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SPEECH/10/112

Michel Barnier

Member of the European Commission responsible for the Internal Market and Services

Laying the foundations for crisis prevention and management in Europe

Figures and graphics available in PDF and WORD PROCESSED

Conference on Building a Crisis Management Framework for the Internal Market

Brussels, 19 March 2010

I would like to start by thanking you all for being here and would also like to say thank you to the major players and officials from the various institutions, the financial industry, the professional organisations and the associations.

In suggesting to you that it is now time to reflect, exchange views and make proposals, the European Commission is doing what it is here to do.

I myself have been involved in a lot of risk-assessment work, but hitherto I have mainly focused on natural hazards. This experience has led me to hold some beliefs that I would like to share with you:

  • Prevention is less expensive than cure.

  • This violent, global crisis can teach us some lessons:

    • about the very nature of progress and growth – I am thinking in particular of the Europe 2020 project proposed by President Barroso, and the need to build intelligent, fair and different growth.

    • about how to share our rules and regulations, and exercise governance of our collective destiny.

  • Unless and until we learn from our past mistakes, we will continue to behave irresponsibly:

- economically: we must start afresh on solid foundations;

- financially: neither the taxpayers not the public purse can afford another crisis;

- politically: we need to tread carefully, to avoid the banana skin of protectionism and to ensure that domestic politics does not gain the upper hand over European thinking. The first victim of an 'every man for himself' approach will be the internal market.

We talk a lot about responsibility at the present time. My own particular responsibility is to strengthen and improve the single market and build greater confidence in Europe.

What we now need to do is to talk to one another about following a new approach to risk-taking and adopting a new crisis management and foresight culture.

How can we go about this? At present we are taking time out to listen to one another and to discuss the issues at stake. I would like to take this opportunity to thank the European Parliament which is doing likewise. We will be discussing the same topics with the Finance Ministers next month in Madrid. We will also be listening to what the ECB, the national central banks, the IMF, industry, experts and the regulators have to say.

And in the autumn, after listening, discussing and assessing the findings, I will publish a Communication. This is an area which requires serious consideration and there can be no question of improvising.

We now need to make an objective assessment of the problems, to ask a number of questions and to come up with a few answers.

First of all, let us take a look at the problems:

When the Icelandic banks could not be properly restructured, and Dutch and UK depositors were not compensated by the Icelandic guarantee fund, the general public were barely aware of their rights or the protection mechanisms available.

When groups were broken down into "national entities", would reorganisation of the group as a whole have been more effective or at least possible?

More often than not, the legal systems in the Member States leave little or no choice between giving banks the last rites or saving them.

It is quite understandable why governments were reluctant, to say the least, to let banks go into liquidation after the slump in confidence precipitated by the failure of Lehman Brothers.

I. The problems are global; we need to tackle them on a global scale.

Some national authorities are in the process of introducing legal remedies for resolving banking crises, giving preference to the possibility of orderly 'resolution' (winding-up) over bankruptcy or rescue or bail-out operations.

The United States is working to establish a resolution fund to ensure that the financial institutions themselves bear the risks they run in relation to the financial system.

Things are moving, therefore, and I detect a degree of convergence of views between Europe and its partners, including the United States, on this subject.

We need to formulate a global policy in the context of G20. The big 'systemic' banks are neither national nor European, but global.

That was why the Pittsburgh Summit asked us to carry out an examination concerning the establishment of a resolution framework by the end of 2010. This is an ambitious objective but it is a vital one. This is the direction we have to head in and Europe should show the way.

II. We need a resolution scheme in Europe

  • What does that involve?

It is a question of administrative authorities reorganising financial institutions before they become 'insolvent'.

What is the reasoning behind this? The aim is to ensure that the costs of the difficulties are borne by shareholders and by unsecured creditors, and not by taxpayers, while ensuring financial stability and continuity of services to users.

This entails 'intrusive' resolution instruments: transfer of ownership and/or assets, and the power to inflict losses on unsecured creditors. These are recommendations that the IMF has been making for a long time.

An appropriate legal framework is required for bank resolution, but there is no such legal framework at present in the vast majority of Member States.

One more question:

  • Why do we need to harmonise resolution instruments in Europe?

All banks in Europe enjoy freedom to provide services and the right of establishment throughout Europe. This is a fundamental achievement of the internal market. The European banking scene therefore combines host countries and countries of origin. And these differ depending on the establishments in question.

Consequently, resolution schemes need to be not only efficient but also balanced so as to safeguard the financial stability of the host country and the financial stability of the country of origin.

This requires a harmonised scheme for the winding-up of banks.

Financial stability is not just a domestic concern in the European Union.

