Ministers locked in banking recovery debate

How and when banks and other credit and investment firms will be rescued or wound up in future at a minimum cost to the taxpayer were being debated by EU finance ministers in Luxembourg last night, in a bid by the Irish presidency to get member states to agree on the basic rules.

Known as the Banking Recovery and Resolution Directive (BBRD), it covers the three stages of dealing with a crisis; prevention, early intervention, and resolution or winding up.

It is designed to help restructure Europe’s struggling banking sector, which has hindered eurozone recovery.

The new framework should ensure that there will never be a repeat of the Anglo Irish Bank debacle with ministers and bankers meeting in secret in the middle of the night and pledging the state’s wealth to rescue an entity having no idea how much that would cost.

Instead, with the ECB in charge of supervising the largest banks in each country, and with national supervisors on a tight rein, there should be lots of early warnings of a problem in a bank.

There will be a set of rules to evaluate what needs to be done, if the bank can be rescued, how much money they will need, where the money will come from and if it cannot be saved, a separate set of rules to say who loses their money and what happens then.

It would give national authorities in each country the same powers and instruments to deal with a crisis; ensure there is no contagion; and preserve essential bank operations while limiting taxpayer’s exposure.

Institutions will have to draw up and annually update recovery plans in anticipation of a potential adverse event or crisis. The resolution authorities would have to prepare resolution plans for each institution.

The authorities could appoint representatives to oversee an institution.

Resolving or winding up a bank would include the sale of all or part of the business, setting up a “good bank” and a “bad bank”, imposing losses on investors according to a priority list.

This would see “natural persons” or individuals, and micro, small and medium- sized enterprises having preference over the claims of unsecured, non-preferred creditors and depositors from large corporations.

France and Britain want maximum flexibility for their national authorities to decide who should be exempt. The compromise tabled by the Irish presidency say covered bonds would not be bailed-in while the national authorities could exclude derivatives in certain circumstances.

The national authority should set a minimum amount each institution needs in own funds and eligible liabilities (MREL) to absorb losses. The ministers were considering a review clause that would allow the European Commission to introduce a harmonised MREL, as the European Banking Authority advised.

Each country would have to set up a resolution fund with contributions from the institutions based on their liabilities, with a target level to be reached within a specific period of time.

These funds would not be used to recapitalise banks, but to provide temporary support to institutions via loans, guarantees, asset purchases or capital for bridge banks. They could also compensate shareholders or creditors if their losses exceeded what they would suffer under normal insolvency proceedings. They could also be used to substitute funds from exempted creditors.

Finance Minister Michael Noonan, who was chairing the meeting, said that flexibility was the biggest issue. “We have made significant progress in narrowing the ground, however there are still some significant divergences of opinion”.

Economics Commissioner Olli Rehn said there was “a fair chance” of agreement.