15.2.2013   

EN

Official Journal of the European Union

C 44/68

1.1

The EESC welcomes the legislative proposal for a framework designed to address banking crises pre-emptively, safeguard financial stability and diminish the burden on public finances by introducing new preventive, early intervention and resolution tools. Ensuring the effective resolution of failing financial institutions within the EU is an essential element in the completion of the internal market. The EESC supports the introduction of the proposed tools but would welcome additional clarity regarding those which are new and have not been tested in systemic crises. The EESC expects that the content of this directive would be coordinated with the provisions on the banking union.

1.2

The EESC accepts the proposal that Resolution Authorities (RAs), in consultation with the competent authorities, should draw up and update resolution plans. The Committee is convinced that both individual and group resolution planning and updating would be improved if banks were also involved in the process. The professional advice of other stakeholders, for example consumer organisations, trade union representatives, etc., that could be affected by the resolution plans should also be sought on relevant matters where appropriate.

1.2.1

Central banks, including the ECB, are best placed to carry out assessments on matters of public interest and the EESC recommends involving them in the assessment of the recovery and resolution plans, while at the same time fully respecting their independence.

1.3

Confidentiality requirements with respect to credit institutions and their recovery and resolution plans should be strengthened. Special provisions in the directive should guarantee that all authorities, institutions and stakeholders involved in the drafting, updating and assessment of the banks' recovery and resolution plans strictly respect the confidentiality of the relevant information.

1.4

The EESC welcomes the proposed provisions allowing for the introduction of harmonised rules and conditions under which intra-group financial support is to be provided and at the same time points out that the protection of the transferee's and transferor's interests and rights should be well balanced when there are disagreements among them regarding the support. The Committee fully supports the provisions of Article 19(1) and proposes to expand the requirement in Article 19(1)(f) to additionally include any higher own funds and liquidity requirements imposed by the regulators of the transferor's country.

1.5

The key trigger conditions for appointing a special manager (SM) are a matter for the competent authorities to judge. The EESC accepts the need for the competent authorities to enjoy some discretion, but taking into account the significant role and powers given to special managers, the Committee would encourage a greater degree of certainty for the institutions by introducing explicit and more clearly defined trigger rules and conditions.

1.6

The appointment of the SM is a highly intrusive early intervention measure that has to be applied after the less intrusive measures have been exhausted. However, there might be a situation when a significant deterioration in the financial position of the institution develops too quickly and a special manager has to be appointed without waiting for the implementation of the less intrusive early intervention measures proposed in Article 23(1). Under such circumstances it should be possible to appoint an SM even if one of the trigger conditions described in Article 24 (i.e. ‘… other measures taken in accordance with Article 23 are not sufficient to reverse that deterioration …’) has not been met.

1.7

The powers and responsibilities of RAs need additional distinctions and clarifications. While the competent authorities/supervisors are responsible for early intervention, the RAs are responsible for choosing and applying the resolution tools. However, in some cases certain responsibilities are executed both by supervisors and RAs. Depending on the choices made by MSs, supervisors could perform the responsibilities of RAs but the two functions should be separated in order to minimise the risks of forbearance. The EESC would encourage establishing a clear distinction between the mission of supervisors and RAs and the timing of their intervention.

1.8

The directive proposes that the management body of an institution should notify the competent authority when they consider that the institution is failing or likely to fail. The EESC believes that, if the initiative is left entirely to the discretion of the bank's management, the decision of the RA could be taken too late. The directive should leave no doubt that the supervisors have the right and opportunity to inform the RA without waiting for notification by the bank's management whenever they deem that the trigger conditions for resolution have been met but the notification is delayed. It should request MSs to provide for heavy penalties for bank managers who are in breach of the rules of professional practice.

