Devil in the detail as EC prepares for next banking crisis

What is it?

European authorities have drawn up plans for a European Union (EU) framework for crisis management in the banking sector. The aim is to safeguard financial stability and continuity of banking services in a cross-border banking emergency.

While banks welcome anything that might get them out of a tight hole in future tricky situations, they have reservations about this particular proposal. They are concerned about the complexities and sensitivities involved and cannot envisage a workable framework.

Who dreamed it up?

The Internal Market and Services Directorate General of the European Commission (EC). The details were announced in October, and the consultation period runs until January 20.

The proposed framework would complement the regulation and supervision reforms of financial markets announced by the EC earlier this year. These involve the creation of a European Systemic Risk Board and three European Supervisory Authorities.

What are the main provisions?

The framework would contain the following key elements:

- 'early intervention' action by banking supervisors aimed at correcting irregularities in banks;

- 'bank resolution' measures which would attempt to save and reorganise ailing banks; and

- insolvency measures under which failed banks would be wound up.

What's in the small print?

The framework could be extended to cover other financial institutions, such as investment firms.

What does the industry say?

The European Banking Federation (EBF) supports the proposals which, it says, demonstrate "that the commission and the member states are committed to taking up the difficult, sensitive but essential issue of cross-border crisis intervention, management and resolution".

But Noémie Francheterre, a banking supervision adviser in the federation, claims the complex and sensitive nature of the issue raises concerns. "The commission will need to take its time in creating the framework to ensure it is effective," she says.

"The most sensitive issue is how it will deal with the different insolvency laws in every country. It would be perilous - in fact, it would be nigh-on impossible - to harmonise these laws throughout the EU. If you open the doors on insolvency law, you will soon be faced with many more doors.

"You cannot expect to harmonise European insolvency laws, but the impossibility of harmonising should not be used as an excuse to delay progress on a crisis-management framework. The EBF has not found a magic solution yet, but we should not give up looking."

How much will it cost?

...and who will pay? The EC's frequently asked questions document on the proposal gives no estimate of costs, but makes clear it would prefer the private sector, not taxpayers, to pick up the tab, which could include "the purchase of the whole or parts of a failing bank by another institution". The EC admits, though, that the "use of public funds may be unavoidable" and that clarification is needed on how the costs of managing international banking catastrophes would be shared between affected member states.

What do the regulators say?

Elemér Tertak, the EC's director of financial institutions, talking to The Banker last month, had this to say: "While prudential regulations are internationally almost harmonised, that is not the case for rules and procedures to be applied in case of a crisis. The aim is now to create a framework which helps in hard times to protect fairly the interests of all stakeholders of a cross-border bank."

The law of unintended consequences

If the EC does not coordinate its actions with the high-level ideas on this matter already put forward by the Financial Stability Board and the Basel Committee on Banking Supervision, the EU could find itself going down the wrong path.

Could we live without it?

Yes... if we want to continue living dangerously.

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