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Bank resolution and recovery in the EU: enhancing banking union?

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Abstract

The article analyses some of the legal and economic policy issues concerning proposals to establish a European Banking Union. It discusses the role of the European Central Bank as a bank supervisor and the creation of the Single Supervisory Mechanism (SSM). The article then critically analyses the draft Directive on Bank Recovery and Resolution (RRD) and argues that it is inadequate to serve as one of the pillars of banking union. The article reviews the difficulties of Member States in implementing the RRD by analysing the United Kingdom’s resolution framework as a case study. Finally, the article suggests that although strengthened powers for national resolution authorities are necessary to enhance the RRD, the logic of banking union demands further centralisation of sovereign authority in the Euro area in order to manage more effectively the resolution and recovery of financial institutions and to establish more institutional coherence with the ECB/SSM as bank supervisor. Further centralisation of banking supervision and resolution powers, however, could result in a deepening split in the EU internal market between member states not participating in banking union and participating states.

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Notes

  1. According to the IMF estimates, crisis-related losses incurred by European banks between 2007 and 2010 were close to €1 trillion or 8 % of the EU GDP. In addition, between October 2008 and October 2011, the Commission approved €4.5 trillion (equivalent to 37 % of EU GDP) of state aid measures to financial institutions. See http://www.g20.org/images/stories/docs/eng/washington.pdf (last visited 9 August 2012).

  2. Commission Communication on an EU Framework for Cross-Border Crisis Management in the Banking Sector, COM(2009) 561 final.

  3. Commission Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investment firms, COM(2012) 280/3.

  4. The European Commission proposal has incorporated some of the international standards on bank resolution adopted by the Financial Stability Board, ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’, (July 2011) (BIS: Basel). See http://www.financialstabilityboard.org/publications/r_111104cc.pdf (last visited 8 August 2012).

  5. See RRD, Recital 1 provides ‘adequate tools to prevent the insolvency of credit institutions or, when insolvency occurs, to minimise negative repercussions by preserving systemically important functions of the failing institution’.

  6. Council, Conclusions, 29 June 2012, EUCO 76/12., p. 3.

  7. European Council President, ‘Towards A Genuine Economic and Monetary Union’, 26 June 2012, EUCO 120/12, pp. 3–4.

  8. Council, Conclusions, 29 June 2012, EUCO 76/12, p. 3.

  9. Commission, Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, COM(2012) 511 final, Brussels, 12.9.2012.

  10. Commission, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority).

  11. European Council President, ‘Remarks by President Van Rompuy following the first session of the European Council’, 19 October 2012, EUCO 193/12, pp. 1–2.

  12. Council Conclusions, 4 December 2012, ECOFIN 1011.

  13. Commission Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning the policies relating to the prudential supervision of credit institutions, Art 27 (1) & (2), 2012/0242 (CNS), ECOFIN 1011, Brussels, 3.12.2012.

  14. Commission, Proposal for a Council Regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, Art 4 (1)–(4), COM(2012) 511 final, Brussels, 12.9.2012. The Regulation was subjected to final amendments approved by EU Heads of State on 11 December 2012.

  15. Art 4 (1)(k).

  16. Council, Conclusions, October 2012, EUCO.

  17. See Case C-66/04 United Kingdom v. European Parliament (Smoke Flavourings) [2005] ECR I-10553, Case C–217/04 United Kingdom v. European Parliament (ENISA) [2006] ECR I-3771.

  18. RRD, Article 1. A €730k firm is defined as such under Article 9 of Directive 2006/49/EC (the Recast Capital Adequacy Directive).

  19. Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions, [2010] OJ C 293/1; and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions, [2009] OJ L 94/97.

  20. Article 3 RRD.

  21. Article 5 RRD. The EU Council has proposed to amend article 7 RRD to require that group recovery plans be required only for the group as a whole and individually for significant entities in the group.

  22. European Banking Authority, EBA Discussion Paper on a template for recovery plans, 15 May 2012 (EBA/DP/2012/2) (containing draft template with information to be provided in recovery plan).

  23. Article 16 RRD.

  24. See Annex XI to Draft Directive for the content requirements of a recovery plan.

  25. Articles 9-12 RRD.

  26. Article 10 RRD.

  27. Article 9 RRD.

  28. This conflicts with the UK Independent Commission on Banking (Vickers’ Commission) proposals which would give retail deposit creditors a priority over the bank’s unsecured bondholders. The UK Treasury has incorporated the depositor preference rule as a provision in the UK Banking Bill 2013.

  29. In a recent report, the International Monetary Fund concluded that certain features of the UK SRR—particularly property transfer arrangements to the private sector—could be used to resolve other types of financial firms.

  30. The Treasury’s consultation concluded that the UK special resolution regime should extend to insurance and investment services firms, and financial conglomerates and groups. UK Treasury Consultation, Financial sector resolution: broadening the regime, Cm 8419 (HM Treasury: August 2012).

  31. Commission Communication, COM(2012) 510 final.

  32. Ibid., p. 15.

  33. See Oral evidence of Andrea Enria, Chairman of the Supervisory Board, European Banking Authority, before House of Lords Subcommittee on Europe (Economic and Finance): European Banking Union: Key Issues and Challenges, 7th Report of Session 2012–13.

  34. Article 127 (6) of the EU Treaty provides that: “The Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.” Under EU law, European institutions have legal competence to exercise powers that are specifically conferred. Under article 127 (6), the ECB does not have the conferred power to exercise supervision over credit institutions unless it is provided by unanimous consent of EU states. The Regulation granting bank supervisory powers to the ECB relies on Article 127 (6). According to Article 127 (6), however, the ECB can only have supervisory powers conferred on it ‘concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.’ This means it can only have bank supervisory powers conferred on it under this provision, not resolution powers, as suggested by President van Rompuy and the Commission.

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Authors and Affiliations

  1. The Centre for Financial Analysis and Policy, University of Cambridge, Cambridge, UK

    Kern Alexander

  2. University of Zurich, Raemistrasse 74-22, 8001, Zurich, Switzerland

    Kern Alexander

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  1. Kern Alexander
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Correspondence to Kern Alexander.

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This article is based on a paper given at the conference Managing Europe’s Financial Crisis, organised by ERA on 6–7 December 2012 in Brussels.

The author would like to thank the funding support of the European Commission’s Framework Programme 7 ‘Augur’ project which made this research possible.

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Alexander, K. Bank resolution and recovery in the EU: enhancing banking union?. ERA Forum 14, 81–93 (2013). https://doi.org/10.1007/s12027-013-0284-1

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