European Union: EU Draft Crisis Management Directive Requires Banks To Implement Recovery Plans

Keywords: European Commission, credit institutions, crisis management directive, recovery plans,

Overview

On June 6, 2012, the European Commission presented a draft directive on the recovery and resolution of credit institutions and investment firms (also referred to as the "Crisis Management Directive" or "CMD") after extensive preparatory work on the international level and within the European Union. The draft directive provides a framework for crisis management in the financial sector. It envisages implementation into national laws by January 1, 2015, with the exception of the regulations concerning "bailin," which should be implemented by January 1, 2018. The aims of the draft directive are:

  • To avert systemic risks for the financial sector resulting from a bankruptcy of credit institutions and investment firms;
  • To resolve bank failures in an orderly way by, among other things, improving cross-border cooperation;
  • To avert and prevent banking crises and spill-over effects and preserve financial stability; and
  • To make shareholders and creditors pay for bank failures rather than using public funds.

The Crisis Management Directive is based on the assumption that ordinary insolvency regimes are not suited to deal with bank failures because (i) banks perform critical functions for the entire economy, (ii) they operate entirely on the basis of trust and bank failures undermine confidence in the banking system, (iii) of the long duration of traditional insolvency procedures and (iv) the financial crisis showed that resolution and maintenance of financial stability required significant funds from the public. The Crisis Management Directive focuses on the following parts: Prevention and preparation, early intervention, resolution and liquidation and resolution financing.

PREVENTION MEASURES

Member States are obliged to designate public administration authorities with special skills in the context of restructuring and liquidating credit institutions (resolution authorities). Suitable for this purpose can be existing supervisors, central banks and relevant ministries, as well as separately created authorities.

Coordinating tasks and decision-making powers will be given to the European Banking Authority ("EBA"), which is responsible for coordination among Member States, as well as for the development of various technical standards. Institutions are required to submit detailed financial recovery plans, at both the individual bank and the group level. A consolidating supervisory authority coordinates different national resolution authorities. EBA may be called upon for coordination or may act on its own initiative to coordinate competent authorities on national level.

Furthermore, resolution authorities are required to establish resolution and liquidation plans, at both the institutional and the group level. The detail required in the plan is dictated by the significance of a possible failure and the complexity of the structure of the relevant institution.

EARLY INTERVENTION RIGHTS

If the competent authority comes to the conclusion that a recovery plan is insufficient, or an institution has not filed a resolution plan, early intervention rights come into existence. These include the right to request a reduction of the complexity of an institution, the adaption of financial strategies or the preparation of capital measures.

Intra-group Financial Support

The Crisis Management Directive establishes a framework for intra-group financial support by group members in favor of other group entities. The parent company may determine the participating group entities. Support may not be granted without consideration, and the principle of reciprocity applies.

The creation of an intra-group support framework requires an application by the parent company. Any support may not endanger compliance with capital rules, but support measures may be granted notwithstanding any limitations of domestic laws. In this respect these rules do not have equivalents in national laws, e.g., neither German corporate law nor the German Restructuring Act allows such a far reaching intra-group support.

Appointment of Special Agent

In the case of a significant deterioration of the financial situation, or in the case of material infringement of laws or material irregularities, authorities may appoint a special agent to replace the ordinary management of an institution. The term of such special management is limited to one year, but it may be extended under certain circumstances. Groups may be submitted to a joint special agent and EBA has a coordinating role. Any appointment of a special agent cannot be regarded as a case of liquidation, resolution or termination.

RESOLUTION AND LIQUIDATION

Authorities will have the power to apply a number of resolution tools if an institution becomes insolvent or is at the brink of insolvency without action being taken, if interference with shareholders rights is justified or if there is no other solution available to restore the institution and the resolution measures are justified by public interest. These tools include:

  • Sale of an institution or its business;
  • Setting up a bridge institution;
  • Spin-off of assets and liabilities; and
  • Bail-in.

These tools can be applied in combination: however, a spin-off must be combined with other instruments. Additionally, domestic resolution tools may be applied if not conflicting with overall resolution of groups.

The "sale of business" tool does not require shareholder consent, and it envisages a sale on commercial terms. The "bridge institution" tool allows authorities to transfer systemically relevant parts to a publicly controlled bridge bank and aims at rescuing those parts of a failing institution. The purpose of the "spinoff" tool is to transfer distressed assets to an asset management vehicle that allows workout over a longer period of time. The "bail- in" tool allows authorities to write-down claims of unsecured creditors and to make debt-equity conversions without creditors' consent. However, certain creditors will be privileged and are not subject to a bail-in: e.g., deposits covered by deposit protection schemes, covered liabilities, short term liabilities with original maturities of less than one month and claims of employees and certain contractors, as well as tax and social liabilities.

In addition, and subject to the composition of total liabilities of the relevant bank, authorities may require banks to maintain a minimum debt eligible for bail-in. It can be predicted that these bail-in rules will have significant impact on the refinancing costs of financial institutions and that the line between debt and equity need to be reconsidered.

RESOLUTION FINANCING

The aim of the draft Crisis Management Directive is to avoid public funding of losses generated by a resolution of financial institutions. Member States are required to set up special financing arrangements the aim of which is that losses resulting from bank failures shall be covered by contributions from the industry. Those national financing arrangements will have minimum funding levels based on model calculations, but it is envisaged that optimal funding levels should reach 1 percent of protected deposits.

Furthermore, national deposit protection schemes shall be included into resolution financing, and all national financing arrangements and deposit protection schemes are required to provide cross-financing to each other on an EU-wide level. In addition, the CMD provides for the mutualisation of those financing arrangements in the case of a group resolution.

