Bank crisis rules need a dose of realism and more detail

The European Commission’s bank crisis resolution plans focus too closely on individual troubled banks, and must do more to address crises that could infect an entire banking sector, commented MEPs on the draft legislation tabled in the Economic and Monetary Affairs Committee on Tuesday. MEPs also stressed that this legislation must be more detailed, to ensure that all share and bond holders’ stakes are turned into rescue cash before taxpayers are asked to contribute.

7-11-2012 — / — “The Commission proposal is good for dealing with an individual bank in crisis but more is needed to address a widespread banking crisis”, said rapporteur Gunnar Hokmark (EPP, SV), in his opening remarks. The next priority would be for the legislation to distinguish clearly between the final stage at which a bank is still run by its owners and that at which it is taken into public control, as this clarity would be essential to proper crisis resolution, he added.

This draft legislation is one of the three key building blocks for establishing an EU banking union. The other two are more integrated supervision of banks, and stronger deposit guarantee schemes.  MEPs insist that all three need to be in place for the banking sector to be properly regulated.

Address the full-blown crisis scenario

To address crises that could threaten a whole banking sector, Mr Hokmark’s text offers a definition of  “systemic crisis” and recommends methods for allowing public budgets to also be called upon should public intervention be needed to avoid much greater costs.

“Let us not delude ourselves that public financial intervention will never be necessary.  When it is necessary, it would be better to have rules in place for this intervention”, Mr Hokmark said.  Public intervention would be an option only after bank owners (primarily shareholders) had been wiped out, and for this reason his text specifies how shareholders’ holdings would be liquidated.  His text also stresses that banks must contribute to crisis resolution funds before trouble hits, again to ensure that the industry itself has taken a full hit before taxpayers are called in.

One captain at any one time

Mr Hokmark’s text would also introduce rules to ensure that it is always clear which entity is running a bank.  “There must be no grey zones”, in which decisions could be taken both by shareholders and an outside public authority, he said.

The rule changes aim to clarify the fact that so long as a bank is a going concern, it is its shareholders who are responsible.  On the other hand, once resolution is necessary, the relevant public authority should have full control.

Next steps

Economic and Monetary Affairs Committee MEPs will now hold a series of meetings with a view to putting the draft legislation to a committee vote in March and a plenary one in June.  The definitive version of the legislation needs to be agreed between the European Parliament and EU member States.




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