EU struggles with cross-border crisis rules

Senior regulatory figures speak out on future legislation at a Brussels conference

BRUSSELS – European and international supervisors have warned banks and their shareholders they will have to pay to resolve future crises and cannot rely on the taxpayer to bail them out.

“Why should our citizens pay for the excesses and the inconsiderate risks taken by financial institutions?” said Michel Barnier, the new European commissioner for the internal market and services, speaking at a conference in Brussels last month. “When dealing with the environment, there is a principle accepted by all: the polluter pays. I cannot see why this should not be applied in the financial sector.”

At the conference, ‘Building a crisis management framework for the internal market’, Barnier said a “new culture” of prevention is needed to avoid the costly bailouts of the past.

The authorities in several countries are already pushing through measures to make it possible to have a more “orderly” resolution or restructuring of banks, which is a better alternative than simply deciding between bankruptcy or rescue, he said. The US authorities are setting up a resolution fund to ensure financial institutions contribute to cover the risks they take and potential threats to the financial system, something the EU could emulate.

An orderly resolution regime would allow financial institutions facing a crisis to be reorganised before they become insolvent, with banks, their shareholders and unsecured creditors facing the costs rather than the taxpayer. A special fund should be established to deal with such crises, he said. “It is my personal conviction financial institutions should contribute to a resolution fund.”

Dominique Strauss-Kahn, managing director at the International Monetary Fund, supported the idea and suggested the EU set up a resolution authority.  “What I think is needed is a European resolution authority, armed with the mandate and tools to deal cost-effectively with failing cross-border banks – an ex ante solution to the problems that hamper co-operation in crisis situations, rather than an ex post one. It should be part of an integrated system of crisis prevention, crisis management, crisis resolution and depositor protection.”

But the idea was coolly received by Antonio Garcia del Riego, director in European corporate affairs at Grupo Santander. “We don’t support the creation of a European resolution authority. We support national rules and we believe work should be focused on improving and enhancing national solvency frameworks.”

To make the reform possible, the regime and tools available to supervisors across the EU would need to be harmonised, Barnier said. “Harmonising regimes is a first indispensible step. All the national authorities must be able to participate in the same resolution procedure.” He acknowledged, however, that national differences will be difficult to overcome. Some authorities favour a European solution that could include establishing an agency modelled on the US Federal Deposit Insurance Corporation; others prefer more co-ordination of national authorities and regimes.

Paul Tucker, deputy governor at the Bank of England, said greater harmonisation might help to reduce distrust between countries, “but harmonisation does not remove the potential conflict of interests between home and host authorities”. Daniele Nouy, secretary-general of France’s Commission Bancaire, noted “co-operation among supervisors is more wishful thinking than reality. There is room for improvement”.

This point was supported by Sharon Bowles, MEP and chair of the European parliament’s economic and monetary affairs committee. “As we know from recent experience, even if supervisors talk to one another, other actors or countries might not.” Dealing with cross-border groups is particularly difficult. “It is not helpful that there is not even a harmonised legal concept of a group within the EU,” she said.

Adam Farkas, chair of the Hungarian Financial Supervisory Authority (HFSA), favoured stronger co-operation among colleges of supervisors and setting triggers for intervention. With more than 75% of banking assets in Hungary held by international banks, he said, the HFSA had lots of experience with colleges. “They work well, but when it comes to co-operation, the level tends to fall. We support legislation for tools to be used in an early intervention stage,” he said, adding the “rules of engagement for colleges” should be defined more clearly and that the European Banking Authority (EBA) should have a stronger role in supervising cross-border institutions.

The idea of setting hard triggers for intervention was debated, with participants from the regulatory side and the financial industry warning it would reduce flexibility in responding to problems. Hector Sants, chief executive of the UK’s Financial Services Authority, said the EBA should make sure there is effective supervision across Europe and that supervisors are doing their job properly, but rejected triggers. “There’s a need for discretion,” he said.

Charles Goodhart, professor at the London School of Economics, said setting up and financing a resolution fund before a crisis occured “was not a bad idea”, but that laws needed to be harmonised first. “The real problem is, I don’t se how it would operate when all the laws are national. You need to get the legal structure agreed and harmonised first,” he said. Otherwise, “you’re putting the institutional cart before the legal horse”.
Jorgen Holmquist, director-general of the internal market and services at the European Commission, said the Commission would present legislation proposals soon on harmonising legal regimes, but cautioned: “Insolvency laws are national. Creating a harmonised law is a long-term objective.”

Elisa Ferreira, MEP and the rapporteur for the European parliament report on crisis management, said much more needs to be discussed. “The question is, who does what, when and how. Who should intervene in a crisis? I believe the EBA should, but each country is trying to find a national solution.”