Banking_Union_within_EU
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This document discusses the key elements of the European Union's banking union and single rulebook for banking supervision and resolution. It outlines the Single Supervisory Mechanism, Single Resolution Mechanism, and harmonized deposit guarantee schemes across EU member states. It also discusses capital requirements, bank recovery and resolution directives, deposit guarantee scheme directives, and the development of a single resolution fund and potential future European Deposit Insurance Scheme. The goal is a fully integrated system for supervising banks, resolving failing banks, and guaranteeing deposits across the European Union.
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- 1. Banking Union & Single Rules Capital Requirements & Bank Resolution & Deposit Guarantee Schemes Prepared by Natalia Perestyuk Advisory Panel Member Attorney at law, MBA Deposit Guarantee Fund of Ukraine Advisory Panel Meeting of December 29, 2015
- 2. EU-wide financial reform puzzle
- 3. Banking Union Foundations Single Rulebook for bank supervision and resolution across the EU The Single Supervisory Mechanism (SSM) gives the European Central Bank responsibility for supervision of all banks (approximately 6000) in the euro area (and other SSM- participating Member States). Single Resolution Mechanism allows bank resolution to be managed through a Single Resolution Board backed by a Single Resolution Fund. The Deposit Guarantee Scheme Directive provides that bank deposits in all Member States are guaranteed up to €100 000
- 5. Single Rulebook & Banking UnionCRD-4 Package (as Response to Basel III) Capital Requirements Directive #2013/36/EU Capital Requirements Regulation #575/2013 BRRD: Banks Recovery and Resolution Directive #2014/59/EU DSG: Deposit Guarantee Schemes Directive #2014/49/EU EBA Guidelines: on early intervention triggers (in force since January 01, 2016) on common procedures and methodologies for the supervisory review and evaluation process (SREP) stress tests of deposit guarantee schemes (draft) cooperation agreements between deposit guarantee schemes
- 6. Synergy effect: DGS + BRR Combined introduction of deposit guarantee schemes and resolution frameworks produces synergies: early intervention (recapitalization, liquidity assistance, guarantees, etc.) and resolution mechanisms maintain the systemic functions of banks, avoids contagion (and therefore additional payouts) DGS dissuades bank runs (and therefore avoid vicious circles which lead to banks crises) DGS and bank resolution frameworks are mutually beneficial The new financing requirements ensure that DGSs have enough funds in place to deal with small and medium-size bank failures.
- 7. Early Intervention Triggers 1) triggers based on the outcomes of supervisory review and evaluation process (SREP): i. overall SREP score and ii. pre-defined combinations of the overall SREP score and iii. scores for individual SREP elements 2) material changes or anomalies identified in the monitoring of key indicators under SREP 3) significant events in particular: major operational risk events, need to review the quality of assets/evaluation, loss of senior management or key staff, significant outflow of funds as due to reputational damage, management fail to comply with regulatory
- 8. Single Rulebook on Resolution The BRRD provides for the first time binding rules on the bail- in of shareholders and creditors so that shareholders and creditors are the first to pay for banks in difficulty (and to avoid that the taxpayers bear such costs) Any additional funds exceptionally required to provide funding during the resolution process (after the bail-in would be applied) will come from the banking sector itself Under BRRD individuals and small businesses with deposits of more than €100 000 will benefit from preferential treatment
- 9. Contributions to Resolution Fund Target is >= 1 % of all covered deposits in all credit institutions authorised in the territory of the Member State (by January 01, 2015 + 10 years) Contributions are composed of: -flat part (institution liabilities – own funds – covered depodits) and -risk adjustment (up to institution risk profile) Alternatives: individual or consolidated levels
- 10. EU MS BRR Evolution Perspectives within Banking Union: MS resolution funds -> one Single Resolution Fund Target is >=1% (estimated at €55 billion) of the covered deposits of all credit institutions in the participating Member States (by January 01, 2016* + 8 years) *or as of the date when the conditions for the transfer of contributions to the Single Fund are met
- 11. Single Rulebook on DGS Current level – EUR 100K, higher coverage limited by 12 months: real estate transactions (sale of a house) some specific life events (marriage, divorce, retirement, etc.) Covered per depositor per bank (1 brand = 1 bank) Deposits held by individuals and enterprises (whatever their size) Funds accessibility - within 20 working days after a bank failure
