Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the European Court of Justice and the European Central Bank - An EU Framework for Cross-Border Crisis Management in the Banking Sector {SEC(2009) 1389} {SEC(2009) 1390} {SEC(2009) 1407}
Date: 2009-10-20
Institutions: European Commission
Subjects: credit institution, economic recession, economic reform, financial institution, financial market

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.10.2009 
COM(2009) 561 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE EUROPEAN COURT OF JUSTICE AND THE EUROPEAN 
CENTRAL BANK 

An EU Framework for Cross-Border Crisis Management in the Banking Sector 

{SEC(2009) 1389} 
{SEC(2009) 1390} 
{SEC(2009) 1407} 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE EUROPEAN COURT OF JUSTICE AND THE EUROPEAN 
CENTRAL BANK 

An EU Framework for Cross-Border Crisis Management in the Banking Sector 

(Text with EEA relevance) 

1. 

INTRODUCTION  

The recent crisis has exposed the EU's lack of an effective crisis management for cross-border 
financial institutions. In autumn 2008, Member States agreed to take the necessary action to 
recapitalise and guarantee banks, and this unprecedented action was coordinated at European 
level  on  an  ad-hoc  basis.  The  measures  were  necessary  in  the  exceptional  conditions  that 
afflicted the financial system. 

National  approaches  differed,  but  broadly  speaking  authorities  either  used  public  money  to 
bail  out  banks,  or  ring-fenced  a  bank's  assets  within  their  territory  and  applied  national 
resolution tools at the level of each entity rather than at the level of the cross-border group. 
This raised the risks of reduced confidence, competitive distortions, high bail-out costs carried 
by  taxpayers1  and  legal  uncertainty.  The  events  surrounding  the  failures  of  Fortis,  Lehman 
and  Icelandic  banks  in  the  recent  financial  crisis  illustrate  how  damaging  the  absence  of  an 
adequate resolution framework can be for financial stability of the whole EU banking system. 

There  is  wide  recognition  that  the  EU  needs  to  build  a  resolution  regime  that  would  ensure 
that  all  competent  authorities  effectively  coordinate  their  actions  and  have  the  appropriate 
tools for intervening quickly to manage the failure of a bank, with the objective of minimising 
the need for States to resort to the kind of exceptional measures that have been necessary in 
this crisis. 

The  European  Commission  is  proposing  a  fundamental  reform  of  the  regulation  and 
supervision  of  financial  markets  to  address  the  failings  exposed  by  the  banking  crisis.2 
Measures  have  already  been  taken  to  upgrade  deposit  insurance,  strengthen  capital 
requirements and reform the EU supervisory infrastructure: measures that are essential for a 
more robust framework for prudential supervision and financial stability. 

However,  the  reforms,  to  date,  must  be  complemented  by  a  clear  framework  that  will,  in 
future, enable authorities to stabilise and control the systemic impact of failing cross-border 
financial  institutions.  Europe  needs  a  strong  regulatory  framework  that  covers  prevention, 
early intervention, bank resolution and winding up (see table below).  

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Such  bank  re-structuring  measures  are  considered  in  the  context  of  EU  rules  on  state  aid.  They  fall 
outside  the  scope  of  this  Communication,  and  are  already  the  subject  of  Commission  guidelines  on 
recapitalisation, the treatment of impaired assets and rescue and restructuring aid to banks. 
See 
to 
http://ec.europa.eu/commission_barroso/president/pdf/press_20090304_en.pdf. 

the  Spring  European  Council,  4th  March  2009: 

the  Commission's  Communication 

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•  The  Larosière  report  concluded  that  “The  lack  of  consistent  crisis  management  and 
resolution tools across the Single Market places Europe at a disadvantage vis-à-vis the US 
and these issues should be addressed by the adoption at EU level of adequate measures”.3 
This critical lacuna must now be addressed. 

•  The  European  Council  of  June  2009  concluded  that  work  must  be  advanced  to  build  a 
comprehensive  cross-border  framework  for  the  prevention  and  management  of  financial 
crises. 

•  At  the  Pittsburgh  summit  on  25  September,  G20  Leaders  committed  to  act  together  to 
"...create more powerful tools to hold large global firms to account for the risks they take" 
and,  more  specifically,  to  "develop  resolution  tools  and  frameworks  for  the  effective 
resolution  of  financial  groups  to  help  mitigate  the  disruption  of  financial  institution 
failures and reduce moral hazard in the future". 

