27 June 2013

Graham Bishop: BRRD: Council agrees its Common Position for negotiations with Parliament – Implications for the financial system

The chances of a broader banking union have just risen – as have the chances of the Commission acting as the Single Resolution Authority. However, there will be profound implications for the structure of the financial system as the consequences unfold over the next few years. If big banks still fail after all this, then the question will be put: should they just be scaled down?

The main aspects of the Council position are:

• All banks will need to draw up a recovery plan – and keep it up to date. Judging by the evidence uncovered by the UK’s Parliamentary Commission on Banking Standards, it may still come as a surprise to many bank managements to discover exactly how their bank really works. That behavioural change itself may shift the culture. The top 39 EU banks are already required to have submitted such plans by the end of 2013.

• The hierarchy of liability amongst the unsecured creditors has been adjusted to prefer individuals and small companies.

• Exclusion of inter-bank loans and payment systems are now reduced to seven days. The situation of derivatives obligations seems unclear.

• Resolution funds should be set up with a target value of 0.8 per cent of eligible liabilities of all banks. Additionally the Deposit Guarantee Scheme Directive proposes a fund 0.5 per cent of the covered deposits (i.e. those under €100k).

• Bailing-in begins with a standard hit to creditors of 8 per cent of a bank’s overall liabilities and then the 'but's start:
  • The resolution fund could step in, but only to provide a maximum of 5 per cent of the liabilities.
  • Other flexibilities allow for some shifting of bail-in burdens – subject to agreement by the Commission and the principle that no creditor is worse off than in a normal liquidation.
  • Then comes the delicate bit: “In extraordinary circumstances, where this limit has been exceeded, and where all unsecured, non-preferred liabilities other than eligible deposits have been bailed in, the resolution authority may seek funding from alternative financing sources". This is code for direct recapitalisation from the ESM but the conditions set out in the recent agreement make it clear that it really will be quite extraordinary before such funding is available.

To read on for some of the implications, please click on the link below.

© Graham Bishop