16 April 2019

Parliament approves rules to reduce risks to EU banks and protect taxpayers

The rules approved by Parliament and already informally agreed with member states, concern prudential requirements to make banks more resilient. This should help to boost the EU economy by increasing lending capacity and creating more liquid capital markets, and a clear roadmap for banks to deal with losses without having to resort to taxpayer funded bailouts.

Proportionality

To ensure that banks are treated proportionately, according to their risk profiles and systemic importance, MEPs ensured that “small and non-complex institutions” will be subject to simplified requirements, in particular with regard to reporting and to putting fewer funds aside to cover possible losses. Systemically important banks, however, will have to have significantly more own funds to cover their losses in order to strengthen the principle of bail-in (losses imposed on banks' investors (e.g. bondholders) to avoid bankruptcy, instead of state-funded recapitalisation) in the EU.

SME supporting factor

As small and medium enterprises (SMEs) carry a lower systemic risk than larger corporates, capital requirements for banks will be lower when they lend to SMEs. This should mean that lending to SMEs will increase.

Avoiding taxpayer bailouts

Parliament has approved the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR), which means that international standards on loss absorption and recapitalisation will be incorporated into EU law.

This new legislation on a clear roadmap for banks to deal with losses should ensure that they hold enough capital and bail-inable debt to not resort to taxpayer bailouts and define conditions for early remedial measures.

Moratorium

The new rules for applying a “moratorium power” will suspend payments by banks that are in difficulty . This power may be activated when it has been determined that the bank is failing or likely to fail and if there is no immediately available private sector measure to prevent the failure. It allows the resolution authority to establish whether it is in the public interest to put the bank into resolution rather than insolvency. The scope of the moratorium would be proportionate and tailored to a concrete case.If the resolution of a failing or likely to fail bank is not in the public interest, it should be wound up in an orderly manner according to national law.

Protection

Finally, Parliament secured provisions to protect small investors from holding bail-inable bank debt, such as bonds issued by a bank when it is not a suitable retail instrument for them. Financial contracts governed by third country law in the EU would need to have a clause acknowledging that it was subject to the resolution rules on bail-in and moratorium.

Full press release

Prudential requirements of investment firms (Regulation)

European Commission: Adoption of the banking package: revised rules on capital requirements (CRR II/CRD V) and resolution (BRRD/SRM)

Opening statement by VP Dombrovskis at the Plenary debate on Sovereign bond-backed securities

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