Euro­pean Union plans eas­ing bank-fail­ure rules

The Pak Banker - - FRONT PAGE -

The Euro­pean Union is con­sid­er­ing eas­ing bank-fail­ure rules in­tro­duced to end the era of ex­pen­sive tax­payer-funded bailouts.

A dis­cus­sion pa­per pre­pared by the Euro­pean Com­mis­sion, the EU's ex­ec­u­tive arm, en­vi­sions set­ting EU loss-ab­sorbency re­quire­ments for its big­gest banks, led by HSBC Hold­ings Plc and Deutsche Bank AG, in line with those is­sued in Novem­ber by the Fi­nan­cial Sta­bil­ity Board for the world's 30 most sys­tem­i­cally im­por­tant lenders. The pa­per, dated this month and seen by Bloomberg, "ex­plores pos­si­ble op­tions" for im­ple­ment­ing the FSB rule in the EU and isn't bind­ing on the Brus­sels-based com­mis­sion.

Yet Elke Koenig, head of the euro area's bank res­o­lu­tion au­thor­ity, has re­peat­edly said that the cur­rency bloc would ex­ceed global stan­dards to en­sure its big­gest banks can be re­struc­tured and re­cap­i­tal­ized with­out threat­en­ing fi­nan­cial sta­bil­ity. "On nine out of 10 oc­ca­sions," re­quire­ments in the bank­ing union would be stiffer than the FSB's rules on to­tal loss-ab­sorb­ing ca­pac­ity, or TLAC, she said in De­cem­ber.

As the EU pre­pares to im­ple­ment global bank­ing stan­dards in­clud­ing TLAC, the lever­age ra­tio and the net sta­ble fund­ing ra­tio, it's strug­gling to boost lend­ing and kick-start the econ­omy. As a re­sult, Jonathan Hill, the EU's fi­nan­cial-ser­vices com­mis­sioner, has said he'll take into ac­count the im­pact these rules could have on Euro­pean busi­ness. "That's the ap­proach to leg­is­la­tion we will be bring­ing for­ward this year to im­ple­ment the to­tal loss ab­sorb­ing ca­pac­ity re­quire­ment," Hill said last month, vow­ing to come for­ward by the end of the year with "a pro­posal on how to ap­ply these rules in a way that makes sense for Europe."

Koenig's Sin­gle Res­o­lu­tion Board is watch­ing the pol­icy de­bate closely, and she's not alone. While the euro area cur­rently has eight banks on the FSB's top-30 list, two other EU na­tions, the UK and Swe­den, count five more be­tween them, in­clud­ing HSBC. The FSB re­quires banks to is­sue or­di­nary shares, sub­or­di­nated debt and other po­ten­tially loss-ab­sorb­ing se­cu­ri­ties equiv­a­lent to 18% of risk-weighted as­sets by 2022. A 6.75% lever­age ra­tio re­quire­ment will also ap­ply.

Koenig has con­sis­tently spo­ken of a loss­ab­sorb­ing base­line for top banks of 8% of to­tal as­sets; in De­cem­ber, she said this equated roughly to 24% on a risk-weighted ba­sis. This 8% fig­ure cor­re­sponds to the amount of to­tal li­a­bil­i­ties, in­clud­ing own funds, that must be wiped out un­der EU law be­fore a bank in res­o­lu­tion can tap into res­cue funds built up from levies on the in­dus­try. The com­mis­sion's dis­cus­sion pa­per states that Euro­pean firms on the FSB list would be held to the greater of the two stan­dards-based on risk-weighted as­sets or a lever­age ra­tio ex­po­sure mea­sure-as laid out by the Basel-based glob­ala reg­u­la­tor.

In ad­di­tion to the po­ten­tially lower min­i­mum loss-ab­sorb­ing re­quire­ment for big lenders, the pa­per sets out a se­ries of con­di­tions to be met be­fore bank-spe­cific add-ons could be ap­plied.

Au­thor­i­ties would need to con­sider a "re­solv­abil­ity as­sess­ment" of the bank and whether ex­tra re­quire­ments are "pro­por­tion­ate and nec­es­sary," it states. A high MREL re­quire­ment "would need to be sub­stan­ti­ated as nec­es­sary on grounds of po­ten­tial loss ab­sorp­tion needs," ac­cord­ing to the doc­u­ment, mean­ing the au­thor­ity would need to show "that the bank is likely to in­cur the ex­tent of losses that jus­tify such a high cal­i­bra­tion."

A Euro­pean Com­mis­sion spokes­woman de­clined to com­ment on the pa­per when con­tacted on Thurs­day. Taken to­gether, its dis­cus­sion points raise the ques­tion of whether banks will be re­quired to have the li­a­bil­i­ties and own funds avail­able for bail-in so they can gain ac­cess to res­cue funds in a cri­sis. The Euro­pean Bank­ing Au­thor­ity has said that the EU's loss­ab­sorbency stan­dard, known as the min­i­mum re­quire­ment for own funds and el­i­gi­ble li­a­bil­i­ties, or MREL, is needed to "en­sure the ef­fec­tive­ness of the bail-in tool."

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