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The EU Recovery and Resolution framework Fátima Pires Financial Services Policy Division Directorate General Financial Stability Brussels, 2 October 2012.

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Presentation on theme: "The EU Recovery and Resolution framework Fátima Pires Financial Services Policy Division Directorate General Financial Stability Brussels, 2 October 2012."— Presentation transcript:

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 2 Outline I.Bank Recovery and Resolution Directive (BRRD) 1.General observations 2.Selected issues –Recovery and Resolution Plans (RRP) –Definition of resolution –Involvement of central banks in recovery and resolution –Bail-in –Financing arrangements II.Towards the creation of a Banking Union

3 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 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 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 6 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 1.2. Selected issues – involvement of central banks in recovery and resolution

7 7 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 1.2. Selected issues – bail-in

8 8 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 1.2. Selected issues – financing arrangements

9 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) Single supervisory mechanism Integrated resolution framework Common system for deposit protection The Banking Union comprises:

10 10 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! 2. Towards the creation of a Banking Union

11 11 Thank you very much for your attention!


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