16 November 2012

Insurance Europe publishes key messages on proposed Directive to establish framework for recovery and resolution of credit institutions

European insurance companies have approximately €7,500 billion of assets under management, of which approximately 55 per cent is invested in both fixed income and loan assets. An insurer’s investment strategy is generally driven by the need for both predictable and stable long-term cash flows to meet insurance liabilities. In this regard, insurers are an important source of long term funding for the banking sector and the impact of the proposed Recovery and Resolution Directive on this funding process requires consideration.

Insurers recognise the importance of breaking the link between banks and their sovereigns. However, from an investor perspective, it is important that the proposed bank resolution tools strike a balance between ensuring an appropriate framework for managing resolution and recovery actions and maintaining sufficient incentives to invest in the banking sector. Specifically, the establishment of a bail-in regime could have a significant impact on investment decisions and, as a consequence, have implications for the banking sector’s ability to fund itself successfully. An improperly calibrated bail-in mechanism could not only lead to an increase in the cost of banks’ debt funding but could also restrict banks’ access to long-term financing.

Insurance Europe strongly believes that the use of the proposed ‘bail-in’ mechanism by resolution authorities should be incorporated into a ‘ladder of intervention’ for use in the case of a failing credit institution. Within this framework, use of the bail-in mechanism should be limited to instances where a credit institution is no longer viable as a going concern. The assessment of whether a credit institution is failing should be based on clearly defined objective and quantifiable criteria and the process of making this assessment should be as transparent as possible. Supervisory discretion should be kept to a minimum to avoid disruptions in markets. In the interests of transparency, the bail-in mechanism should only be applied to debt issued following the entry into force of the Directive, with no impact on existing contracts.

Insurance Europe would suggest that in cases of bank recovery, creditor participations should be determined on a contractual basis within a minimum regulatory framework and should be distinct from the proposed bail-in mechanism (e.g. contingent convertible bonds). This would allow investors and banks to structure contractual parameters in advance in a manner acceptable to both, and would avoid the need to implement prescriptive regulation. In cases of a bank recovery, this process would have the advantage of ensuring that the existing hierarchy of creditors is unaffected and the contract would be directly applicable to foreign creditors.

Position Paper

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