June 4, 2012
The European Commission is, according to press reports, about to finally unveil, this week, its legislative proposal for a restructuring and resolution regime for European banks.
The restructuring proposal is the main component missing from the new legislative architecture. The elements suggested are, by and large, sensible and follow the frameworks created over recent years, for example in Germany and the UK. Important elements are an obligation to create restructuring funds (alternatively, at national discretion, to use an existing deposit guarantee fund for this), with a target volume of 1% (within 10 years) of covered deposits, and making it possible to bail-in senior unsecured creditors, either by writing down their claims or by converting debt into equity. While bail-in is a powerful instrument to restructure ailing financial institutions, it will make it more difficult to issue long-term unsecured debt and will, together with the contributions to the restructuring fund, raise refinancing costs. (The bail-in tool will not take effect before January 2018, though.)
However, in contrast to ongoing political discussions on the creation of a “banking union” with an accompanying institutional and legislative framework, the proposal does not propose the creation of pan-European institutions, but only sets guidelines for respective regimes in the member states. It does foresee some cross-border financing mechanisms by proposing to oblige restructuring funds to lend to each other and by proposing mutualisation of financing in case of cross-border group restructurings, but this clearly falls short of creating a truly pan-European regime. Specifically, it neither creates a resolution authority, nor a restructuring fund nor a deposit guarantee scheme at the EU level. All in all, then: a sensible framework, but clearly insufficient as a European answer to the threat of re-nationalisations and weak EU banking systems.
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