The Council agreed that better mechanisms are needed to ensure the mitigation of systemic risk and that the financial sector bears the cost of resolution measures in a way that equitably reflects its responsibility and with a view to eliminating the need for the use of public funds.
The Council adopted the following conclusions:
"The crisis in global financial markets has severely tested the stability of the European financial system and revealed that more fundamental changes to EU financial stability and crisis management arrangements, including the supervisory and regulatory frameworks, are needed to reinforce the financial system and restore investors' confidence. In this respect, the Council RECALLS its conclusions of 20 October 2009 and of 2 December 2009, whereby it underscored the importance of both the following workstrands: on the one hand, the enhancement of the EU regulatory framework for crisis prevention, management and resolution and, on the other hand, the development of a comprehensive EU-wide framework for closer policy coordination on financial stability, including in respect of the principles for burden sharing, "in particular to deal with a cross-border financial crisis, while taking into account the respective responsibilities of EU bodies/Institutions/ Committees and national authorities".
The Council also RECALLS the conclusions agreed by the European Council on 26 March, where the latter emphasised that "progress [was] particularly needed on issues such as capital requirements; systemic institutions; financing instruments for crisis management …". In its conclusions of 11 December 2009, the European Council encouraged the IMF "to consider the full range of options including insurance fees, resolution funds, contingent capital arrangements and a global financial transaction levy in its review".
In all these areas, the Council further STRESSES the need to devise compatible arrangements at a global level, in line with G-20 leaders' Pittsburgh declaration and subsequent related follow-up work.
Against this background, the Council:
1. UNDERLINES the importance of a comprehensive reform of the EU framework to address crisis prevention, management and resolution challenges and, in particular, to achieve two main objectives:
- To preserve the stability and the level playing field of the EU financial system and the financial systems of Member States, by protecting public and market confidence, including by ensuring continuity of essential banking functions and access to deposits;
- To minimise overall costs, protect public funds, and curb effectively moral hazard in the financial sector by ensuring that shareholders, holders of subordinated debt and, to the appropriate extent, uninsured creditors of a failing financial institution are the first to bear the costs of its distress, and that culpable management are held accountable;
2. CONSIDERS that such reform should allow EU Member States to be better and adequately equipped to address different types of crisis situations, allowing for a better coordination of actions in case of cross-border financial crisis, taking into account the greater interdependence between national financial systems, and ensuring consistency of those reforms with similar measures being considered in the international context;
3. STRESSES, for that purpose, the need to pursue a holistic approach that covers the complete succession of steps involved in a crisis and work on three complementary aspects of crisis management: an EU framework for policy coordination in case of crisis (including general principles for burden sharing), a common EU regulatory framework for crisis prevention, management and resolution, and mechanisms to ensure the mitigation of systemic risk and that the financial sector bears the costs associated with crisis resolution measures.
On developing an enhanced EU policy coordination framework for crisis prevention, management and resolution, the Council:
4. WELCOMES the EFC report on an EU policy coordination framework for crisis prevention, management and resolution, including burden sharing arrangements (Nyberg Report) and UNDERSCORES in this respect the importance of a clear articulation of roles, powers and responsibilities of the different EU and national bodies and institutions involved in crisis prevention, management and resolution, as well as a clear definition and determination of procedures; In particular, when public resources are used, these interventions must be compliant with the State aid rules.
5. CONSIDERS that the Council (ECOFIN) should play a strong role in coordinating financial stability policies in an EU-wide systemic crisis and that the EFC working arrangements should be revised accordingly;
6. ACKNOWLEDGES that the current EU coordination framework for crisis prevention management and resolution between EU and national financial supervisory authorities, central banks and finance ministries should be further enhanced following a pragmatic approach and
AGREES that the following components should underpin this EU framework:
a. The establishment of Cross Border Stability Groups (CBSGs) by mid 2011 accompanied by the signature of Cross-Border Cooperation agreement (CBAs), as defined in the 2008 MoU2. These CBSGs should be set up for all large EU cross-border financial groups, retaining flexibility at the national level for the operational set-up of such structures, especially avoiding overlaps or duplication with analogous groups set up within the FSB framework and draw on the experience gained with other bodies, in particular the supervisory colleges required under the Capital Requirements Directive and other existing structures such as Domestic Standing Groups and Central bank networks;
b. Whilst stressing that the final responsibility for crisis management and resolution remains national and that the general principles and procedures on ex-post burden sharing as included in the 2008 MoU remain fully valid, CBSGs should be provided with common tools to enable effective coordination between the national authorities involved in a crisis including, in particular:
i. Operational criteria and principles for ex post burden sharing based, where possible, on concrete experience. To this end, the CBSGs should organise crisis management simulation exercises –including burden sharing discussions- aimed at enhancing the preparedness of the Member States for tackling a financial crisis;
ii. Recovery and Resolution Plans (RRPs). In particular, the performance of CBSG simulation exercises could be partly developed on the basis of the information available from the RRPs to be drawn up, respectively, by financial institutions and their supervisors by end 2010, and the experience of those simulation exercises could be used to refine and update the contents of RRP and further contribute to help develop regulatory policy in relation to this tool;
c. Establishing an efficient monitoring mechanism by the EFC (peer review of the implementation3) in order to scrutinise the implementation and identify specific problems and barriers to coordinated action that may arise in handling severe stress at specific banking institutions;
7. INVITES the EFC to continue work on these aspects of the coordination framework in accordance with the agreed timetable (in annex) and to report back on the establishment of CBSGs by end 2011 and on implementation of all steps described above in early 2012.