The inclusion of national deposit protection schemes, as well as cross-border support, is highly controversial. Member States may be concerned that compulsory common lending between, and group mutualisation of, resolution financing arrangements will give rise to risks and unintended consequences such as contagion, moral hazard and strategic default. There is a possibility that a financial crisis could spread from Member State to Member State as national financing arrangements are exhausted and other Member States' resolution financing arrangements are obliged to lend to them.

Main Differences Between Draft EU-Directive and US Approach

In contrast to the proposed EU Crisis Management Directive, the resolution framework established in the United States by the Dodd-Frank Act's Orderly Liquidation Authority ("OLA") does not contain preventive measures aimed at averting the failure of large systemically significant financial companies. Instead, OLA establishes a framework to address systemic risk through the liquidation process by placing failing financial companies (including bank holding companies, broker-dealers and other companies engaged primarily in financial activities) into a special resolution framework with the Federal Deposit Insurance Corporation ("FDIC") acting as receiver.

While OLA does not contain preventative measures, other parts of the Dodd-Frank Act impose enhanced supervisory and capital requirements on banks and bank holding companies, which are designed to prevent the insolvency of these types of entities. OLA is not intended to replace the existing United State Bankruptcy Code as the primary method of resolving financial companies, rather, it would be used in very limited special situations to preserve financial stability.

The FDIC's powers as receiver in an OLA proceeding are very broad, and are similar to those currently possessed by the FDIC for bank receiverships. Under OLA, the FDIC would be tasked with liquidating the business. It would likely accomplish this liquidation by either transferring the business of the company to an existing bank or bank holding company or to a newly created "bridge company" (for subsequent sale) or by winding down the relevant institution through the sale of assets and business lines.

Areas for Discussion

PROCESS FOR SETTING UP RECOVERY AND RESOLUTION PLANS

Although the EU Crisis Management Directive becomes effective only on January 1, 2015 (2018 with respect to the bail-in provisions), European regulators already now require banks, in particular global systemically important institutions (G-SIFIs), to set up resolution plans (so called "living wills"). Until the Crisis Management Directive becomes effective, the legal basis for living wills is, in many EU countries, still general regulatory law. For example, in Germany, neither the Restructuring Act nor the Banking Act contains specific legal requirements for living wills. Hence, banks are depending on close cooperation with their regulators in order to determine the content and detail of resolution planning. Guidelines are provided by the terms of the Crisis Management Directive, as well as by the "Key Attributes of Effective Resolution Regimes for Financial Institutions" published by the Financial Stability Board1 and the EBA Discussion Paper on a Template for Recovery Plans.2

CONNECTION WITH ENVISAGED EUROPEAN BANKING UNION AND THE ROLE OF THE ECB

The proposals of the EU Commission for a European Banking Union and the allocation of specific tasks to the ECB concerning prudential supervision and the CMD are parallel working streams. However, it may be expected that the potentially new supervisory role of the ECB will trigger certain amendments to the CMD.

Indeed, the CMD is specifically considered in the Communication outlining the Commission's overall vision for banking union, which was published alongside the proposal for banking union.3 Somewhat unexpectedly, the Communication did not promise a future proposal for a single resolution fund or a single deposit guarantee scheme, but it did cross-refer to the CMD and another proposal currently being negotiated—the recast of the deposit guarantee schemes directive4—and asked the European Parliament and the Council to reconsider both these proposals in light of the proposal on banking union.

The Commission called on the European Parliament and the Council to reach agreement by the end of the year on both of these proposals. Once agreement on these proposals has been achieved, the Commission plans to publish a proposal creating a single resolution authority for countries within the banking union, which would have the ability to resolve banks and to coordinate the application of resolution tools.

The creation of a single resolution authority for countries within the banking union would clearly impact on the framework envisaged by the CMD, and so it is somewhat surprising that it will be proposed immediately after agreement is reached on CMD. The banking union proposals themselves appear also to impact on some of the proposed provisions of the CMD, in particular those on resolution financing.

As explained above, the proposed CMD contains provisions that oblige the national financing arrangements of all 27 Member States to lend to each other and mutualises those financing arrangements in the case of a group resolution. The original proposal to recast the deposit guarantee schemes directive contained a similar provision, which mandated mutual borrowing, but this has been deleted in Council negotiations as Member States had serious concerns about both practical funding and consequential risks.

There is a logical argument that supervisory control and fiscal responsibility are linked. If this argument is accepted, then it could be said to follow that banks that are not subject to banking union ought not to benefit from provisions that establish a common fiscal backstop, and, equally, that Member States should not be obliged to accept fiscal responsibility for banks over which they do not have supervisory control. This may lead to the provisions on common lending and group mutualisation, particularly their application to countries outside the banking union, being reconsidered.

Originally published October 12, 2012

Footnotes

1 Available at http://www.financialstabilityboard.org/publications/r_111104cc.pdf.

2 Available at http://www.eba.europa.eu/cebs/media/Publications/Discussion%20Papers/DP%202012%2002/Discussion-Paper-on-Template-for-Recovery-Plans.pdf.

3 Communication from the Commission to the European Parliament and the Council, "A Roadmap towards a Banking Union" (COM(2012) 510 final).

4 See http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm

Learn more about Mayer Brown's Banking & Finance, Financial Services Regulatory & Enforcement, Restructuring, Bankruptcy & Insolvency practices and our Bank Asset Sale Initiative.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2012. The Mayer Brown Practices. All rights reserved.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions