17 September 2012

EBF Position on European Commission proposals for Bank Recovery and Resolution Directive

Overarching Principle

• EBF supports a high degree of harmonisation that leaves no room for national opt-outs and alternative options on the key elements of the draft Directive.
• EBF supports the creation of a framework that minimises the systemic and fiscal consequences of bank failures and eliminates moral hazard.
• Resolution frameworks need to be introduced globally to ensure a level playing field.
• There needs to be legal certainty with regard to the accountability and liability of the institutions and authorities involved in crisis management.

Scope

• EBF supports a broad scope of application of the Crisis Management Framework to all financial institutions, albeit respecting the principle of proportionality.

Cross-Border Issues

With regard to Resolution Colleges, EBF believes that:

• All resolution authorities should have a mandate for global financial stability;
• There should be only one resolution authority per country represented in a resolution colleges;
• The home authority should be the lead authority;
• Third countries should be recognised if their rules respect the global financial stability.

Recovery and resolution planning

• A bank’s management should be responsible for recovery planning, which should be undertaken at a group level unless management believes plans should also be prepared for subsidiaries and this is agreed by the competent authorities. The possibility of preparing individual RRPs on a voluntary basis must be ensured.
• Confidentiality of Recovery and Resolution Plans should be strengthened, oversight established and sanctions imposed in the case of a breach of confidentiality requirements.
• Recovery and Resolution Plans or other preventative measures should not be used for supervisory intervention in the structure or operation of healthy financial institutions without restructuring or resolution having become necessary.
• The EBF stresses the need to establish recourse, with a suspensive condition, for the most intrusive "resolvability" and early intervention measures.

Intra-group Support

• The voluntary nature of ex-ante intra-group support agreements must be respected in all circumstances.
• The absence of an ex ante intra-group support agreement should not prevent the possibility to provide such support if the institution decides to do so, on a case-by-case basis and according to the group policies.

Early Intervention

• Prevention, early intervention and resolution procedures and measures must be clearly defined in terms of their respective tools and measures. These in turn must be used proportionally.
• Given the signalling risks of public disclosure of the use of early intervention tools the recovery phase must remain private and the management in place should have the choice of recovery tools applied. Board Directors must retain sole control of the institution to ensure that they are able to fulfil their fiduciary duties under corporate law.

Conditions for Resolutions

• The degree of supervisory discretion implied by the conditions necessitates resolution authorities to work with the institutions and the market to explain how the resolution powers may be implemented in practice.

Valuation

• Valuation should generally be based on a market value, which allocates the losses between the shareholders and the creditors of the institution with a defined hierarchy on a fair basis.
• Subject of valuation (e.g. whole bank, business units, single assets or liabilities), objectives of valuation (e.g. fair, realistic, and prudent) and valuation assumptions (going concern vs. gone concern) depend on the decision about the application of resolution tools.
• Because of the different and particularly opposing requirements on the valuation (e.g. fair and realistic valuation vs prudent assumptions) one single valuation method could not achieve all objectives of this Directive.
• The different objectives of the valuation require a valuation on a going concern basis (going concern value) as well as on a gone concern basis (liquidation value).
• Although it would be desirable that an initial valuation at the entry into resolution determine once and for all the allocation of losses between shareholders and the different classes of creditors, this is unfortunately unrealisable. Consideration must therefore be given to how to manage the impacts of subsequent, more precise, valuations.
• EBF encourages the EBA to publish its proposed methodology for valuation sufficiently ahead of the Directive taking effect.

Bridge Banks and Competition

• The bridge bank should comply with regular prudential requirements notably those defined in the Capital Requirements Directive IV.
• The bridge bank should be managed in a way to minimise any distortion of competition in the financial services markets given that the bridge bank will benefit from the backing of the State, i.e. a bridge bank should not be entitled to expand its activities beyond those clearly defined as its core activities.

Bail-in

• Members generally support bail-in as a resolution tool, but stress that it must be a last measure (ultima ratio). Concern remains among some Members to use bail-in as a recovery tool as the aim of the bail-in tool is to protect taxpayers in a resolution situation.
• EBF supports that the trigger conditions for bail-in should be the same as for other resolution tools, but suggest setting out EBA guidelines with further principles for using bail-in.
• EBF supports the proposition that a broad range of instruments be eligible for bail-in, however further assessment is needed with regard to the exclusion of short-dated instruments and derivatives. Policy-makers should further consult with investors and other stakeholders in the market to ensure that an appropriate balance is reached to ensure sufficient bail-inable debt at an acceptable funding cost.
• There should be no requirement for firms to hold a specific proportion of their Total Liabilities as bail-in instruments. An alternative would be for Resolution Authorities to ensure that each institution maintains a sufficient amount of bail-inable liabilities as an extension of the Recovery and Resolution Planning process. There should not be a one-size-fits-all minimum.
• The proposals for write-down need to be consistent with the CRD and Basel III provisions on Point of Non-Viability (PONV) capital.
• The bail-in regime needs to be compatible with third countries and the EBF urges EU policymakers to follow the lead of the FSB and seek to ensure international harmonisation.

Restriction of the enforcement of security interests

• Restriction of the enforcement of security interests shall follow the same regime as the restrictions concerning the close-out netting including, for the avoidance of doubt, when such security interest secure the indebtedness of a bank.

Suspension of termination rights and safeguards for netting agreements

• Further structuring/clarification is needed regarding the different but overlapping provisions for suspensive powers or powers to exclude termination rights.

Specific rules concerning close-out netting

• It should be ensured that any measures suspending/transferring financial contracts do not, by themselves, trigger any adverse effects under the CRD (e.g. no impact on the recognition as netting agreement for the purposes of the CRD).
• EBF welcomes a broad definition capturing at the minimum all netting agreements for financial transactions, in particular derivative, securities lending and repo transactions and regardless of the type of standard/master agreement used.
• EBF stresses the importance of ensuring that the rules also apply to third party country counterparties (specifically where these are subject to equivalent rules under their home jurisdiction.

Financing Arrangements

• The Commission’s approach of requiring every Member State to have in place financing arrangements funded by the banking sector is acceptable.
• The banking union discussion is relevant for many of the issues addressed in the Recovery and Resolution Directive (RRD); however, it is vital that this Directive is delivered in a manner which supports the Single Market.
• As regards the Directive on DGS, the proposal by the Commission has been amended by the Council and the European Parliament, but there is no agreement yet. It is important to ensure the consistency of both Directives in this regard, while taking into account the differences in scope where relevant.

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