The EU Recovery and Resolution framework

1. The EU Recovery and Resolution framework Fátima Pires Financial Services Policy Division Directorate General Financial Stability Brussels, 2 October 2012 Disclaimer: The views expressed do not necessarily reflect the official view of the ECB

2. Outline • Bank Recovery and Resolution Directive (BRRD) • General observations • Selected issues • Recovery and Resolution Plans (RRP) • Definition of resolution • Involvement of central banks in recovery and resolution • Bail-in • Financing arrangements • Towards the creation of a Banking Union

3. 1.1. General observations • Full support to establish effective BRR framework in EU in line with FSB Key Attributes • manage orderly bank failures avoiding contagion, thus safeguarding financial stability whilst minimising taxpayers’ money • Framework will reduce obstacles to effective cross-border crisis management in financial sector: • Establish comprehensive framework addressing prevention, early intervention and resolution • Provide common set of powers and tools • Allow early, coordinated and quick intervention, which is crucial to preserve the credit institutions’ critical functions • Improve functioning of the Single Market

4. 1.2. Selected issues – Recovery and Resolution Plans (RRP) • Development of RRP is key element of proposal • RRP as prevention tool – raises awareness and preparedness; many issues can already be identified and addressed in normal times • RRP as crisis management tool – provides both the institution and the authorities with an action plan that will support decisive and timely action • Further analysis warranted on: • operational effectiveness • risk of collective triggering leading to herding or pro-cyclicality • resolvability assessments – role of EBA key (in defining parameters for assessment and issues to be examined to assess resolvability)

5. 1.2. Selected issues – definition of resolution • Definition of resolution crucial – ‘No Bail Out’ Principle • Support ‘Pecking order’ regarding institutions failing or likely to fail • Liquidate, if do not pose systemic risk • When in the public interest, use resolution tools to wind down institution • Only under exceptional circumstances, resolve as going concern. Further analysis warranted. • Assessment of failing or likely to fail - entity responsible for decision should be clearly defined

6. 1.2. Selected issues – involvement of central banks in recovery and resolution • Involvement in assessment of public interest concerns such as financial stability and continuity of financial services, given central bank expertise. These may include: • Assessment of recovery and resolution plans • Assessment triggering the use of resolution powers • Adequate exchange of information and cooperation should be ensured (when central bank not resolution authority) • Independence of central banks shall not be compromised

7. 1.2. Selected issues – bail-in • Support for development of bail-in tool • Support for adequate transition period: bail-in applies from 2018 at the latest. Continued research into the practical implications and possible impact on markets warranted. • Minimum bail-in requirement – support for proportionate and institution-specific (e.g. type, risk profile). Harmonised application of a minimum requirement will be key to ensure level playing field and sufficiency of bail-inable funds • Legal certainty - support for Pecking order in hierarchy of claims. Predictability needs to be ensured. • Further analysis warranted on depositor preference

8. 1.2. Selected issues – financing arrangements • Resolution funding key to avoid high costs for taxpayer • Contribution to resolution funds: • Ex ante contributions supported. Cyclically neutral, favours ‘polluter pays’ principle and reduces time to act • Ex post contributions as supplement (if ex ante funds insufficient). ‘Survivor bias’ will also contribute towards enhancing market discipline • Contributions should be risk-based - reflect potential costs in resolution and their likelihood • Minimum target fund level - 1% of covered deposits over 10 years • Support use of DGS in resolution funding given synergies and in order to reap economies of scale

9. 2. Towards the creation of a Banking Union • The resolution framework is one of three pillars necessary to build a Banking Union (in line with the Commission’s Roadmap towards a Banking Union) The Banking Union comprises:

10. 2. Towards the creation of a Banking Union • Harmonised resolution framework providing common powers and tools necessary but not sufficient • An integrated resolution framework requires: • European Resolution Authority separated from supervisor underpinned by a European resolution fund • Unified legal framework: harmonised rules not enough. Clear and unequivocal rules and procedures are crucial • Elements of Banking Union constitute a sound and robust framework that will foster financial stability and support EMU • Timely advancement of all three pillars is of the essence!

11. Thank you very much for your attention!