Crisis management in the financial sector

KEY POINTS

Scope

The set of rules for crisis management in the financial sector concerns:

• all credit institutions;
• certain investment firms, more particularly those whose failure might put the financial system at risk.

Objectives

The aim of these rules is to ensure that the financial system is stable, even in the event of a business failure, and to:

• encourage prevention and preparation to reduce risks in the financial system;
• prepare credible resolution tools;
• implement fast and effective means to act;
• reduce moral hazard by ensuring shareholders contribute to costs;
• contribute to a smooth resolution of cross-border groups to preserve the internal market;
• ensure legal certainty;
• limit competitive distortions.

Areas of action

The communication identified measures that should be taken in the following areas:

• authorities responsible for crisis management — each EU country must designate a resolution authority that is independent from the supervisor;
• preparatory and preventative measures — including the implementation of a supervisory programme for each supervised institution and on-site supervisory examinations;
• triggers — early intervention should be put in place in case a bank or investment firm cannot satisfy the requirements of the Capital Requirements Directive;
• early intervention — provides for the widening and clarifying of supervisors’ powers. Banks and businesses would be obliged to present a plan enabling the institution to recover in the event of financial difficulties;
• debt write-down — allowing an institution in difficulty to continue its activities or to cease some of them in order to limit risks of ‘contagion’ to other institutions;
• resolution — reform legislation on bank insolvency in order that failing banks may benefit from liquidation proceedings.

Action taken

1. Supervisory authorities

3 European supervisory authorities were established in 2011:

• the European Banking Authority (EBA), which deals with bank supervision, including the supervision of the recapitalisation of banks;
• the European Securities and Markets Authority (ESMA), which deals with the supervision of capital markets and carries out direct supervision with regard to credit rating agencies and trade repositories; and
• the European Insurance and Occupational Pensions Authority (EIOPA), which deals with insurance supervision.

The 28 national supervisors are represented in all 3 supervising authorities.

A European Systemic Risk Board was established to monitor and assess potential threats to financial stability that arise from macro-economic developments and from developments within the financial system as a whole.

1. Bank Recovery and Resolution Directive

This directive (Directive 2014/59/EU) entered into force in all EU countries in July 2014. It sets out a number of rules to harmonise and improve the tools for dealing with bank crises across the EU, including:

• banks are required to prepare recovery plans to overcome financial distress;
• authorities are granted a set of powers to intervene in the operations of banks to avoid their failure;
• authorities also have powers to implement plans to resolve failed banks in a way that preserves their most critical functions and avoids taxpayers having to bail them out;
• a Single Resolution Fund for countries in the euro area was established in 2016; separate national funds remain in place for those EU countries outside the area;
• procedures to improve cooperation between national authorities.

1. Deposit Guarantee Schemes (DGSs) Directive

This directive (Directive 2014/49/EU) entered into force in 2014. It strengthens the existing system of national DGS to respond to the weaknesses revealed by the financial crisis. Its key elements include:

• universal guarantee of deposits up to €100,000;
• easier and faster access to repayment — a gradual reduction in payment deadlines from 20 working days to 7 working days;
• more robust financing regime;
• better information for depositors.