minimum of 8% of the bank’s liabilities to be mobilised in the event of a bail-in before having any recourse to public money and, if so, how should this be done? Certain countries feel that there should be a minimum threshold, whilst others argue that the 8% threshold can be achieved by mobilising other types of financial instrument.
EDIS. In the ‘sharing of financial risks’ plank, the Estonian Presidency has focused on a small number of characteristics of the future EDIS system: - scope of application; - putting together a methodology to contribute banks’ contributions to the future European Deposit Insurance Scheme through the national regimes; - identifying alternatives to the EDIS system.
Setting out the scope of application of EDIS is still a major question to which there is no answer. In this context, discussions have focused on whether branches of a bank headquartered in a third country should be included, as well as medium-sized financial entities not covered by the ‘supervision’ and ‘resolution’ planks of Banking Union in the Eurozone.
In a working document, the Estonian Presidency proposes that branches of third-country groups be included in the scope of application of EDIS if they pass an equivalency test of the prudential standards to which they are subjected. There are four options for the inclusion of medium-sized financial entities, including the creation of a dedicated guarantee fund.
As for the exclusion of a financial entity from EDIS, this possibility should be activated only as a last resort once a series of corrective measures has been exhausted. Even in the event of breaches of the European rules, a national deposit guarantee system should be able to trigger the EDIS system in an emergency for a failing bank. In such cases, the assistance received would take the form of a loan, the Presidency explains.
The Estonian document does not state whether the national technical experts have discussed the Commission's recent proposals to move forward discussions at the Council on finalising Banking Union (see EUROPE 11881). (Original version in French by Mathieu Bion)