On enhancing the EU regulatory framework for crisis prevention, management and resolution, the Council:
8. WELCOMES the Commission's intention to present a Communication on crisis management in autumn 2010 and concrete legal proposals by spring 2011, focusing on establishing a holistic, coordinated and more harmonised framework for preventative action, early intervention and resolution and with an initial scope focused on credit institutions with further consideration of the crisis management measures that would be appropriate for certain categories of investment firms;
9. CONSIDERS that an EU regulatory framework for crisis management should be comprehensive and cover, in particular, enhanced prevention measures, including enhanced supervision and a more harmonised approach to supervisory review processes, deposit protection, exploring an EU framework for asset transfers along with the necessary safeguards (in particular in insolvency and company law and in view of ensuring financial stability in all Member States concerned), early intervention, resolution and liquidation. In the end, that framework should apply to both purely domestic and cross-border institutions, taking into account the need to ensure that systemically important financial institutions can also be resolved;
10. UNDERLINES that, in developing the EU crisis management framework over the short to medium term, the Commission is invited to work on the following elements:
a. A sufficiently wide set of preventative and early intervention and resolution tools to be harmonised across countries enabling supervisory and resolution authorities to deal rapidly and effectively with crises and ensuring that interventions can be done without jeopardising financial stability or triggering a systemic event, while minimising public support and limiting competitive distortions;
b. Enhanced supervisory powers where existing tools are not sufficient to deal with levels of complexity and interconnectedness that make a financial institution difficult or impossible to resolve rapidly and effectively;
c. An adequate coordination mechanism for all relevant types of instrument that ensures that all competent authorities effectively coordinate their actions to resolve failing cross-border institutions, in line with the conclusions of the December 2009 Ecofin Council.
In addition, the Council NOTES that the Commission intends to propose in July an enhanced, credible and better harmonised framework for Deposit Guarantee Schemes (as an integral part of the crisis resolution framework), Investor Compensation Schemes and similar schemes in the Insurance area, thus ensuring depositor, investor and policyholder protection and market confidence across the EU, and contributing to financial stability;
11. INVITES the Commission, over the long term, to give further consideration to the sectorspecific issues associated with broadening the scope of the framework to other types of financial institutions and to further explore whether a more ambitious approach entailing a harmonised, pragmatic insolvency and liquidation regimes for financial institutions would be appropriate, on the basis of its potential economic costs, benefits and viability, and the necessity to safeguard tax payers' interest.
On enhanced mechanisms to ensure the mitigation of systemic risk and that the financial sector bears the net costs of financial crises, the Council:
12. AGREES that better mechanisms are needed to ensure the mitigation of systemic risk and that the financial sector bears the cost of resolution measures in a way that equitably reflects its responsibility and with a view to eliminating the need for the use of public funds, whilst preventing further moral hazard;
13. NOTES that a number of Member States have introduced or are considering the possibility of introducing levies or taxes on the financial sector, either with a view to allocating the proceeds to the general budget or to a resolution fund, and that a number of proposals are also being developed by third countries as well as by international financial institutions such as the IMF, the FSB and the Basel Committee;
14. AGREES that further work is necessary, at EU and international level, including on strengthening the capital basis of financial institutions as discussed in the BCBS and on the design of the arrangements to mitigate systemic risk and better anticipate and defray the costs of a possible crisis. That work should take due account of the cumulative impact of the various regulatory measures under consideration and be guided by the following overarching principles:
a. Coordination at EU level and, to an important extent, at global level is critical to limiting competitive distortions and to preserving the level playing field.
Acknowledging that coordination does not mean uniformity, future analysis should aim at finding common principles and approaches to the design and implementation of solutions in line with the relevant Treaty provisions, including State aid rules where applicable;
b. Coherence and consistency between these arrangements and the current prudential supervisory and regulatory reform is needed. These reforms should be considered as complementary and equally necessary and, whilst avoiding duplication, their objectives should be adequately aligned. In this respect an evaluation of the cumulative impact of these reforms should be performed. Additionally, implementation of the reforms should be in accordance with an adequate sequencing and timing;
c. These arrangements should be primarily based on the principle that financial institutions should contribute to the cost of crisis, taking into account the risks posed by each institution. However, they should not be considered as an insurance against the costs of future crises. On the contrary, they should be designed to support the resolution framework outlined above and to ensure that financial institutions internalise the risks that their activities bring to the wider economy, so as to mitigate systemic risk, diminish moral hazard, avoid competitive distortions and, reduce or preferably eliminate market expectations on future public financial support;
15. LOOKS FORWARD to the Commission's Communication on Options for bank resolution funds, announced for May 2010 and INVITES the Commission to consider a broad range of resolution mechanisms;
16. STRESSES the need for further comprehensive work on other possible arrangements such as those considered in the IMF Interim Report for the G-20 on “A fair and Substantial contribution by the Financial Sector”; and
17. INVITES the EFC/FSC, in close cooperation with the Commission, to report back on all these issues by autumn 2010."
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