Since the crisis started in 2008, the European Commission has worked hard to learn all the lessons from the crisis and create a safer and sounder financial sector. The Commission has proposed 28 new rules to better regulate, supervise, and govern the financial sector so that in future taxpayers will not foot the bill when banks make mistakes. Most of these rules are now in force or being finalised.
Parliament won substantial concessions from finance ministers, especially on the rules establishing the bank Single Resolution Mechanism (SRM) and its related €55 billion bank-financed fund, steered through Parliament by Elisa Ferreira (S&D, PT). These greatly reduce the scope for power-play politics that could otherwise block action against banks, and ensured that the fund can be established faster and used more fairly.
SRM- Frequently asked questions
In the bank recovery and resolution directive (BRRD), work on which was led by Gunnar Hökmark (EPP, SE), MEPs made any potential use of public money subject to very strict processes.
Amended BRRD text, 8.4.2014
BRRD- Frequently asked questions
The updated deposit guarantee (DGS) rules steered through Parliament by Peter Simon (S&D, DE), will ensure that depositors get their money back much faster if a bank fails. It also requires banks to fill guarantee schemes with real cash, rather than mere commitments.
DGS- Frequently Asked Questions
Banks must take losses and pay for fire-fighting funds
During the economic crisis, many banks’ losses were transferred onto the taxpayer, leaving the value of the banks themselves virtually intact. "Bail-in", enshrined in the two laws on bank crisis resolution, by contrast means that bank owners (shareholders) and creditors (primarily bondholders) will be first in line to absorb losses the bank could incur, before outside sources of finance may be called upon.
The two laws on bank resolution will also require banks to finance reserve funds to cover further losses after bail-in has been used. Countries in the banking union (all the eurozone and possibly opt-ins) will share a bank-financed €55 billion Single Resolution Fund, to be established gradually over 8 years. Those outside Banking Union will be required to set up their own bank-financed fund amounting to 1 per cent of covered deposits within 10 years.
MEPs have long argued that when a bank runs into trouble, decisions on how to proceed need to be taken on sound technical grounds Some member states on the other hand wished to give finance ministries a key role in deciding how to handle specific cases falling under the single resolution mechanism. The final compromise limits their influence and political pressure significantly to allow more fairness, speedier action and lower costs to resolve bank problems.
The update to the deposit guarantee scheme (DGS) will oblige EU countries to set up their own bank-financed schemes to reimburse guaranteed deposits (up to €100,000) when a struggling bank is not able to do so itself. This will ensure that taxpayers would not have to bear the costs of guaranteeing such deposits.
MEPs also ensured that depositors will get their money faster. The total amount of their guaranteed deposit would be available within 7 working days, and a subsistence amount (decided country by country) within 5 days. MEPs also inserted clauses which include "temporary large balances" in the guarantee. If a deposit account temporarily has more than €100,000 in it, e.g. due to the sale of a house, all or a part of this higher amount is protected for at least 3 months.
EP press release
EP background note
Commission MEMO (incl infographics)
ECON 'Financial Supervision' documents
Michel Barnier, Internal Market and Services Commissioner, commented: "Today, the European Parliament has adopted 3 key texts to complete the legislative work underpinning the Banking Union. Thanks to the assiduous work of the co-legislators, we have turned the idea of a Banking Union into reality in less than two years. The EU has lived up to its commitments: the Banking Union completes the economic and monetary union and ensures taxpayers will no longer foot the bill when banks face difficulties.
Not only does the banking union help to restore confidence in the banking sector, but it also ensures a truly European system of supervision and resolution of banks when they fail. With today's vote, we remain on track for the operational work to start later this year."
European Parliament President Martin Schulz stated: "Even though European Parliament’s initial proposal was more ambitious, the spirit of this regulation has been safeguarded and led to a major victory for European citizens. From now on, taxpayers will not systematically foot the bill for bank losses. Bail-out will not be the default setting.
This is a decisive step to break the link between bank debt and sovereign debt. From now on, clear rules to resolve a failing bank will be in place and the risks for the whole banking system contained. It's also a major victory for the European Parliament. The European Parliament succeeded in fighting off the illogical pressure of some countries during the negotiations. The Parliament succeeded in defending a fair, efficient, speedy and a truly European mechanism. The Parliament succeeded in safeguarding the interests of European citizens. This improved text signals that parliamentary involvement is not an impediment to optimal solutions. Once again, co-decision proved its worth."
Sharon Bowles, ALDE, Chair of the EP'S ECON Committee: "The passing of the Bank Recovery and Resolution Directive puts an end to taxpayers being on the hook to bail-out banks. We have learnt from the crisis and subsequent experience that the shareholders and bondholders cannot be protected by taxpayers, but it was necessary to have in place proper procedures.
"Super-preference given to everyday depositors means that their money will be last in the line of the bail-in, safeguarding the deposits of EU citizens. This is in addition to the absolute guarantee of the first €100,000.
"One of the dilemmas we faced was to enable sufficient flexibility, given that the circumstances of every resolution are different, whilst still allowing investors to understand their risks. MEPs successfully negotiated a 'presumptive path' approach to resolution, ensuring that costs will be kept to a minimum by granting some flexibility to the resolution authority carrying it out."
European Banking Federation - Vote in EU Parliament paves way for truly European banking landscape
The EBF congratulates the EP with its approval today of the new SRM that will determine how failing eurozone banks can be resolved without relying on taxpayer support, and of new rules for bank recovery and resolution in the EU. The vote paves the way for a truly European banking landscape.
The Single Resolution Mechanism (SRM) and the Bank Recovery and Resolution Directive (BRRD) will shape the future banking landscape in the European Union. The BRRD establishes a clear bail-in mechanism and common toolkit for all EU credit institutions with an emphasis on early intervention and recovery. Using the BRRD as a foundation, the SRM for Eurozone banks is seen as the second pillar of Banking Union and will be the counterpart of the Single Supervisory Mechanism that already is being put into place.
"This vote is a landmark moment for European integration", said Guido Ravoet, Chief Executive of the EBF. "There now is a true European way to deal with troubled banks by involving shareholders, creditors and investors instead of having to rely on national taxpayer support. Introducing measures like these will ultimately help make clear the cost of bank bonds to external investors and thus should renew confidence in the banking sector", said Ravoet. "Having the same rules for banks in all EU member states creates much-needed clarity and makes processes more effective. Although the cost of banks’ funding is likely to go up, it will make it possible for more banks to attract and allocate fresh capital to serve the real economy."
An artlicle for the FT (subscription) points out the six ways in which Europe’s financial sector has changed – or at least is supposed to change:
Governments are no longer sole masters of their banks. Europe’s Banking Union is a project to pool power and money unmatched since the creation of the single currency.
Taxpayers are no longer first in line to bail out banks
Better-funded banks, with less leeway on paying bonuses Banks have made great strides in addressing the woefully inadequate capital buffers seen during the financial boom. The EU law broadly follows the Basel III international accord, which will see big improvements in the quality and quantity of capital, as well as the easy-to-sell assets banks must retain.
Bank-dominated markets move out of the shadows
Regulators leave no financial frontier untouched - one overriding message from EU policy makers is that no corner of the financial system will be left unregulated.
The regulatory game moves to the technicians
The legislating is finished but the lobbying battle has only begun. The laws are punctuated with political compromises that are deliberately ambiguous
Further reporting on the EP plenary 'Super Tuesday' by the Wall Street Jounal (subsciption), the BBC, and Reuters.
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