1.9

The wide range of powers given to the RAs, coupled with a limited right to redress granted to third parties, raises concerns regarding the legal solidity of the proposed framework. In many MSs, especially those governed by common law jurisdictions, the courts would most probably protect their own rights to hear claims of judicial review of any decision made by an administrative authority, when any individual or group can show that they have suffered as a result of that decision. Should anybody feel that the RA or the administrators acted with gross professional misconduct, the judges only enjoy a kind of immunity for decisions taken in court, but no law or regulation can extend this privilege to an administrative authority such as the RA, which might then be held liable in court for damages.

1.10

The bail-in tool needs additional explanations and clarifications. In order to minimise any uncertainties among investors, clear rules should be introduced regarding eligible liabilities and the threshold conditions for bail in.

1.11

The EESC welcomes the introduction of harmonised funding rules based on ex ante contributions for deposit guarantee funds (DGF) and resolution funds (RF). The criteria for contributing to resolution funding seem to be correct and realistic in relation to the current situation; however the economic and financial conditions may change unexpectedly, as we have seen in recent years. The EESC suggests the introduction of a rule whereby the criteria for ex ante contribution can be revised from time to time.

1.12

While accepting the potential benefits from a possible synergy of a single institution for the DGF and RF, the Committee also welcomes the Commission's approach, which allows each MS to decide whether it would prefer to have one or two financing arrangements (funds). In both cases the directive should introduce realistic provisions guaranteeing that the DGF can perform its main function to protect retail depositors at all times, taking account of what is to be established by the banking union.

1.13

The EESC welcomes the introduction of the effective resolution of failing financial institutions within the EU as an essential element in the completion of the internal market. A European system of financing arrangements would ensure that all institutions are subject to equally effective resolution funding rules whilst contributing to the stability of the single market and providing equal conditions for competition. The Committee would welcome the introduction as soon as possible of a realistic roadmap towards establishing the future system of financing arrangements.

1.14

The EESC hopes, however, that the directive pursues the objective of greater regulatory integration and convergence, beginning with the euro area countries.

2.1

The Commission proposes a directive (1) establishing an effective policy framework to manage bank failures in an orderly way and to avoid contagion to other institutions by equipping the relevant authorities with common and effective tools and powers to address banking crises pre-emptively, safeguarding financial stability and minimising taxpayer exposure to losses. The current proposal further specifies the Commission's views on the crisis management framework in the financial sector expressed earlier in one of its Communications (2). The new legislative framework is designed as an alternative to existing national insolvency procedures and bailout in particular and is in line with the key attributes of effective resolution regimes for financial institutions, developed by the Financial Stability Board (FSB) (3) and the principles agreed upon at the G-20 meetings.

2.2

Bailouts place an enormous burden on public finances, cause distortions to competition, increase moral hazard, and are currently recognised to be an unsatisfactory option in a situation where a bank's closure threatens to create contagion. The proposed framework is expected to:

2.3

On 12 September 2012, the Commission proposed the establishment of a single supervisory mechanism (SSM) for banks in the euro area. The ultimate responsibility for specific supervisory tasks related to the financial stability of all Euro area banks will lie with the European Central Bank (ECB). National supervisors will continue to play an important role in day-to-day supervision and in preparing and implementing ECB decisions. The ECB will be able to carry out early intervention measures when a bank breaches or risks breaching regulatory capital requirements. Once agreement on the existing Deposit Guarantee Schemes (DGS) and the proposal for a directive on the recovery and resolution of credit institutions is achieved, the Commission envisages drawing up a proposal for a single resolution mechanism, which would be responsible for coordinating the application of resolution tools to banks within the banking union (BU).

3.1

The events of the last few years have shown that bank crises should be addressed pre-emptively in order to prevent bank failures as far as possible; the sad lesson derived from the first crisis of 2007 is that a big individual failure almost always entails a systemic crisis, with the familiar social and economic consequences. Deviations from the established and generally accepted principles of bankruptcy laws are then justified by the public interest.

