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20 October 2010

Commission sets out its plans for a new EU framework for crisis management in the financial sector


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The EC Communication also includes a "roadmap" providing a longer-term view of some of the major challenges which will need to be overcome in order to ensure smooth handling of crises. Orderly failure should be permitted and no bank should be "too big to fail".


Internal Market and Services Commissioner Michel Barnier said: “First, we must try to avoid a financial crisis in the future. That is why our work to make the banking sector stronger and to create a real supervisory framework is so important. But banks will still face difficulties in the future. They might even fail and should be allowed to do so. We need to make sure that they can do so without bringing down the whole financial system, or risking that taxpayers are called on to pay the costs. No bank should be "too big to fail" or too interconnected to fail. That is why we need a clear framework which ensures authorities throughout Europe are well prepared to deal with banks in difficulty and handle possible bank failures in an orderly manner. That is the aim of today's plans.”
The Commission's Communication sets out the main elements that will be part of the Commission's legislative proposals next year, and is the result of extensive consultations over the past months.
The new framework described in the Communication will be broad-ranging and aims to equip authorities with common and effective tools and powers to tackle bank crises at the earliest possible moment, and avoid costs for taxpayers. The toolbox of measures will include:
·         Preparatory and preventative measures such as a requirement for institutions and authorities to prepare for recovery (i.e. dealing with serious difficulties faced by a bank) and resolution plans to ensure adequate planning for financial stress or failure, (such plans are called "living wills");
·         Powers to take early action to remedy problems before they become severe such as powers for supervisors to require the replacement of management, or to require an institution to implement a recovery plan or to divest itself of activities or business lines that pose an excessive risk to its financial soundness;
·         Resolution tools, such as powers to effect the takeover of a failing bank or firm by a sound institution, or to transfer all or part of its business to a temporary bridge bank, which would enable authorities to ensure the continuity of essential services and to manage the failure in an orderly way.
No entity should be "too big too fail". The overriding objective will be to ensure that banks can fail without jeopardising wider financial stability. That means banks can be resolved in ways which minimise the risks of contagion and ensure continuity of essential financial services, including continuous access for bank account holders to their accounts. The framework should provide a credible alternative to the expensive bank bail-outs we have seen in the last couple of years.
Europe is also faced with the issue that many banks operate throughout Europe but no system exists to deal with the cross-border implications of such a Europe-wide bank failing. So a key challenge is to put in place effective arrangements which ensure that authorities coordinate and cooperate as fully as possible in order to minimise any harmful effects of a cross-border bank failure. The Commission proposes to build on existing supervisory colleges (groups of national supervisors) to set up resolution colleges (where supervisors and national authorities in charge of resolution would meet), for the purposes of crisis preparation and management. The Commission will also propose that the new European Supervisory Authorities and in particular the European Banking Authority, should have coordination and support roles in crisis situations, without impinging on the fiscal responsibilities of Member States.
As previously set out in its Communication on bank resolution funds from May 2010, the Commission is also proposing that national funds should be set up  on the basis of contributions paid by banks, to fund the cost of future resolution measures and ensure that resolving a bank is a credible option. At present, moral hazard is pervasive across the system as no alternative to government bail-outs exist. The existence of common financing mechanisms which avoid use of taxpayer funds should enhance cross-border cooperation and facilitate advance planning of how the costs of resolving a cross-border institution should be shared.
Finally, the Communication sets out a roadmap of measures which will be considered in the longer term with a view to delivering a more integrated crisis management framework, in particular better suited to integrated European banking groups (i.e. banks operating at European level). The Commission plans to examine the need for further harmonisation of bank insolvency regimes with a report by the end of 2012 and, alongside the review of the European Banking Authority in 2014, will assess how a more integrated framework for the resolution of cross-border groups might best be achieved.


© European Commission

Documents associated with this article

EU Framework for Crisis Management in the Financial Sector.pdf


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