17 September 2013

EBF: Positioning paper on the principles underlying the Single Resolution Mechanism

The EBF is supportive of the concept of Banking Union as a complement to EMU and in the spirit of promoting the single rulebook and its consistent application. The Banking Union framework needs to progress to overcome the present fragmentation of financial markets and help break the link between sovereigns and the banking sector. It should promote a level playing field as well as provide an efficient common crisis management framework for banks in countries participating in the Single Supervisory Mechanism.

In addition, it should further alleviate contentious home-host issues in the recovery and resolution process within the participating Member States, as it would overrule national interests in cross-border bank failures. It should also facilitate the speed of cross-border resolutions which in turn may minimise the systemic impact and the cost of bank failures as well as the need for taxpayer support.

The EBF in principle supports the creation of the Single Resolution Board (the Board) to plan and oversee banking resolutions. EBF Members believe that the Board should be given a strong legal basis, if deemed necessary by a treaty change.

The Board should work in close contact with the European Central Bank (ECB) to monitor the health of banks in the Banking Union and develop resolution plans and minimise any duplication of data requests.

The governance of the SRM needs to be solid from the start. It should be upfront clear what the roles and responsibilities of the stakeholders in resolution and supervision are with the basic principle that duplication of responsibilities should be avoided.

The current proposal for the SRM should be also underpinned by a harmonised framework for Bank Recovery and Resolution (BRRD) at the EU level which addresses the basic framework for the resolution of banks. The EBF urges EU policymakers to finalise the negotiations of the BRRD without delay.

The Board should ensure that effective and binding cross-border decisions on bank resolution are taken in an appropriate timeframe for managing a crisis, with sufficient powers and resources to ensure these decisions are executed in a consistent manner. The ultimate decision maker in the SRM should be independent, but accountable through democratic oversight and answerable to legal proceedings and rights of appeal.

A key precondition for the creation of the SRM is that it should not be burdened with legacy costs. Banks should therefore be given a financial health check (i.e. their balance sheet should be assessed) by the ECB prior to their admission, if the ECB has not recently already performed such a test. Legacy asset shortfalls in the banking sector should be dealt with on a national basis.

EBF Members agree that the SRM should be supported by a credible bail-in regime and resolution financing arrangements, in the form of a Single Resolution Fund (SRF). However, while several EBF Members are concerned that the SRF is not feasible in the short term, all EBF Members agree that significant preconditions need to be fulfilled before the SRF can start operating. Most important is an assessment of the balance sheets of all the SSM banks.

While the SRM should be supported by the SRF, the EBF firmly believes that the principle tool for absorbing losses and recapitalising restructured banks is bail-in and not the SRF. The level of outstanding senior unsecured long-term debt currently held by banks - around €1.1 trillion - is 20 times the size proposed for the SRF. Bail-in would absorb all or most of the cost of a bank failure in most circumstances.

The purpose of the SRF is not and should never be recapitalisation - as such the size of the SRF should be limited in line with a targeted purpose to provide financing to meet operational costs of resolution. Its use should be subject to well-specified preconditions and safeguards to avoid moral hazard.

When the SRF is created, this should be done in a way that minimises the impact by ensuring: no duplication of contributions by banks; phasing out national resolution funds; contributions are risk-based and vary in proportion to the likelihood of failure and are to be capped; the target level is built up over a reasonable timeframe (at least 15 years) and subject to strict annual affordability limits.

The entry into force of the BRRD and of the SRM Regulation should be closely aligned, in order to avoid the double duty to set up national resolution funds next to the SRF and the administrative burden to merge them into one single fund. Alternatively, the entry into force of the national resolution funds foreseen by the BRRD should be delayed.

The SRF should make extensive use of payment commitments which are fully backed by collateral of low risk assets unencumbered by any third party rights and alternative financing arrangements in order to limit the impact on the EU banks’ capacity to back the real economy.

Full position

© EBF