An  EU  resolution  framework  for  cross-border  banks  is  also  a  vital  complement  to  the  new 
supervisory architecture that the Commission is proposing.4 The new European Systemic Risk 
Board will provide an early warning system for system-wide risks, while the new European 
Banking  Authority  will  have  an  important  role  in  coordinating  supervisory  responses  and 
channelling  information  as  well  as  ensuring  that  there  is  an  appropriate  follow-up  to  risk 
warnings. These new arrangements cannot achieve their objectives unless national authorities 
can  take  effective  measures  at  the  level  of  banks  to  deal  with  failure  and  prevent  systemic 
contagion.  

2. 

PURPOSE AND STRUCTURE OF THIS COMMUNICATION 

2.1. 

Purpose 

The  Commission  considers  that  changes  are  needed  to  make  possible  effective  crisis 
management and resolution or orderly winding up of a failing cross-border bank.5 The main 
focus  is  on  deposit-taking  banks,  which  play  a  unique  role  as  providers  of  credit,  deposit-
takers  and  payment  intermediaries.  This  Communication  considers  measures  to  deliver  two 
distinct, but connected objectives. 

The  first  objective  is,  to  ensure  that  all  national  supervisors  have  adequate  tools  to  identify 
problems  in  banks  at  a  sufficiently  early  stage  and  to  intervene  to  restore  the  health  of  the 
institution  or  group,  or  prevent  further  decline.  This  will  require  amendments  to  the 
supervisory regime on bank capital. Those core amendments might also be accompanied by a 
framework to enable asset transfers between group entities as a means of financial or liquidity 
support before the problems of particular group entities become critical. 

The  second  objective  is  to  make  it  possible  for  cross-border  banks  to  fail  without  serious 
disruption to vital banking services or contagion to the financial system as a whole. This will 
mean  the  development  of  an  EU  resolution  framework  as  well  as  measures  to  address  the 

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See Larosière report, p. 34: 
http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf. 
See  Commission's  new 
http://ec.europa.eu/internal_market/finances/committees/index_en.htm#package 
This  Communication  is  accompanied  by  a  staff  working  document  which  provides  further  details  in 
relation to specific aspects of the potential regime.  

legislative  proposals  on  financial  supervision,  23  September  2009: 

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obstacles to effective cross-border resolution that arise from the territorial and separate entity 
approach  to  insolvency,  and  arrangements  for  financing  such  resolutions,  including  the 
sharing of any direct fiscal costs by Member States.  

2.2. 

Structure 

The Communication covers three areas. 

1. 
Early intervention (section 3), covering actions by supervisors aimed at restoring the 
stability  and  financial  soundness  of  an  institution  when  problems  are  developing,  together 
with intra-group asset transfer between solvent entities for the purposes of financial support. 
These  actions  would  be  taken  before  the  thresholds  conditions  for  resolution  are  met,  and 
before the institution is or likely to become insolvent. The new European Banking Authority 
could play a role in coordinating supervisory early intervention in a cross-border group.  

2.  Resolution  (section  4),  covering  measures  taken  by  national  resolution  authorities  to 
manage a crisis in a banking institution, to contain its impact on financial stability and, where 
appropriate, to facilitate an orderly winding up of the whole or parts of the institution. These 
measures  take  place  outside  the  framework  of  banking  supervision,  and  may  be  taken  by 
authorities other than supervisors, although it is by no means precluded that supervisors might 
be involved. 

Insolvency (Section 5), covering reorganisation and winding up that takes place under 

3. 
the applicable insolvency regime.  

Although  these  measures  are  –  for  the  purposes  of  discussion  -  presented  as  conceptually 
distinct,  they  do  not  necessarily  constitute  separate  and  sequential  'phases'  of  a  crisis.  In 
practice, there may be considerable overlap between resolution and insolvency, in particular, 
and supervisory early intervention may move rapidly into resolution measures.  

2.3 

Interaction with other EU measures 

These  measures  are  an  important  part  of  the  wider  EU  regulatory  system  and  initiatives  to 
increase its resilience, as explained in the chart below. 

