The EU reached landmark agreement on failing banks


In December 2013, an agreement was reached between the European Council and Parliament on the Bank Recovery and Resolution Directive (BRRD).

The long awaited directive now bridges the gap between the prudential and financial stability framework.

The Directive establishes a clear mechanism and common toolkit for banks to plan and act in stress situations with emphasis on early intervention and recovery while also putting a framework in place that would anticipate the worst case scenario of a systemically important bank failure. As a result, it should help restore confidence in banking supervision to minimize the fall-out from bank failures while providing the foundation for the Single Resolution Mechanism.

It is expected to apply to all banks in all 28 Member States by 2015, while bail-in will enter into force in all jurisdictions by January 2016

The EBF has been advocating for clear rules in terms of the hierarchy of shareholders and creditors that would be subject to bail-in and is pleased that this principle has been largely upheld. The EBF particularly welcomes the fact that uninsured deposits of individuals and SMEs enjoy depositor preference.

The bail-in tool will allow banks to continue their vital operations to support payments and access to deposits while it undergoes restructuring without impacting the wider financial and economic system.

Even given the so called ‘framed flexibility’ framework, which would give Member States the ability to make exemptions for systemically important liabilities in extreme situations, resolution authorities will have to bail-in at least 8% of total assets of a failing bank. According to calculations by the industry a bail-in threshold of 8% of total liabilities would have been enough to absorb the losses in the most recent cases of bank failures experienced in the last crisis.

The EBF remains however concerned with regard to the demand for banks to build-up at Member State level a separate ex-ante financed resolution fund of 1% of covered deposits, which combined with the deposit guarantee funds (if calibrated at the same level) is estimated to amount up to EUR 155 billion worth of bank financing over the next 10 years. The Federation is hopeful that the European Council and Parliament will agree on some flexibility for the industry to make payment commitments backed by collateral and allowing existing bank tax levies to make up (partially) their duties to finance both these funds.

The Directive is being finalised; the vote in the European Parliament on the compromise text is due to take place on 25 February.


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