EC is seeking feedback, until December 08, 2020, for an initiative to review the bank crisis management and deposit insurance framework. A targeted evaluation of the three existing legislative texts will be performed as part of this review; these legislative texts are the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR), and the Deposit Guarantee Schemes Directive (DGSD). The initiative involves development of proposals for a directive and regulation. The main purpose of the review is to enhance the efficiency, flexibility, and overall coherence of the framework for handling EU bank failures in resolution or insolvency. EC plans to launch a public consultation on this in the fourth quarter of 2020 and expects to adopt the proposal for directive by the third quarter of 2021.
The evaluation will focus on areas such as measures for preparing for and preventing bank failures as well as the measures applicable once a bank has been declared failing or likely to fail. The evaluation will be performed back-to-back with the impact assessment and will feed into the problem definition. The evaluation will rely on the certain criteria, including effectiveness, efficiency, relevance, coherence (in relation to other banking and financial sector legislation), proportionality, and incentive compatibility. This initiative intends to address a number of the identified problems, including the following:
- The existing framework appears to contain incentives toward using tools outside of resolution (for example, preventive uses of the Deposit Guarantee Scheme (DGS) or other measures in insolvency, including alternative uses of DGS liquidation aid(, driven mainly by the different conditions to access funding within and outside of resolution and, particularly in the context of the Banking Union, by a restrictive approach to the public interest assessment as the entry gate to resolution.
- Differences in the availability and actual use of tools in insolvency exist across member states. In some jurisdictions, insolvency proceedings provide tools similar to those available in resolution. Since insolvency proceedings play a role as a counterfactual to resolution, this situation creates discrepancies, even among jurisdictions participating to the Banking Union.
- The legal certainty and predictability of the existing framework is sub-optimal, particularly in a cross-border context; for example, decision-making on whether to use resolution, triggers for resolution and insolvency, differences in the hierarchy of liabilities in insolvency, and availability of backstop arrangements.
- The framework could foster further market integration and, hence, resilience and efficiency, in particular in the Banking Union. However, several elements seem to impair this objective and these include a lack of agility in the management of resources at central level for cross-border banking groups and the misalignment between liability and supervisory control in the safety nets of the Banking Union. Similarly, differences have been observed in the functioning of national DGSs and their ability to handle adverse situations as well as some practical difficulties
- Discrepancies in depositor protection across member states in terms of the scope of protection and payout processes have been observed and may undermine the confidence in the financial safety nets.
EC highlights that the policy options will include a revision of the legislative framework, which can involve adjusting the public-interest assessment to ensure a sufficiently broad scope for bank resolution, creating new tools for orderly liquidation inside resolution with funding appropriate for smaller and medium-size banks, and ensuring the availability and usability of tools for DGS interventions in insolvency as an alternative to paying out depositors. In addition, whenever possible, the use of non-legislative tools such as providing interpretation or guidance on the application of the current framework will be considered. The consultation strategy related to the initiative will aim to gather views and experience of relevant stakeholders with the current crisis management and deposit insurance framework. The strategy will be designed with a two-level content structure: fundamental issues and main design principles, along with the detailed technical issues related to individual elements of the framework. The strategy will cover evaluation criteria as well as key elements of the impact assessment.
Related Link: Notification
Comment Due Date: December 08, 2020
Keywords: Europe, EU, Banking, BRRD, SRMR, DGSD, Resolution Framework, Crisis Management Framework, DGS, Proportionality, Banking Union, EC
Previous ArticleEC Rule Updates Technical Information for Solvency II Calculations
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.