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Going concern 
supervision/Crisis 
prevention 

(cid:213)    Scope of the Crisis Management Communication     (cid:214) 

Early intervention 

Bank resolution 

Insolvency framework 

Current 
situation 

Capital Requirements 
Directive 3 pillar approach 
(CRD) 

CRD (Art. 130 + 136) 

Colleges 

Emergency Liquidity Assistance  
by National Central Banks (NCBs)

2008 MoU 

Colleges 

National authorities 

Committee of European 
Banking Supervisors (CEBS) 

Stress testing 

2008 MoU – determines who 
(e.g. finance ministries, NCBs) 
coordinates actions with other 
competent authorities 
(coordination  via cross-border 
stability groups) 

Possible 
changes for 
consideration  

Establish European Systemic 
Risk Board (ESRB) and 
European Banking Authority 
(EBA) 

Leverage ratio 

Management of risks 
(remuneration structures) 

Quantity and Quality of capital 

Enhanced capital 
requirements 

Supervision of liquidity 

Preparation of Wind-down 
plans 

European Banking Authority  

New bank resolution tools 

New powers towards bank 
management 

Joint assessment framework 

Restoration plans 

Asset transferability framework 

Expanded common tools for 
supervisors (CEBS) 

Clarify home/host branch 
supervision (Art. 33 CRD) 

New framework for cooperation

Broader changes to the legal 
framework in support of new 
bank resolution tools 

Mechanisms to finance cross-
border resolutions (including 
possible role for DGS) 

Application of wind-down plans

Winding up Directive:  

Winding-up of a cross-border 
branches takes place under 
insolvency procedures of country 
of parent bank.  

Winding up of cross-border 
subsidiaries takes place 
according to procedures where 
subsidiary is licensed. 

Facilitate integrated winding up of 
a group: 

−  Coordination framework for 
insolvency proceedings 

−  Lead insolvency administrator

−  Integrated resolution by a 

single authority 

−  Asset transfers under post 
commencement financing 

3. 

EARLY INTERVENTION BY SUPERVISORS  

3.1. 

Early intervention tools 

Some elements of a framework for early intervention by supervisors already exist under the 
current  prudential  framework  for  banks  in  so  far  as  it  specifies  a  minimum  set  of  measures 
which  must  be  available  to  supervisors  to  address  failures  by  credit  institutions  to  meet  the 
requirements  of  that  Directive.6  These  include  requiring  the  institution  to  increase  its  own 
funds above the minimum level specified in the Directive; strengthen its internal organisation 
and  governance  arrangements;  apply  specific  provisioning  policy;  restrict  its  business  or 
operations;  or  reduce  the  risk  inherent  in  its  activities,  products  or  systems.  Such  measures 
leave  control  of  the  institution  in  the  hands  of  the  management,  and  do  not  necessarily 
represent  a  significant  interference  with  the  rights  of  shareholders  or  creditors.  Recently 
agreed  changes  to  the  Capital  Requirements  Directive  ('CRD')7  will  require  consolidating 
supervisors to plan and coordinate joint assessments, exceptional measures, contingency plans 
and communication to the public in emergency situations.  

However,  significant  gaps  remain  which  might  be  addressed  with  the  following  additional 
measures: 

•  harmonised  powers  for  supervisors  to  require  the  preparation  in  appropriate  cases  (for 
example, systemically important financial institutions) of " firm- specific contingency and 
resolution  plans"  (sometimes  called  "living  wills")  detailing  how  an  institution  and  its 

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Article  136  of  Directive  2006/48/EC  relating  to  the  taking  up  and  pursuit  of  the  business  of  credit 
institutions (recast) (OJ L 177, 30.6.2006, p. 1). 
Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions (recast). 
This has recently been amended under the CRD 2 proposal: 
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52008PC0602:EN:NOT 

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business might be dismantled and wound up rapidly and in an orderly manner – the need 
for such plans is currently discussed by the G-20; 

•  promoting  good  governance  within  financial  institutions  in  order  to  make  it  simpler  and 

easier to handle a future crisis if and when it occurs; 

•  the powers - not currently conferred on all national supervisors - to require the submission 
of  a  group  restoration  plan,  to  change  the  management  of  a  bank,  or  to  appoint  a 
representative  with  the  particular  objective  of  restoring  the  financial  situation  of  an 
institution; 

•  common  indicators  or  thresholds,  and  an  agreed  terminology  between  EU  supervisors, 
which would clearly define when and how intervention in a cross-border bank should take 
place; 

•  the  review  of  supervision  of  cross-border  branches  in  light  of  shortcomings  in  the 
cooperation  arrangements  between  home  and  host  authorities  and  concerns  about  the 
powers of the host State to intervene effectively in emergency situations.  