3.2

Currently there is no harmonisation of the procedures for resolving credit institutions at EU level and the EESC welcomes the legislative proposal for a framework that is designed to address banking crises pre-emptively, safeguard financial stability and diminish the burden on public finances by introducing new tools and procedures. The Committee is aware that the new preventive, early intervention and resolution tools and procedures alone can hardly resolve systemic crises but if applied appropriately and consistently, they could contribute to preventing them from happening. While supporting the introduction of recovery and resolution tools, the EESC warns that some of them (bail in) have not been tested in systemic crises and there is not sufficient experience with their application, which means that they should be treated with special care.

3.3

The EESC welcomes the attempt to establish a framework for managing bank failures in an orderly way and accepts that ‘because of … systemic risk and the important economic function played by institutions the normal insolvency procedure may not be appropriate in some cases …’ (4). It also recognises that whenever the public interest requires an orderly resolution of a failing bank a specialised resolution authority (RA), other than the judicial one, needs to be entrusted with the governance. An RA is in fact an administrative authority with powers, which are traditionally the unchallenged domain of judicial authorities as a result of which the transfer of powers involves certain legal amendments. There may be consequences resulting from this transfer of powers:

3.4

The EESC accepts the Commission's conclusions that the costs of the framework arise from a possible increase in funding costs for institutions due to the removal of the implicit certainty of state support, and to the costs of resolution funds. The Committee shares the Commission's concern that those increased costs might be passed on to customers or shareholders by pushing down rates on deposits, increasing lending rates (5) and banking fees or reducing returns on equity. The Impact Assessment carried out by the Commission states that, although banks will have to meet ‘some’ increase in the operational costs, the overall cost of operations and of drafting recovery and resolution plans will be ‘negligible’ or ‘immaterial’ (6).

3.5

The banks' concerns that costs will be far from negligible have been challenged by both the Commission and by the social partners. The Committee shares the Commission's views concerning the potential benefits of the framework in the long term. The short to medium term impact of costs on all interested parties should be carefully evaluated and considered by each MS when drawing up their national rules, which should take into account their own specific needs and conditions.

3.6

The EESC welcomes the Commission proposal for establishing a BU with an SSM and believes that the current recovery and resolution framework should be amended in line with the operation of the new mechanism. At the same time, the Committee is aware that a combination of European supervision and local resolution can hardly operate successfully, especially in cases of failures of systemically important institutions functioning in several MS. Ideally the European competence in bank regulation and supervision should be complemented by a European competence in resolution and deposit insurance (7). The Commission envisages proposing a single resolution mechanism (8) but at present it is difficult to judge when this could become a reality.

4.1.1

Special attention should be given to the need for human resources. Drafting recovery and resolution plans is a highly specialised job, and experts in possession of the necessary expertise and experience are not easily found among the staff of banks or public authorities. A major problem for supervisors and resolution authorities will consist in acquiring sufficient human resources with specific and highly developed professional abilities. This problem cannot be avoided, as the reliability of the plans and confidence in any adequate intervention both rely on the high professional quality of the entire construction.

4.1.2

The EESC accepts the proposal that RAs in consultation with the competent authorities should draw up and update resolution plans at least once a year. These should set out options for applying the resolution tools. The Committee is convinced that both individual and group resolution planning and updating would be improved if banks were also involved in the process, as suggested by the Commission Communication (2010) 579 final (9) and the impact assessment document accompanying the proposal for a directive (10) but not explicitly stated in the directive. The professional advice of other stakeholders, for example consumer organisations, trade union representatives, etc., that could be affected by the resolution plans should also be sought on relevant matters where appropriate.

