08 March 2013

VP Almunia: Banking crisis, financial stability and State aid - The experience so far

Almunia said that experience had helped clarify the necessary features for an effective single resolution mechanism, and that in parallel with the creation of the SRM, the State aid control rules for banks would also be updated.

In light of this experience, we have a good idea of the features a single resolution mechanism will need to have if it is to be effective. The best source draws on the governance model of the Spanish programme. A simple rule agreed in the Memorandum of Understanding provided that no money could be paid from the ESM to Spain for recapitalising banks until the Commission takes a final decision under the State aid rules approving the restructuring or the orderly winding down of individual institutions. This governance model significantly changed the incentives of the participants in the restructuring and resolution negotiations, and allowed us to conclude them with unprecedented speed. Restructuring and/or resolution decisions for eight banks were taken in less than six months, with decisive restructuring of 20 per cent of Spain’s banking sector. Moreover, additional powers in relation to burden-sharing meant that the Commission could go further than what is normally required under the State aid rules and arrive at a significant contribution by junior debt holders with important savings in the order of €12.7 billion compared to programme funds that eventually amounted to a total of €41.3 billion.

These were some of the lessons learned from restructuring or resolving 59 European banks. As we speak, we have another 29 individual institutions under scrutiny, and I'm afraid that the counting is not over. In dealing with these cases and the future ones, the Commission’s State aid enforcement will function in a new regulatory and institutional landscape which will be shaped by the steps taken towards the creation of the Banking Union.

As regards resolution, the harmonised toolbox for the resolution of banks is currently being discussed in the Council and Parliament. Once adopted and implemented, it will result in the creation of national resolution authorities equipped with the same set of tools. The question is how to put order in the functioning of the instruments, institutions and tools that will be available. In Spring 2014 the single supervisory mechanism (SSM) will become operational. In 2015 we should see the new resolution toolbox available to national resolution authorities. As from 2018, this should be complemented by the bail-in instrument. And, of course, State aid control will continue to apply.

I think that the SSM will need a Single Resolution Mechanism as its counterpart when it starts its operations. Based on our experience, I would never recommend that the latter takes the form of a platform for the coordination of national supervisors. Moreover, we have to realise that over the next three to five years the bulk of banks' restructuring and resolution is likely to involve the use of taxpayers' money, either from national or European sources, for the following reasons:

• It will take time to collect the funding needed in the resolution funds – and even then, these will remain subject to State aid control;
• Bail-in provisions are planned to be implemented only as of 2018, though the legislator may decide to bring this date forward;
• Even then, measures need to be taken to level out to acceptable levels the proportions of bail-inable instruments that bank hold in their balance sheets. Their implementation will inevitably take time.
• And any use of taxpayers' money – be it national or from the ESM, through direct recapitalisations or loans to governments – will continue to be subject to State aid control.

Therefore, in parallel with the work on the creation of the Single Resolution Mechanism, we are preparing to update the State aid control rules for banks, in order to integrate the lessons we have learned and in particular the mechanisms that have delivered the best results. We need to reflect on how our tried and trusted instrument can best contribute to the future functioning of the Single Resolution Mechanism.

Over the next few years we will be facing a transition period, before a fully functioning Banking Union enters into force and reaches its operational and financial capacity. This transition period will be characterised by continued exposure of the taxpayers to the cost of banks' failures and by the need to maintain a level playing field in the internal market. For these reasons, the role of State aid control during this transition period will remain very important as a proven instrument to protect financial stability, the internal market, and taxpayers' interests.

Full speech

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