There  is  clear  evidence  from  the  recent  past  that  the  supervisory  framework  has  not  been 
sufficiently robust and that incentives have been lacking to support efficient coordination of 
supervisory measures aimed at restoring a cross-border group.  

Questions8 

Which additional tools should supervisors have in order to address developing problems?  

How should their use be triggered? 

How important are wind-down plans ("living wills") as a tool for crisis management? 

3.2. 

Intra-group asset transfers 

The  transfer  of  assets  as  a  means  of  intra-group  financial  support  could  assist  groups  in 
managing  liquidity  positions  and  in  some  cases  could  help  stabilise  entities  in  a  developing 
crisis. 

•  There is currently no EU authorisation regime for asset transfers and EU legislation does 
not provide a general framework of terms and conditions for transfers.9 In principle, in all 
Member States asset transfers must be made for fair consideration, irrespective of whether 
they are between affiliated or unconnected entities. However, the way that this principle is 
expressed and applied varies between Member States. 

•  Transfers of assets that are not made on purely commercial terms may detrimentally affect 
creditors  and  minority  shareholders  of  the  transferor.  Such  transfers  may  be  subject  to 

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More  detailed  questions  on  this  and  the  other  sections  in  this  Communication  are  to  be  found  in  the 
accompanying staff document. 
Recital 52 of Directive 2006/48/EC only specifies that the management of exposures should be carried 
out  in  a  fully  autonomous  manner,  in  accordance  with  the  principles  of  sound  banking  management, 
without regard to any other considerations.  

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challenge from minority shareholders or creditors, and directors may be exposed to civil or 
criminal liability.10 

These issues may prevent actions that might be in the best interests of groups, and of cross-
border groups in particular. Introducing a concept of 'group interest' for banking groups might 
be a way of underpinning transfers and addressing the risks of liability for directors. A limited 
concept  of  the  interdependence  and  mutual  interest  of  group  companies  might  be  worth 
exploring,  whereby  transfers  would  be  permitted  if  specified  conditions  were  satisfied. 
However, the impact of any such proposal on the principle of limited liability and the separate 
legal personality of group entities needs to be considered carefully. It would also be important 
to  design  adequate  safeguards  to  prevent  the  possible  misuse  of  asset  transfer  for  criminal 
purposes. 

It  may  also  be  appropriate  to  back  such  a  regime  with  modifications  to  insolvency  law  to 
provide appropriate safeguards, such as a priority ranking for the transferor in the event of the 
insolvency of the transferee. 

Is the development of a framework for asset transfer feasible? If so, what challenges would 
need to be addressed?  

What safeguards for shareholders and creditors are needed?  

4. 

BANK RESOLUTION 

4.1.  Why is EU action on bank resolution needed? 

Differences in national frameworks 

Existing EU measures aimed at resolving a failing bank are minimal in scope and substance. 
They  address  only  supervisory  intervention  and  the  mutual  recognition  of  insolvency 
proceedings for cross-border bank branches. Directive 2001/24/EC on the reorganisation and 
winding up of credit institutions (‘the Winding-up Directive’) requires that any reorganisation 
or winding up of a credit institution with branches in another Member State is initiated and 
carried  out  under  a  single  procedure  by  the  relevant  authorities,  and  in  accordance  with  the 
national insolvency law, of the home Member State of the institution. Cross-border banking 
groups,  composed  of  a  parent  company  with  subsidiaries  in  other  Member  States  are  not 
covered by this Directive.  

Subsidiaries  are  the  predominant  form  of  cross-border  banking  business  in  Europe,  holding 
assets of almost € 4 trillion. 11 In the absence of any EU measures, therefore, the management 
of  crises  is  almost  entirely  governed  by  national  regimes  which  can  be  significantly 
different.12 For example, in some Member States the relevant powers derive from a specific 
resolution  or  insolvency  regime  for  banks,  while  in  others  only  the  general  corporate 

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14 November 2008 Commission services report on asset transferability, see 
ttp://ec.europa.eu/internal_market/bank/docs/windingup/rep141108_en.pdf 
Assets held by cross-border subsidiaries (2006), Source ECB. 
DBB Law "Study on the feasibility of reducing obstacles to the transfer of assets within a cross border 
banking group during a financial crisis and of establishing a legal framework for the reorganisation and 
winding-up of cross border banking groups", 2008.  