- 12. DSG contributions Target >= 0.8% of covered deposits in all credit institutions in the MS (by July 03, 2014 + 10 years + <= 4 years within certain MS) Individual contribution = base * risk adjustment (as linked to scores from a set of indicators: 1) to reflect banks’ capital structure and solvency profile 2) to measure the riskiness and/or exposure of the banks 3) to cover banks’ profitability/income profile
- 13. EU MS DGS Evolution Coverage EUR 50K -> EUR 100K (since 2011, as a response to 2008 crisis) Repayment deadlines will be gradually reduced from 20 working days to 7 working days. This reduction will be made in three phases: 15 working days as from 1 January 2019, 10 working days as from 1 January 2021, and eventually 7 working days as from 1 January 2024 European Deposit Insurance Scheme (proposal)
- 14. EU MS DGS -> EDIS (Proposal) A European Deposit Insurance Scheme (EDIS) is a further step to a fully fledged Banking Union, ensuring that the level of depositor confidence in a bank would not depend on the bank's geographical location. It is a Third Pillar (next to First Pillar - Single Supervision & Second Pillar - Single Resolution – both already in place) EDIS would develop over time and in three stages: 1) re-insurance stage (until 2020), 2) co-insurance stage (until 2024) and, 3) full European system of deposit guarantees (since 2024)
Editor's Notes
- http://europa.eu/rapid/press-release_MEMO-14-294_en.htm
- http://ec.europa.eu/priorities/economic-monetary-union/docs/single-market-strategy/factsheet-completing-banking-union_en.pdf
- EBA Guidelines on early intervention triggers https://www.eba.europa.eu/regulation-and-policy/recovery-and-resolution/guidelines-on-early-intervention-triggers/-/regulatory-activity/consultation-paper the new regulatory framework with common rules for banks in all 28 Member States, set out in a single rulebook, is the foundation of the banking union. Common rules will help to prevent bank crises in the first place (in particular Capital Requirements Directive and Regulation – see MEMO/13/690) and, if banks do end up in difficulty, set out a common framework to manage the process, including a means to wind them down in an orderly way (Directive on Bank Recovery and Resolution (BRRD) – see IP/14/2862 and MEMO/14/297). Common rules will also ensure that all EU savers are guaranteed that their deposits up to €100 000 (per depositor/ per bank) are protected at all times and everywhere in the EU (Directive on Deposit Guarantee Scheme – see MEMO/14/296).
- Early intervention (recapitalization, liquidity assistance, guarantees, etc.) may be useful to rescue an ailing bank, but there is no guarantee that a bank failure will be avoided thanks such an intervention. As a result, payout of depositors may be eventually needed. Therefore, some DGS funds must be reserved for payout (or bank resolution measures, such as the transfer of deposits to another bank, which is an alternative to payout). According to the Directive, DGS funds could be used for early intervention, provided that some conditions are met, e.g. the resolution authority has not taken any resolution action, the DGS has appropriate systems and procedures for selecting and implementing alternative measures and monitoring affiliated risks, the costs of the measures do not exceed the costs necessary to fulfil the statutory or contractual mandate of the DGS, etc. There is also a safeguard stipulating that the member banks of the DGS would have to provide the DGS with the means used for early intervention in the following situations: if there is a need to reimburse depositors and the available financial means fall below 2/3 of the target level, or if the available financial means of the DGS fall below 1/4 of the target level. Should the use of DGS funds for bank resolution be allowed? Yes, because it is often cheaper than paying out depositors. To a large extent deposit guarantee schemes and resolution frameworks share the same function: protecting depositors against the unavailability of their deposits, which may happen as a result of a single bank's failure or a systemic crisis. DGS and resolution frameworks are mutually beneficial. On the one hand, resolution maintains the systemic functions of banks, avoids contagion and therefore additional payouts. On the other hand, DGS dissuades bank runs and therefore avoid vicious circles which lead to banks crises. As a result, the combined introduction of deposit guarantee schemes and resolution frameworks produces synergies. In essence, maintaining the availability of deposits through resolution is equivalent to a payout. Indeed, it is even better – it is more beneficial for depositors to have continuous and unlimited access to their bank accounts and the full amount of their deposits than to have the right to a maximum of € 100 000 paid after several days (or