4.1.3

The involvement of the supervisory and resolution authorities together with credit institutions would be insufficient when plans have to be assessed in the context of the public interest. Central banks are best placed to carry out similar assessments. Assessments as to whether the individual recovery and resolution plans of several institutions could be simultaneously implemented in systemic situations and the extent to which the individual solutions would affect the financial system as a whole in a national or cross-border context require a macro-prudential approach. Given their expertise and experience, central banks are best suited to apply this approach and the EESC recommends allowing them to participate in the assessment of the recovery and resolution plans in the context of the public interest, while at the same time fully respecting their independence. Perhaps in the future the ECB both as a Central Bank and as a Single Supervisory Authority should also conduct similar assessments of banks' plans.

4.1.4

Confidentiality requirements with respect to credit institutions and their recovery and resolution plans should be strengthened. Special provisions in the directive should guarantee that the confidentiality of the relevant information is strictly respected by all authorities, institutions and stakeholders involved in the drafting, updating and assessment of the banks' recovery and resolution plans.

4.2.1

The EESC welcomes the proposed provisions allowing for the introduction of harmonised rules and conditions under which intra-group financial support is to be provided but at the same time warns that the protection of the transferee's and transferor's interests and rights should be well balanced when there are disagreements among them regarding the support. The EESC fully supports the provisions of Article 19 (1) and points out that the requirement in Article 19(1)(f) should be expanded to additionally include any higher own funds and liquidity requirements imposed by the regulators of the transferor's country.

4.3.1

The key trigger conditions for appointing an SM, as stipulated by Article 24(1) are a matter for the competent authorities to judge (11). The Committee acknowledges the need for soft triggers and greater flexibility that would allow the competent authorities to enjoy some discretion, but taking into account the significant role and powers given to the SM, we would encourage a greater degree of certainty for the institutions by introducing explicit and more clearly defined trigger rules and conditions. Experience has demonstrated that early warning signs are often of a qualitative nature, whose perception depends, on the experience and skill of the supervisors or on efficient intelligence rather than on computer models and ratios. In such cases, in the absence of clearly defined rules exempting them from responsibility for their judgment, supervisors might hesitate to take the initiative, and so lose a precious opportunity for early and timely intervention. Clearly defined trigger rules and conditions are essential also because in cases of real or supposed mismanagement, third parties might request redress not only against the SM for personal liability, but against the supervisors for poor judgment in deciding that an early intervention procedure needed to be started, or in choosing the person appointed as the SM.

4.3.2

The directive introduces a certain sequence in the application of the different early intervention measures. The appointment of the SM is a highly intrusive early intervention measure that has to be applied after the less intrusive measures have been exhausted. However, there might be a situation when a significant deterioration in the financial position of the institution develops too quickly and a special manager has to be appointed without waiting for the implementation of the less intrusive early intervention measures proposed in Article 23(1). In such cases it should be possible to appoint an SM even if one of the trigger conditions described in Article 24 (i.e. ‘other measures taken in accordance with Article 23 are not sufficient to reverse’ that deterioration) has not been met.

4.3.3

The Committee would encourage the Commission to consider a scenario where the appointment of a SM could trigger bank runs and to propose appropriate measures preventing them. In certain cases and situations the appointment of a SM might be a signal to the market that the bank was experiencing serious financial difficulties and could trigger a run on its deposits. The situation might be even more challenging if the appointment of several SMs for several banks took place simultaneously at a national or cross-border level and the sector experienced bank runs and a confidence crisis. The Committee is convinced that certain provisions should be put in place in the directive to prevent similar developments from happening during the early intervention phase. The future Single Supervisory Authority should be in a strong position and appropriately equipped to effectively address similar situations in a timely manner.

4.4.1

The powers and responsibilities of RAs need additional clarification. While the competent authorities/supervisors are responsible for early intervention, the RAs are responsible for choosing and applying the resolution tools. However, in some cases certain responsibilities are executed both by supervisors and RAs. For example, Article 27(1)(a) states that the ‘competent authority or resolution authority determines that the institution is failing or likely to fail’. Depending on the choices made by MSs, supervisors could perform the responsibilities of RAs but the two functions should be separated in order to minimise the risks of forbearance (12). The Committee would encourage establishing a clear distinction between the mission and responsibilities of supervisors and RAs and the timing of their intervention. The Committee believes that the assessment and notification procedures regarding resolution conditions should be based on clear distinctions between the responsibilities of the different authorities involved and should be simplified in order to speed up the decision and execution of resolution.