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insolvency regime is available. The powers to manage cross-border bank crises are conferred 
on  a  range  of  different  domestic  authorities  including  banking  supervisors,  central  banks, 
government  ministries,  courts  or  insolvency  officials  and  in  some  cases  deposit  guarantee 
schemes. The extent of powers and the conditions governing their use also vary according to 
each national system.  

Effective  cross-border  resolution  is  made  more  difficult  if  the  measures  available  under 
national  law  or  the  procedural  requirements  for  certain  corporate  actions  differ.  As  a  basic 
example, if one national authority has the power to transfer assets to a third party purchaser by 
executive  order,  while  another  cannot  do  so  other  than  by  judicial  proceedings,  a  rapid  and 
coordinated  intervention  by  those  two  authorities  to  deal  with  affiliated  banks  or  assets  in 
their respective jurisdictions is likely to be very difficult. 

The  stage  at  which  resolution  measures  can  be  taken  may  also  be  crucial.  Not  all  national 
authorities have the power to stabilise and reorganise an ailing bank before the formal point of 
insolvency  (as  defined  in  national  law)  is  reached,  and  the  lack  of  harmonised  threshold 
conditions which trigger such powers may prevent coordinated action in relation to a cross-
border group. This is further discussed in Section 4.4. 

While this diversity is not necessarily a problem if the operations of troubled bank are entirely 
national  and  the  measures  comply  with  State  Aid  rules,  it  will  certainly  hamper  effective 
coordinated action in respect of a banking group operating in several jurisdictions.  

Incentives for ring-fencing of national assets  

In their responses to this crisis, Member State authorities have tended to ring-fence national 
assets of a cross-border group and apply national resolution tools at the level of each entity 
rather  than  seek  a  group-wide  solution.  However  ring-fencing  local  assets  may  often  hinder 
rather  than  help  resolve  a  problem  in  a  cross-border  group.  There  will  be  cases  where  such 
actions result in increased losses to the group as a whole. 

Member States' incentives to co-ordinate and refrain from ring-fencing national assets during 
a cross-border crisis are limited by their need to protect the interests of national stakeholders 
(including creditors, taxpayers and the deposit guarantee scheme). This fundamental obstacle 
to cooperative resolution of a cross-border group is, inter alia, rooted in the territorial nature 
of insolvency law. If insolvency law is national, domestic authorities have a legitimate – as 
well as a strong political – interest to ring-fence the national assets of an ailing bank in order 
to protect national deposits and maximise the assets available to the creditors of the national 
entity. 

However, any agreement on limiting the rights of Member States to ring-fence the local assets 
of a cross-border banking group will depend critically on the existence of adequate, fair and 
legally  compliant  arrangements13  between  Member  States  for  burden-sharing  of  any 
subsequent losses that a banking group as a whole - including its foreign subsidiaries – might 
incur.  Such  arrangements  would  not  only  support  crisis  management,  but  could  also  assist 
crisis  prevention  by  reinforcing  incentives  for  co-operation  among  public  authorities.  In 
particular,  trust  and  confidence  in  cooperation  arrangements  must  be  underpinned  by  the 

13 

Financial support for resolution measures would almost certainly engage EU rules on State aid, and any 
such arrangements would therefore have to comply with those rules.  

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assurance that the costs resulting from a cross-border resolution can be fairly shared between 
the various stakeholders. This is discussed in Section 4.8 of this paper. 

4.2. 

Objectives of a bank resolution framework 

The  different  national  approaches  to  bank  resolution  currently  have  varying  objectives. 
Corporate  insolvency  laws  typically  have  two  principal  objectives:  a  fair  and  predictable 
treatment of creditors and the maximisation of assets available to satisfy creditors' claims. By 
contrast, in a specific regime for bank insolvency, public policy objectives such as financial 
stability,  the  continuity  of  services  and  the  integrity  of  payment  systems,  may  take  priority. 
Agreement on a common set of objectives will determine and shape the nature of a new EU 
framework. 

