European Banking Federation: EU Crisis Management Framework is top priority for 2011
18 January 2011
The framework is particularly welcomed as the proposed tools for resolution of banks in distress may solve the “too-big” or “too-interconnected to fail” conundrum.
“We believe that all banks, regardless of their shape or size should be allowed to fail when recovery is no longer feasible,” said Guido Ravoet, Secretary General of the EBF, “and we think this is possible without resorting to taxpayers' money.” Sale of business, bridge banks and asset separation are the proposed tools for resolving financial institutions while keeping their systemically relevant functions alive for the greater good.
A critical element before it gets to this stage will be the tools for planning, prevention and early intervention. Here supervisors will have to ensure the best possible application of the powers from within the existing Capital Requirements Directive. In the absence of a cross-border crisis management framework, which is expected to be achieved by 2014, supervisors and resolution authorities will have to also cooperate in resolution colleges to manage both the early intervention and resolution phase of cross-border banks.
So-called Recovery or Resolution Plans will be key to pre-empt any escalation of financial stress by building up capital and liquidity and reducing risks. Resolution plans will then offer a road map to resolution authorities when the bank-driven recovery has failed. Nevertheless, those plans should not interfere with the banking structure of a healthy financial institution.
The resolution of large banks will no doubt require funding, but extracting more funding from banks is a sensitive issue in today's financial and economic environment. The Commission will have to carefully examine the options available in order not to place an unsustainable burden on banks and the economy. Rather than creating new ex-ante funds, the Commission should consider allowing national loan facilities with ex-post contributions and possibly through the use of so-called „debt write-down‟ or „bail-in‟ mechanism, of which the contours are still to be clarified and restricted to junior debt. Senior debt should only be affected if other instruments are not sufficient within the liquidation process.
The EBF looks forward to an impact assessment on the funding requirements for the resolution tools and in particular, encourages the European Commission to explore the option of „debt-write down‟ to curb the cost of bank resolution. “It is critical that both industry and supervisors provide credible solutions, also to investors, as to how to overcome bank failures in the future,” concluded Ravoet.
© EBF
