Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel European Commission International Conference Building a Crisis Management Framework for the Internal Market Brussels, 19 March 2010 Danièle NOUY Secretary General of the French Prudential Supervisory Authority Early Intervention: Which new tools for supervisors ? Secrétariat général de lAutorité de Contrôle Prudentiel - ACP

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 2 The recent crisis revealed clear shortcomings in resolution frameworks : lack of scope, coordination, and reactivity. Two key objectives : 1.Strengthening and harmonizing domestic regulatory powers. 2.Setting up a clear framework for coordination, to enhance supervision of cross-border banking groups. Introduction

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 3 1- Strengthening domestic regulatory powers No clear boundary between early intervention and resolution. What is needed ? A gradual approach that will provide supervisors with a wide range of adequate tools for both early intervention and resolution purposes.

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 4 Member States should agree on powers and tools available to supervisory authorities in crisis situation Replace the management body of the firm and appoint a special representative/administrator in a going concern, Limit the scope of the firms activities, Prohibit / limit the distribution of profits to shareholders, Prohibit / limit assets intra-group transfers, Ensure active role of DGSs in preventing failure. 1- Strengthening domestic regulatory powers

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 5 A clear framework should enable supervisors, when dealing with bank crisis, to take decisions which can affect stakeholders rights. As regards the use of thresholds that would trigger the use of intervention tools in a not insolvent situation: –No need for automatic / quantitative thresholds, –But a wide set of qualitative thresholds allowing for intervention at the earliest stage possible of financial distress. 1- Strengthening domestic regulatory powers

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 6 Early intervention should not go too far: –Early intervention actions by banking supervisors should aim at restoring the stability and financial soundness of an institution when problems are developing… –…and not at imposing one particular business model. The concept of living wills raises some issues: –Feasibility and benefits remain uncertain, notably because circumstances in the next crisis will be different from previous crises. –Potential negative impact on banks activity/efficiency/profitability and international implications, especially in case of disclosure. 1- Strengthening domestic regulatory powers

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 7 Possible use of living wills as a tool to require a bank to change its business model and/or streamline its corporate organization would be deeply questionable: –Neither the complexity nor the size of a banking group are in themselves central in the too-big-to-fail or too-big-too-save issue. –Living wills might have a deep impact on group structures and business models, with far-ranging legal and macroeconomic consequences for the EU (adverse effect on the integration trend in the internal market). 1- Strengthening domestic regulatory powers

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 2- A clear framework for coordinated supervision of cross-border groups Discussions on crisis management and intervention tools relate to discussions on: –The new supervisory framework for the EU, –The model of development for the financial sector, –The future for the Single Market. We must reconcile two elements: –Financial integration is developing fast, on the one hand; –Resolution arrangements covering the cross-border banking groups are still national, on the other hand. 8

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 9 2- A clear framework for coordinated supervision of cross-border groups We have the choice between two opposite models: –An «isolation model» which would imply requiring business and economic fragmentation so as to be consistent with the current fragmentation of crisis management framework. –A« cooperative model » which would consist in aligning legal / institutional / operational frameworks with financial integration, and improving cooperation between authorities.

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel A clear framework for coordinated supervision of cross-border groups (A)Facilitating asset transfers as a crisis intervention tool –Why promoting asset transfers? In a liquidity crisis, assets transferability may enable an ailing cross-border group to survive, where ring fencing practices would have forced it into bankruptcy. Current legal uncertainty may force authorities to fall back on ring-fencing and non cooperative solutions –How to improve legal certainty of asset transfers? By giving a legal existence to the notion of group interest, Intra-group arrangements could produce prudential benefits as well as improve the safety of creditors in case of problems.

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel A clear framework for coordinated supervision of cross-border groups (B)Enhancing intervention and resolution on a consolidated basis –We need to align the scope of the resolution framework with the definition of the financial groups, supervised on a consolidated basis. –A first step is needed: the inclusion of investment firms in the Directives governing the winding-up of credit institutions and insurance undertakings.

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel A clear framework for coordinated supervision of cross-border groups (C)Promoting a European System of Deposit Guaranty Schemes -DGS- Not a replacement of national domestic schemes but rather a re- insurance scheme, actively involved in crisis management. Such a system would enhance cooperation between authorities and: –Facilitate mechanisms of solidarity between national DGSs, –Limit the risks of run-to-deposits and of contagion to other countries, –Intervene as a guarantee in intra-group asset transfers.

Banque de France – Secrétariat général de la Commission bancaire Bruxelles, 19 mars 2010 Early intervention – which new tools for supervisors? Banque de France – Secrétariat général de lAutorité de Contrôle Prudentiel 13 Conclusion We have the choice between different early intervention tools and resolution regimes, with different degrees of cooperation between authorities and countries. A national approach of resolution regimes would imply fragmentation not only of supervision but also to some extent of financial markets. Promoting a cooperative framework is the only way forward, due to the reality of cross-border groups and the objective of the Single Market.