EU: new crisis measures to avoid future bank bail-outs

Scofflaw

This is partly an update to the "banking union" thread, but seems worth it's own:

The European Commission will propose far-reaching powers for regulators to deal with failing banks today, a step towards the banking union the European Central Bank has demanded to secure the euro's future.

The proposal will suggest closer coordination between countries and powers to force losses on the bondholders of failing banks to prevent a repeat of the chaos following the 2008 collapse of US investment bank Lehman Brothers.

If it wins the backing of EU countries and the European parliament, the law would represent a step in the direction of the banking union championed by ECB president Mario Draghi.

...

Draghi's three-pillar plan for a banking union consists of: central monitoring of banks; a fund to wind-down big lenders: and a pan-European deposit guarantee. Although this would apply chiefly to the euro zone, it would affect other EU countries.

http://www.irishtimes.com/newspaper/breaking/2012/0606/breaking20.html

And from the Commission press release: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/570&format=HTML&aged=0&language=EN&guiLanguage=en

The proposed tools are divided into powers of "prevention", "early intervention" and "resolution", with intervention by the authorities becoming more intrusive as the situation deteriorates.

Preparation and prevention measures:

1. recovery plans setting out measures that would kick in in the event of a deterioration of their financial situation in order to restore their viability.
2. resolution plans with options for dealing with banks in critical condition which are no longer viable
3. if authorities identify obstacles to resolvability in the course of this planning process, they can require a bank to change its legal or operational structures to ensure that it can be resolved with the available tools in a way that does not compromise critical functions, threaten financial stability, or involve costs to the taxpayer.
4. intra-group support agreements to limit the development of a crisis and quickly boost the financial stability of the group as a whole

Early intervention measures:

1. Early intervention powers are triggered when an institution does not meet or is likely to be in breach of regulatory capital requirements. Authorities could require the institution to implement any measures set out in the recovery plan, draw up an action programme and a timetable for its implementation, require the convening of a meeting of shareholders to adopt urgent decisions, and require the institution to draw up a plan for restructuring of debt with its creditors.
2. supervisors will have the power to appoint a special manager at a bank for a limited period when there is a significant deterioration in its financial situation and the tools described above are not sufficient to reverse the situation.

Resolution powers:

1. The sale of business tool whereby the authorities would sell all or part of the failing bank to another bank;
2. The bridge institution tool which consists of identifying the good assets or essential functions of the bank and separating them into a new bank
3. The asset separation tool whereby the bad assets of the bank are put into an asset management vehicle.
4. The bail-in tool whereby the bank would be recapitalised with shareholders wiped out or diluted, and creditors would have their claims reduced or converted to shares.

The resolution framework would involve cooperation between the national authorities involved in cross-border banks:

In order to deal with EU banks or groups that operate across borders, the framework enhances cooperation between national authorities in all phases of preparation, intervention and resolution. Resolution colleges are established under the leadership of the group resolution authority and with the participation of the European Banking Authority (EBA). The EBA will facilitate joint actions and act as a binding mediator if necessary. This lays the foundations for an increasingly integrated EU-level oversight of cross-border entities, to be explored further in the coming years in the context of the review of Europe's supervisory architecture.

There's an open-ended commitment to increasing that, visible in the last sentence.

And resolution funds to provide liquidity will be funded specially by levying the banks in advance:

To be effective, the resolution tools will require a certain amount of funding. For example, if authorities create a bridge bank, it will need capital or short term loans to operate. If market funding is not available and in order to avoid resolution actions from being funded by the state, supplementary funding will be provided by resolution funds which will raise contributions from banks proportionate to their liabilities and risk profiles. The funds will have to build up sufficient capacity to reach 1% of covered deposits in 10 years. They will be used exclusively for supporting orderly reorganisation and resolution, and never to bail out a bank. National resolution funds would interact, notably to provide funding for resolving cross-border banks.

I expect that plan to have fairly widespread support from the member states. It may also run into determined opposition from the usual suspects, although I can't see anything in it that the City would reflexively object to.

cordially,
Scofflaw

andrew

I don't really understand why these measures weren't part of the Euro when it was instituted; unlike other forms of integration which the Euro might need, this aspect doesn't seem like it would ever have been that controversial.

Scofflaw

andrew wrote: »

I don't really understand why these measures weren't part of the Euro when it was instituted; unlike other forms of integration which the Euro might need, this aspect doesn't seem like it would ever have been that controversial.

I could posit two reasons, which are linked - first, the prevailing trend throughout the period of the euro's creation was for less regulation rather than more, particularly of the financial sector. Second, the process of integration is in general a conservative one (outside eurosceptic fantasies of a rush to federalism), and given the trend at the time towards financial deregulation it would probably have been hard to persuade all the member states that such measures were necessary, when some of them (Ireland, for example) intended seeing how much money deregulated banks could make them.

cordially,
Scofflaw