weeks). Also, it is a cheaper solution when faced with a systemic crisis. Indeed, while a disorderly failure obliges the DGS to repay the total amount of covered deposits with an improbable and cumbersome claim over the liquidation estate, resolution "only" costs the amount necessary to bridge the gap and maintain the continuity of the systemic functions of the bank. Given that the means available for resolution are necessarily limited, it seems economically advantageous to allow the use of DGS funds for resolution purposes. However, it appears necessary to limit such support to the potential cost which the DGS could have born in case the relevant institution would have failed. http://europa.eu/rapid/press-release_MEMO-15-6165_en.htm?locale=en
- https://www.eba.europa.eu/documents/10180/1151520/EBA-GL-2015-03_EN+Guidelines+on+early+intervention+measures.pdf/9d796302-bbea-4869-bd2c-642d3d817966 overall SREP score and pre-defined combinations of the Overall SREP score and scores for individual SREP elements; material changes or anomalies identified in the monitoring of key financial and nonfinancial indicators under SREP revealing that the conditions for early intervention are met; significant events indicating that the conditions for early intervention are met In particular, examples of significant events that may put an institution in a situation where conditions for early intervention are met may include: a. major operational risk events (e.g. rogue trading, fraud, natural disaster, severe IT problems, significant fines imposed on the institutions by public authorities); b. significant deterioration in the amount of eligible liabilities and own funds held by an institution for the purposes of meeting the minimum requirements for own funds and eligible liabilities (MREL); c. signals of the need to review the quality of assets and/or conduct independent valuation of specific portfolios/assets, for instance: i. outcomes of the assessment of SREP elements, suggesting that there is a concern that assets might be lower than liabilities; ii. emphasis of matter paragraph4 put in an external auditor’s opinion on the financial statement of the institution, indicating material uncertainty; iii. unfavourable events that occur between the end of the reporting period and date when the financial statement are authorised for issue, which provide evidence of conditions that arose after the reporting period and therefore do not require adjustment/restatement of financial statements (non-adjusting events); for each material category of non-adjusting events the institution should disclose the nature of the event and estimate its financial effect, or make a statement to the effect that such an estimate cannot be made); iv. perpetual and material adjustments to the institution’s financial statements due to errors in valuation of assets/liabilities and frequent changes in the accounting assumptions. d. significant outflow of funds, including retail deposits of customers, caused, e.g. by the reputational damage of the institution; e. unexpected loss of senior management or key staff, who have not been replaced; f. one or more members of the management body fail to comply with regulatory requirements specified in Directive 2013/36/EU to become or remain a member of the management body; g. significant rating downgrades by one or more external rating agencies, potentially leading to substantial outflows of funds, inability to renew funding or activation of contractual covenants related to external ratings.
- During the recovery and early intervention phases laid down in this Directive, shareholders should retain full responsibility and control of the institution except when a temporary administrator has been appointed by the competent authority. They should no longer retain such a responsibility once the institution has been put under resolution. http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0059 the resolution tools should include the sale of the business or shares of the institution under resolution, the setting up of a bridge institution, the separation of the performing assets from the impaired or under-performing assets of the failing institution, and the bail-in of the shareholders and creditors of the failing institution. http://europa.eu/rapid/press-release_MEMO-14-597_en.htm?locale=en + Investment firms http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0059 banks and authorities make adequate preparation for crises; national authorities are equipped with the necessary tools to intervene in a troubled institution at a sufficiently early stage to address developing problems; national authorities have harmonised resolution tools and powers to take rapid and effective action when bank failure cannot be avoided; authorities cooperate effectively when dealing with the failure of a cross-border bank; and banks contribute to resolution financing arrangements to support the costs of restructuring.
