26 October 2017

New Europe: EU reaches agreement to fast-track Banking reform

The elements that are fast-tracked after all three EU institutions’ agreement are the Bank Recovery and Resolution Directive (BRRD), the Capital Requirements Regulation (CRR) and Directive (CRD).

According to the Berlaymont, the agreement on the BRRD creates a new category of unsecured debt in bank creditors’ insolvency ranking. Furthermore, it establishes an EU harmonised approach on the priority ranking of bank bond holders in insolvency and in resolution. As for the agreement on the CRR/CRD, this will implement the new International Financial Reporting Standard (IFRS 9) that will mitigate the impact of the new standards on the bloc’s banks capital and lending ability, making it also possible to avoid potential disruptions in government bond markets that would result from rules limiting large exposures to a single counterparty in the future.

“Harmonised rules for bank bond holders in a situation of insolvency gives banks clarity for building up buffers to absorb losses and protect taxpayers. It is a key step towards complying with the global standard on Total Loss-Absorbing Capacity,” said Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services, and the Capital Markets Union. “The second agreement gives banks more time to adjust to the introduction of the new accounting standard IFRS 9 and to the expiry of certain exemptions from the large exposure limits”.

The agreement will allow for a five-year phase-in period banks to return their capital part of the increase in loan loss provisions, limiting the potential negative impact on bank lending. Banks with large holdings of government bonds not denominated in a domestic currency will have more time to adjust to the rules, according to what was agreed.

Next, comes the Permanent Representatives Committee (COREPER II) of the Council of Ministers is expected to endorse the agreement ahead of the European Parliament’s plenary vote, while the final text will be in place in early-2018.

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