Brdo, 07/04/2008 (Agence Europe) - By launching procedures for signing a new memorandum of understanding (MoU) on cross-border financial crisis management, financial ministers and governors from EU central banks have made a commitment to closer cooperation in critical and normal situations. This memorandum of understanding was prepared by the Economic and Financial Committee (EFC), approved at the informal meeting in Brdo on Friday 4 April, and extends the previous text of 2005 (EUROPE 8948). As part of this new protocol, stakeholders indicate that they are seeking ways of problem solving in the private sector and reducing the socio-economic costs while promoting market discipline and limiting ethical complications. The text does not include any kind of legal commitment to the different parties making an intervention in favour those affected by a financial crisis caused by the collapse of a bank operating in several member states and is therefore not legally binding. The new provisions will be implemented as from December 2008 and will also be used during a crisis simulation exercise in spring 2009.
The new MoU now includes nine common crisis-management principles ratified in Porto (EUROPE 9503). One of the latter states that the use of public money… can never be simply systematic and is only possible when the social benefits of public intervention outweigh the costs of the injection of public funds. The documents explain that in the event of public money being injected, the net direct budgetary costs are shared between the member states affected on the basis of fair and balanced criteria. The text also instructs authorities in member states to think about how to share the potential budgetary burden. The MoU also includes a common framework for assessing the systemic implications of a financial crisis and practical guidelines for crisis-management. Supervisors in the securities and insurance markets have decided to join the mechanism. The report also contains in the appendix, an example of the kind of voluntary cooperation agreement, that is even more specific and which two or several member states can adopt in an effort to resolve a crisis in their countries.
Coordination procedures. The MoU and guidelines define the procedures governing participation of all the different parties in a crisis on the basis of legal existing responsibilities and the decentralised supervisory framework, as well as support from domestic standing groups, colleges of supervisors and central bank networks. They also define the coordination mechanisms based on national and cross-border coordinators. The latter derives authority from the financial institution's country of origin. Cross-border cooperation could also be improved with the creation of cross border stability groups in charge of tackling potential problems involving companies, markets and specific infrastructure of interest to the whole of the group. Sufficient cross-border cooperation is laid down in any case in a normal situation in order to improve the tools and decision-making mechanisms needed when a crisis arises. The MoU could also be used as the basis of broader international cooperation and be applied to non-EU country governments, where necessary, notes the document (which the countries in the European Economic Area have been invited to sign).
Crisis Simulation Exercise. Following signing of the MoU, the preparations of the technical work on a crisis simulation exercise foreseen for the spring of 2009 (a report will be published in September 2009). The exercise will test the functioning of the cooperation networks in a decentralised manner; the efficiency of the cooperation agreements; obstacles to an efficient crisis management and resolution, including conflicts of interest, burden sharing and the functioning of the crisis management tools (deposit guarantees, insolvency procedures and winding up and public intervention tools). The most recent crisis simulation exercise, held in 2006 (see EUROPE 9262), revealed a number of gaps in coordination on the basis of the previous MoU.
The ministers may also look in more detail at deposit guarantee schemes at the ECOFIN Councils of June and December 2008. They may discuss whether there is a case for regulatory action to harmonise rules in this connection (the Commission will issue a report in September). In December 2007, the European Parliament endorsed the Commission's view that no amendment to the European deposit guarantee system was required (see EUROPE 9565). (A.B.)