EU-wide rules for bank recovery and resolution proposed

Its package of measures (171-page / 525KB PDF)  is designed to create a more unified approach for dealing with banks in crisis across the 27-country bloc while ensuring that the costs of recovery and resolution programmes fall upon the bank's owners and creditors and not on taxpayers, the Commission said. Financial authorities will be encouraged to intervene at an early stage, with that intervention becoming "more intrusive" as the situation deteriorates.

Approved state aid granted to financial institutions by member states amounts to €4.5 trillion between October 2008 and October 2011, according to Commission figures – equivalent to 37% of the EU's gross domestic product (GDP).

"The EU is fully delivering on its G20 commitments," said President Barroso. "Two weeks ahead of the summit in Los Cabos, the Commission is presenting a proposal which will help protect our taxpayers and economies from the impact of any future bank failure. [The proposal] is an essential step towards banking union in the EU and will make the banking sector more responsible. This will contribute to stability and confidence in the EU in the future, as we work to strengthen and further integrate our interdependent economies."

Under the proposal, banks will be required to draw up 'recovery plans' setting out measures that will take effect to restore viability should their financial situation deteriorate. Financial regulators will have to prepare 'resolution plans' containing options for dealing with banks that are no longer viable, at both group level and for each individual institution, and will be able to force banks to change their "legal or operational structures" if they identify obstacles during the winding-up process.

Financial groups will also be encouraged to enter into intra-group support agreements, enabling them to provide loans or guarantees to other institutions within the group subject to regulatory approval.

Regulators will be expected to intervene where a particular bank does not meet or is likely to be in breach of its capital requirements. They will be able to require the bank to implement any of the measures set out in its recovery plan, draw up plans for further action and appoint a 'special manager' to restore the financial situation of the bank if the situation is sufficiently serious.

Banking law expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, previously commented on the "clear disparity" in the approaches of different EU member states to banking regulation and operation. This "highlights the need for a more consistent and joined-up response to the issues facing the EU banking sector," he said. Big banks in the UK are expected to submit recovery plans to the Financial Services Authority (FSA) by the end of this month.

As part of the Commission's proposals, regulators in all member states will have access to the same resolution tools and powers. The main powers proposed include the ability to sell all or part of the failing bank to another bank, a 'bridge institution tool' enabling regulators to separate a bank's good assets and essential functions to be sold on to another entity and a 'bail in' tool allowing the bank to be recapitalised. Where this is triggered shareholders will be wiped out or diluted, and creditors will have their claims reduced or converted to shares. An 'asset separation' tool may also be used to clear a bank's balance sheet into an asset management vehicle, providing that this is used in conjunction with another resolution tool.

The new framework will also enhance cooperation between national regulators in cross-border actions, with the European Banking Authority (EBA) given the power to facilitate joint actions and act as a binding mediator if necessary.

The UK banking industry welcomed the proposals, but warned that "rapid and lasting solutions" were needed urgently to deal with the ongoing crisis in the eurozone.

"The EU crisis management proposals published today will take time to implement and so they are for the future," said Angela Knight, chief executive of the British Bankers' Association (BBA). "It is vital the eurozone uses the much talked about bail out funds urgently to stabilise eurozone countries and, where necessary, their banking sectors. The UK took action as far back as the end of 2008 and, although it caused anger then and has remained controversial, reform had been in the best interest of the country. Others must follow suit without further delay."