4.4.2

The requirement for the management body of an institution to notify the competent authority when they consider that the institution is failing or likely to fail would be quite appropriate were it not for a doubt about the timing of the notification by the institution's management board to the competent authority. Past experience has shown that notification might be delayed for various reasons, one of them being doubts regarding the compliance with capital requirement rules. The EESC believes that if the initiative is left entirely to the discretion of the bank's management, the decision of the RA could be taken too late. Article 74 should leave no doubt that the supervisors have the right and opportunity to inform the RA without waiting for notification from the bank's management whenever they deem that the trigger conditions for resolution have been met but the notification is delayed. Article 101 (1) (d) and (2) should request MSs to provide for heavy penalties for bank managers who are in breach of the rules of Article 74 (1), not Article 73 (1) as stated in the directive.

4.4.3

Article 27(1)(c) refers to situations where ‘a resolution action is necessary in the public interest’. The assessment of public interest is an area where central banks are best placed to provide input due to their expertise and experience in assessing financial stability, continuity of essential services, the protection of public funds and the protection of depositors. It is right to include them among the authorities that have to assess whether resolution trigger conditions have been met, but this should be allowed at an earlier stage, especially when assessments are conducted for several institutions in a national or cross-border context. Perhaps in the future Banking Union the ECB, in close cooperation with the European Systemic Risk Board, would be in a better position and better equipped to conduct similar assessments in the context of public interest both in its capacity of a Central Bank and a Single Supervisory Authority. The possible establishment of a Single Resolution Mechanism would be particularly helpful in this respect.

4.4.4

The public interest involved in a banks' failure justifies a different allocation of losses from that normally provided by the insolvency regimes; thus, the proposal creates a specific hierarchy of claims, whereby the shareholders are first in line, followed by unsecured creditors in a ranking order established by Article 43. The EESC has no objection to the proposed hierarchy of claims, but would like to draw attention to the fact that ‘creditors’ are also, technically and legally, all depositors/customers. With the exception of ‘affected creditors’, Article 2 provides no definition for ‘creditors’ and ‘depositors’ and their different types. The EESC would welcome clear definitions of these terms especially bearing in mind that the ranking of depositors as creditors is currently not harmonised in MS.

4.4.5

Government deposits are treated in different ways in different MS. They could belong to, or could be excluded from, the eligible bail-in-able liabilities, depending on whether they belong to the covered deposits, up to a certain amount, and depending on whether they are securitised. In addition, government deposits, which belong to the eligible liabilities and can be subject to bail in, are in fact the taxpayers' money. However, can a bail-in operation that uses public funds actually be defined as a bail in?

4.4.6

The proposal gives the RA a wide range of powers in establishing the rank of bailed-in liabilities. The RA even has the power of writing down commercial trade credits if they are deemed not ‘essential to the functioning of the operations’ (Article 38(2)(e)(ii)), meaning that, for instance, the supplier of catering or hotel services might see his claim written down if the RA decides that such services are not ‘essential’. The par condicio of creditors is a pillar of all insolvency procedures and must also be respected in this case.

4.4.7

The EESC understands the need to ensure that institutions have a sufficient amount of eligible liabilities on their balance sheets that can be subject to the bail-in powers. The issuance of debt instruments which can be subject to bail-in might be challenging, as the difference between subordinated debt and unsecured senior debt will be diluted. In less developed markets it might be more challenging, expensive or even impossible in periods of crisis, especially systemic crises. The Committee recommends that the proposal for harmonised application of the minimum requirement for eligible liabilities at Union level, to be ensured by Commission delegated acts, should be carefully considered and calibrated, taking into account the degree of development of the local financial market in each MS.