A European framework for bank resolution must therefore be based on agreed and common 
objectives  which  should  ensure  that  losses  fall  primarily  on  shareholders  and  junior  and 
unsecured  creditors  rather  than  on  governments  and  taxpayers.  This  is  essential  for  the 
avoidance  of  moral  hazard  which  arises  from  perceptions  that  banks  that  are  too  big  or  too 
interconnected to fail and are likely to be rescued by public financing. The overriding policy 
objective  is  to  ensure  that  it  should  always  be  possible  –  politically  and  economically  –  to 
allow banks to fail, whatever their size.14 That overriding objective is unlikely to be achieved 
unless  the  resolution  framework  is  able  to  ensure  the  protection  of  (insured)  depositors  and 
the continuity of banking and payment services, and generally to manage the systemic impact 
of a bank failure by minimising contagion and providing the necessary legal conditions for an 
orderly winding up.15  

What should be the key objectives and priorities for an EU bank resolution framework? 

4.3.  What resolution tools are needed? 

National  approaches  to  bank  resolution  fall  broadly  into  two  categories:  those  that  operate 
under general corporate insolvency law, including administration and those that have a special 
regime for banks. In both cases, the rules are limited to national banking operations. They do 
not apply extra-territorially.16 Special regimes can either take the form of a general insolvency 
regime adapted to banks, or a set of dedicated resolution tools specifically adapted for failing 
banks.  Dedicated  resolution  tools  may  include  powers  to  transfer  the  whole  or  part  of  the 
assets and liabilities of a failing bank to another private sector entity (an assisted or unassisted 
merger effected by national authorities) or a 'bridge bank'; the power to cleanse the balance 
sheet of the failing institution by transferring non-performing loans and 'toxic' or difficult-to-
value assets to a separate asset management vehicle (or 'bad bank'); and nationalisation.  

Within  this  broad  distinction,  further  differences  exist.  Some  national  systems  favour  a 
graduated approach while others are geared towards rapid emergency intervention. The first 
tends  to  apply  from  an  earlier  stage  and  is  designed  to  encourage  shareholders'  consent  to 
restructuring  measures:  the  first  step  is  often  to  replace  the  management  with  an 

14 

15 

16 

See G20 leaders' statement, Pittsburgh, 24-25 September 2009, 
http://www.pittsburghsummit.gov/mediacenter/129639.htm 
On  15  September  2009  the  Financial  Stability  Board  issued  a  press  statement  announcing  that  it  was 
setting  in  train  a  work  programme  to  address  the  moral  hazard  risks  and  other  challenges  posed  by 
systemically important institutions. http://www.financialstabilityboard.org/press/pr_090915.pdf 
However,  reorganisation  or  winding-up  measures  falling  within  the  scope  of  Directive  2001/24/EC 
apply to the branches of a credit institution (but not its subsidiaries) in other Member States. 

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'administrator'  or  'special  manager'  and  submit  a  restructuring  plan  to  shareholders  for 
approval, and only, as a second step, are measures imposed that override shareholders rights. 
The second, by contrast, imposes measures without the prior consent of shareholders.  

An effective range of tools must give authorities options other than public financial support 
and  liquidation  to  address  problems  in  an  ailing  bank.  While  this  paper  is  open  as  to  –  and 
seeks views on – the most appropriate tools for an EU regime, it is essential that resolution 
authorities have a sufficiently wide range of common tools which can be applied flexibly and 
with discretion, and that they can act with adequate speed and control over the conduct of the 
resolution. A recent IMF working paper17 suggests that the following tools, which are used in 
a  number  of  existing  national  regimes,18  should  be  considered  in  any  review  of  the  EU 
regime:  

–  powers to facilitate or effect a private sector acquisition of the failing bank or its business; 

–  powers to transfer the business of a failing bank to a temporary "bridge bank" in order to 

preserve it as a going concern with a view to sale to a private sector purchaser; 

–  powers to separate "clean" and "toxic" assets between "good" and "bad" banks through a 

partial transfer of assets and liabilities. 

To the extent that such tools could potentially involve State support, they should be designed 
and exercised in a way that is consistent with the EU State Aid regime.19  

Other  jurisdictions  manage  the  reorganisation  of  banks  under  a  framework  of  special 
administration, whereby an administrator appointed by the relevant national authority assumes 
control of the management of a failing bank and considers how it should be restructured. This 
may also be a useful measure in an EU regime, although the appropriate threshold conditions 
and timing may be different (see Section 4.4).  

What are the key tools for an EU resolution regime? 

4.4. 