- In the Banking Union, the target level of the Single Resolution Fund will be at least 1% of the covered deposits of all credit institutions in the participating Member States to be reached over an eight year period as of 1 January 2016 (or as of the date when the conditions for the transfer of contributions to the Single Fund have been met)1. Individual contributions are composed of a flat part and a risk adjustment. The flat part reflects the pro rata size of the credit institution's liabilities minus own funds and minus covered deposits. The flat part has to be risk adjusted in proportion to the risk profile of institutions. The precise amount that individual institutions would have to pay each year will thus depend on their size and risk profile. The risk adjustment part of individual contributions will be based on the criteria set out in the BRRD.
- In the Banking Union, the target level of the Single Resolution Fund will be at least 1% of the covered deposits of all credit institutions in the participating Member States to be reached over an eight year period as of 1 January 2016 (or as of the date when the conditions for the transfer of contributions to the Single Fund have been met)1. Individual contributions are composed of a flat part and a risk adjustment. The flat part reflects the pro rata size of the credit institution's liabilities minus own funds and minus covered deposits. The flat part has to be risk adjusted in proportion to the risk profile of institutions. The precise amount that individual institutions would have to pay each year will thus depend on their size and risk profile. The risk adjustment part of individual contributions will be based on the criteria set out in the BRRD.
- Member States can set a higher target levels for their DGS. Currently, schemes in about half of Member States have already reached the above target level or are relatively close to it. In one third of Member States, DGS funds are above 1% of covered deposits, and in a few of them, they are even beyond 2% or 3%. http://europa.eu/rapid/press-release_MEMO-15-6165_en.htm?locale=en Notably, one third of the schemes have access only to data referring to deposits. Around half can retrieve information on financial statements, capital adequacy ratios and risk-weighted assets. Further information, such as full balance sheets, income statements and/or other supervisory reports, is disclosed to only a few schemes. June 2008 Final Report on Risk-Based Contributions page 3 Typically, in the DGS which adjust their contributions using risk-based information about their members, the annual contribution for each bank (ci) is defined in terms of a contribution base (xi), usually the total amount of eligible or covered deposits, plus or minus a percentage (βi) proportional to the risk attitude of the members and a percentage (α) reflecting the overall conditions in the banking system in the country: ci =αβixi. (1) Coefficient α is often set in the statutes or by-laws governing the DGS and/or revised on a regular basis by the board of the scheme, for instance to reflect any improvement or deterioration in the soundness of the banking sector and consequent need to increase or decrease the resources collected. Coefficient α is equal for all DGS members, irrespective of their risk profiles, and is designed to set the aggregate contributions required to face potential crises.
- http://europa.eu/rapid/press-release_MEMO-15-6153_en.htm he first stage would be a re-insurance scheme and would apply for 3 years until 2020. In this stage, EDIS would provide a specified amount of liquidity assistance and absorb a specified amount of the final loss of the national scheme in the event of a pay-out or resolution procedure. In order to limit moral hazard and avoid “first-mover advantages”, a DGS can only benefit from EDIS in this stage if it has met its requirements and filled its national fund to the required level, and only if those funds have been fully depleted. There are also robust safeguards to avoid any possible abuse of the system [see question 11]. The second stage would be a co-insurance scheme and would apply for 4 years until 2024. For this phase, a national scheme would not have to be exhausted before accessing EDIS. EDIS would absorb a progressively larger share of any losses over the 4-year period in the event of a pay-out or resolution procedure. Access to EDIS would continue to be dependent on compliance by national DGS with the required funding levels. In the final stage, EDIS would fully insure deposits and would cover all liquidity needs and losses in the event of a pay-out or resolution procedure.
- http://europa.eu/rapid/press-release_MEMO-14-294_en.htm