4.4.8

The bail-in tool needs additional explanations and clarifications. In order to minimise any uncertainties among investors, clear rules should be introduced regarding eligible liabilities and the threshold conditions for bail in.

4.5.1

Third party rights seem to come second to those recognised by the insolvency laws in most MSs. The consideration of public interest prevails over the protection of private rights and the allocation of losses follows a different logic. Article 78 makes challenging the RA's decision in court possible, but restricts it to the legality of the decision for resolution, the way in which that decision was implemented and the adequacy of any compensation granted. The RA's decisions cannot be stopped nor are they subject to any sort of automatic suspension. Even in the case of annulment of an RA's decision, third party rights are limited to compensation for the loss suffered (Article 78(2)(d)).

4.5.2

In an emergency such as the threat of a bank's failure, the normal insolvency procedures are certainly not appropriate; however, the wide range of powers given to the RAs, coupled with a limited right to redress granted to third parties, raises concerns regarding the legal solidity of the proposed framework. In many MSs, especially those governed by common law jurisdictions, the courts would most probably protect their own rights to hear claims of judicial review of any decision made by an administrative authority, when any individual or group can show that they have suffered as a result of that decision.

4.5.3

The concern expressed in the above paragraph has been challenged in various circles, both on legal and social grounds, so the EESC leaves it to the appreciation of the legislative entities. However, it draws attention to an aspect of some importance: should anybody feel that the RA or the administrators acted with gross professional misconduct, the judges only enjoy a kind of immunity for decisions taken in court, but no law or regulation can extend this privilege to an administrative authority such as a RA, which might then be held responsible in court for damages. In that case, any sums paid out for redress would be public money.

4.6.1

The Commission has already treated resolution funding in two Communications - on Bank Resolution Funds and on the EU Crisis Management Framework in the Financial Sector (13). The current proposal for a directive further specifies the proposals earlier expressed in the two Communications. The EESC has already explained its views on these Communications in two opinions (14). In both cases the Committee has expressed its support for the Commission's proposal to introduce a harmonised network of national ex ante RF and has recommended designing the network carefully while taking into consideration the specific conditions in each MS.

4.6.2

The directive proposes that resolution costs not covered by shareholders and creditors should be met by additional funding provided by the banking industry; the DGF may be called on to help whenever necessary. The EESC welcomes the introduction of harmonised rules based on ex ante contributions for the DGF and RF. The criteria for contributing ex ante to resolution funding seem to be appropriate and realistic in relation to the current situation; however the economic and financial conditions may change unexpectedly, as we have seen in recent years. Considering that a RF would take ten years to provide for full coverage of costs, the EESC suggests the introduction of a rule whereby the criteria for ex ante contribution can be revised from time to time.

4.6.3

The EESC understands the need for solidarity and accepts the proposal for borrowing between financing arrangements (Article 97) and mutualisation of national financing arrangements in the case of a group resolution (Article 98). However, the implementation of the proposed mutualisation of financing arrangements before the financing arrangements have reached their target capacity and certain degree of harmonisation would be challenging. Most MS accept that their RF and DGF should be based on ex ante funding but ex post funding is still preferred by some of them. The requirements of Articles 97(2) and 98 will be problematic for countries where central banks are not allowed to lend in compliance with Articles 96 and 98. The Committee would encourage the Commission to introduce specific steps and recommendations aiming at overcoming the challenges and speeding up the process of harmonisation.

4.6.4

While accepting the potential benefits of a possible synergy from a single institution for the DGF and RF, a similar arrangement seems challenging for some MS at present, when many DGF are underfunded. The Committee welcomes the Commission's approach, which allows each MS to decide whether it would prefer to have one or two financing arrangements (funds). At the same time the EESC recommends that the directive should introduce provisions guaranteeing that each DGF can perform its main function to protect retail depositors at all times.