Framework for crisis management in the financial sector
Following the 2008 financial crisis, governments have had to grant aid to banking institutions. The amount of such aid represents 30% of European Union (EU) GDP. In order to ensure that this situation is not repeated, this Communication proposes a European framework which should enable banking institutions to fail like any other business without calling into question the stability of the financial system.
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank of 20 October 2010 – An EU Framework for Crisis Management in the Financial Sector [COM(2010) 579 final – Not published in the Official Journal].
This Communication describes the results of considerations led by the European Commission on avenues to be pursued in order to equip the European Union (EU) with a framework for crisis management in the financial sector.
Enterprises concerned and objectives of the crisis management framework
The framework for crisis management in the financial sector concerns:
- all credit institutions;
- certain investment firms, more particularly those whose failure might place the financial system in peril.
The aim of this framework is to ensure that the financial system is stable, even in the event of a business failure, and thus to:
- favour prevention and preparation over risk reduction as regards the financial system;
- prepare credible resolution tools;
- implement fast and effective means to act;
- reduce moral hazard;
- contribute to a smooth resolution of cross-border groups and preserve the internal market;
- ensure legal certainty;
- limit competitive distortions.
Features of the crisis management framework
The framework proposed by the Commission sets out measures in the following areas of action:
- Authorities responsible for crisis management: pursuant to the Directive on capital adequacy and the Directive on the taking up of the business of credit institutions, prudential supervisors are granted powers of early intervention. However, each Member State shall designate a resolution authority that is independent from the supervisor.
- Preparatory and preventative measures: these measures include in particular the implementation of a supervisory programme for each supervised institution, on-site supervisory examinations, and a more detailed supervisory assessment. Intra-group liquidity management is also to be facilitated in order to preserve the financial stability of the Member States where transferring entities are established, in order to protect the rights of creditors and shareholders.
- Triggers: a trigger for early intervention should be put in place in case a bank or investment firm cannot satisfy the requirements of the Capital Requirements Directive or requirements relating to the take up of the business of credit institutions.
- Early intervention: this type of measure provides for the widening and clarifying of supervisors’ powers. Banks and businesses would be obliged to present a plan enabling the institution to recover in the event of financial difficulties.
- Resolution: the Commission insists on the need to reform legislation on bank insolvency in order that failing banks may benefit from liquidation proceedings.
- Debt write-down: this involves allowing an institution in difficulty to continue its activities or to cease some of them in order to limit risks of ‘contagion’ to other institutions.
Cross-border crisis management
The Commission considers that cross-border crisis management should take place by means of a coordination framework based on harmonised resolution tools. Supervisors would be bound to consult and cooperate through resolution colleges and group resolution schemes in particular.
The Commission intends to apply the Communication on the creation of national bank resolution funds. It wishes to establish a strong link between the new resolution framework and financing arrangements. In certain Member States, deposit-guarantee schemes may finance some resolution funds.
Resolution funds should benefit from a harmonised basis for the calculation of contributions. Banks covered by the crisis management framework will contribute to such funds, in the form of shared responsibilities.