Monday, March 31, 2014

E.U. Parliament and Council Reach Deal on Legislation on Orderly Resolution Authority for Failed Financial Firms

The European Parliament and Council reached agreement on legislation to establish a Single Resolution Mechanism to orderly resolve failed and failing financial institutions and investment firms. The resolution authority is backed by an appropriate resolution funding arrangement and a robust decision-making process. A Single Resolution Fund would be constituted to which all the financial institutions in the participating Member States would contribute.  Parliament is expected to pass the legislation in April, with subsequent approval by the Council. The Single Resolution Mechanism would enter into force on January 1, 2015, while bail-in and resolution functions would apply from one year later, as specified under the Bank Recovery and Resolution Directive.
In case of a cross-border failure of a major financial firm, noted Commissioner for the Internal Market Michel Barnier, the Single Resolution Mechanism will be much more efficient than a network of national resolution authorities and will help avoid risks of contagion. While the Single Resolution Mechanism might not be a perfect construction, he continued, it will allow for the timely and effective resolution of a cross border financial institution, thus meeting its principal objective.
Resolution Board. Centralized decision-making would be built around a strong Single Resolution Board and would involve permanent members as well as the Commission, the Council, the European Central Bank (ECB) and the national resolution authorities. In most cases, the ECB would notify the Board, the Commission, and the relevant national resolution authorities that a financial institution is failing. If the Board finds that there is a systemic threat and no private sector solution in sight,  it would adopt a resolution scheme including the relevant resolution tools and any use of the Resolution Fund. 
The Commission, is responsible for assessing the discretionary aspects of the Board's decision and endorsing or objecting to the resolution scheme. The Commission's decision is subject to approval or objection by the Council only when the amount of resources drawn from the Single Fund is modified or if there is no public interest in resolving the financial firm. Where the Council or the Commission object to the resolution scheme, the Board would have to amend the resolution scheme, which would then be implemented by the national resolution authorities. If resolution entails State aid, the Commission would have to approve the aid prior to the adoption by the Board of the resolution scheme.
Resolution Fund. The Resolution Fund has a target level of €55 billion and can borrow from the markets if decided by the Board in plenary session. The Fund would be owned and administrated by the Board. The Single Fund would reach a target level of at least 1 percent of covered deposits over an eight-year period. During this transitional period, the Single Fund, established by the Regulation, would comprise national compartments corresponding to each participating Member State.
The resources accumulated in those compartments would be progressively mutualized over a period of eight years, starting with 40 percent of these resources in the first year. The establishment of the Single Fund and its national compartments and the decision-making on its use would be governed by the Regulation, while the transfer of national funds towards the Single Fund and the activation of the mutualization of the national compartments would be provided for in an inter-governmental agreement established among the participating Member States in the Single Resolution Mechanism.
 German Finance Minister. German Finance Minister Wolfgang Schäuble welcomed the basic agreement on the Single Resolution Mechanism. The legislation will create a sensible decision-making mechanism with effective controls over the funds while minimizing risks to taxpayers, he averred. The main tenets of the agreement are a bail in feature envisioning the clear involvement of private creditors from day one. In addition, there will be more rapid payment into the future resolution fund and progressive mutualization. Finally, the Minister noted that there will be no joint liability for participating Member States.
 In recent remarks at a financial stability forum in Frankfurt, the Minister emphasized that the Single Resolution Mechanism must have efficient decision-making procedures. He cautioned that the resolution of failed and failing financial firms must not be delayed by national interests or conflicts. That is why Germany wants resolution decisions to be taken solely by the resolution board to the maximum extent that this is legally possible.