Let me give you a practical example.

Let us imagine that a cross-border group is adjudged to be failing by a board of supervisors. Today, in the absence of a harmonised crisis management framework, each national authority would apply its own instruments for the winding-up of each entity in the group. The groups would be broken up.

This might not necessarily be a bad thing, and may in fact be the most suitable way of avoiding contagion within a group, or even finding buyers for each legal entity.

But this is not the one and only solution. It may be cheaper and more efficient to find a buyer for the group as a whole, subject to disposing of certain assets or activities.

Financial stability and the protection of users of banking services are at stake, in Europe and in each and every Member State.

I should now like to raise the delicate question of crisis management governance.

This my third question:

III. What sort of crisis management governance is desirable?

How can we strike a good balance between domestic financial stability and financial stability in Europe?

  • The harmonisation of resolution schemes is the first essential step.

There are those who propose the introduction of group resolution or liquidation, accompanied by increased decision-making powers for the European authorities so that they can decide on the winding-up of a group, the setting-up of a European resolution fund, or even the establishment of a European agency modelled on the Federal Deposit Insurance Corporation in the United States.

Others argue for better coordination of national resolution schemes. A coordination framework would greatly facilitate the winding-up of a group. In the wake of the crisis, however, the Member States are reluctant to consider surrendering their sovereignty where financial stability is concerned.

Harmonising national resolution instruments is, in my opinion, the first step that needs to be taken with a view to building a crisis management framework.

Ideally, all of the national authorities should be involved in one and the same resolution procedure. In practice, this would entail an evaluation of group assets by the national authorities working together, possibly proposing different batches of assets to potential buyers, and giving creditors 'haircuts'. And all this in a coordinated fashion.

  • A framework for coordinated action is needed, therefore, but is it enough?

There is no easy answer to this question, but I have every hope that this conference will point us in the right direction.

It remains to be seen whether the harmonisation of bankruptcy law or increased powers for a European authority are necessary. I have therefore decided to convene a group of bankruptcy law experts to advise Commission staff in their endeavours.

Greater legal expertise is a necessity.

Politically, how can the differing interests of the Member States be reconciled, while recognising the legitimate aim of governments – which are accountable to the voters in their countries – of ensuring financial stability? How can financial stability be achieved in an integrated way?

That is a question that I want to raise with the Member States which – I am well aware – are intent on ensuring financial stability both within their own domestic sphere of responsibility and in Europe as a whole.

The issue of funding the resolution process will be a central factor in this debate.

And last but not least, Ladies and Gentlemen, I really must point out that:

  • an integrated response depends on finding a way to resolve the question of funding.

In the vast majority of Member States, the costs of winding-up are borne by the national budget in the absence of crisis resolution funds financed by the private sector.

This gives rise to the awkward problem of burden sharing between Member States.

Not to mention the limits set on the powers of the European banking authority, whose decisions must not encroach on the governments' fiscal responsibility.

Is a resolution authority conceivable if the funding issue is not resolved?

Let me make one thing clear in this connection. A budgetary safeguard clause is only legitimate in the absence of a European crisis resolution framework. A European crisis resolution framework would mean that in the future there would be few or no bail-outs, but instead orderly bank resolution. Shareholders and unsecured creditors would have to pay. The managers would be held to account.

To my way of thinking, financial institutions should contribute to a resolution fund. It is just a matter of thinking ahead, and taking responsibility. But this is also undoubtedly a moral issue.

Why should the general public foot the bill for the excesses and reckless risk-taking of financial institutions? In environmental matters, it is a universally accepted principle that the polluter pays. I see no reason why things should be any different in financial matters.

Let us also be clear about the objective of a resolution fund. It is not a new form of rescue or bail-out. A resolution fund is part and parcel of a resolution scheme for ensuring bank restructuring. I intend to examine mechanisms for burden sharing between group resolution funds.

***

Ladies and Gentlemen,

As you will realise by now, there are more questions than answers at the moment. More objectives than ready-made solutions. But what we have here are the beginnings of a pragmatic approach.

It seems to me that a resolution authority and a European resolution fund cannot be decreed. They will have to be established step by step because they are based on confidence.

It is my ambition that we succeed in ensuring that in future any crisis that arises can be dealt with on a European basis. Perhaps with a more European approach than we were able to muster during the crisis from which we have just emerged.

This will entail ensuring greater continuity of services for depositors, financial stability in all the countries where a group is established, and a resolution procedure that is less costly for society as a whole.

This presupposes harmonised resolution instruments and mechanisms for financing by the private sector. I am firmly convinced about this. However, we must remain open to any institutional developments.

***


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