Threshold conditions and timing for use of tools 

Clear "threshold conditions" that must be met before the powers of intervention are triggered 
are  central  to  an  EU  resolution  regime.  They  facilitate  coordinated  action  by  national 
authorities,  reduce  the  risk  of  challenge,  and  provide  legal  certainty  for  shareholders  and 
creditors  as  to  the  circumstances  in  which  action  might  be  taken.  Any  intervention  which 
affects the interests and rights of shareholders and creditors needs to be proportionate to the 
seriousness  of  the  problems  in  the  institution  and  driven  by  the  legitimate  considerations  of 
public interest.  

In  order  to  safeguard  the  public  interest,  intervention  should  be  possible  before  the  bank  is 
“balance sheet” insolvent: that is, before the bank has reached the relevant threshold for the 
purposes  of  ordinary  insolvency  proceedings.  If  authorities  cannot  intervene  decisively  to 

17 

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19 

IMF Working Paper WP/09/200, "The Need for Special Resolution Regimes for Financial Institutions – 
The Case of the European Union", by Martin Cihák and Erlend Nier. 
In other countries, such powers exist but are implicit. Judicial authorities may use them in the context of 
insolvency proceedings.  
As far as the present financial crisis is concerned, the Commission has adopted a number of guidelines 
to address this emergency exceptional situation.  

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protect the public interest before the bank is technically insolvent, this will limit the effective 
options for stabilisation and resolution, or increase the amount of public funds that will need 
to  be  committed  in  support  of  such  an  option.  The  threshold  conditions  for  an  EU  regime 
should therefore allow intervention at the appropriate stage, while being sufficiently rigorous 
to  ensure  that  intervention  which  interferes  with  the  rights  of  stakeholders  is  justified.  That 
outcome  is  likely  to  be  achieved  by  the  combination  of  a  regulatory  threshold  based  on  a 
supervisory assessment that an institution is failing to meet core regulatory conditions, and a 
broader public interest based on for example, financial stability and the continuity of banking 
services. 

What are the appropriate thresholds for the use of resolution tools? 

4.5. 

Scope of the bank resolution framework 

A new framework will need to apply to all credit institutions that are part of a cross-border 
group.  This  must  include  cross-border  branches  because  experience  has  shown  that  banks 
operating  through  cross-border  branches  can  also  present  a  real  risk  to  financial  stability  in 
Member States where the branches carry on significant amounts of deposit-taking business.20 
Furthermore, as banking groups often include entities that carry on investment activities and 
other financial services, and their failure may also pose systemic risks to the financial system, 
it makes sense for a harmonised EU resolution framework to be extended to investment firms 
and possibly to insurers.21 The winding-up of Lehman Brothers and the market disruption it 
caused,22  including  uncertainty  about  the  location  and  status  of  client  assets,  and  about  the 
contractual  positions  of  Lehman's  counterparties  and  the  status  of  their  outstanding  trades, 
clearly demonstrated that measures aimed at managing the failure of investment firms are also 
needed.  

However,  the  resolution  measures  that  are  appropriate  for  deposit-taking  banks  may  not 
necessarily be appropriate for other kinds of financial institution. For example, the power to 
transfer  assets  and  liabilities  to  a  'bridge  bank'  may  be  suitable  for  deposit-taking  banks 
because of the nature of their activities and the objectives of the resolution, but less relevant 
for investment banks, where the focus of a resolution regime may be to address problems and 
uncertainties  in  respect  of  trading,  clearing  and  settlement,  collateral  and  custody  of  client 
assets. 

What should be the scope of an EU resolution framework? Should it only focus on deposit-
taking banks (as opposed to any other regulated financial institution)?  

If  so,  should  it  apply  only  to  cross-border  banking  groups  or  should  it  also  encompass 
single entities which only operate cross-border through branches? 

20 
21 

22 

As was the case in the Icelandic banking crisis. 
Investment  firms  are  not  covered  by  either  the  Winding-Up  and  Reorganisation  Directive  or  the  EC 
Insolvency Regulation. By contrast, insurers are covered by Directive 2001/17/EC on the reorganisation 
and winding-up of insurance undertakings, which provides for the mutual recognition and coordination 
of home State insolvency proceedings in relation to branches of an insurer in other Member States.  
For example, uncertainty about the size of the exposures of other financial institutions to Lehman led to 
a sharp fall in global equity prices in the banking sector, while runs on U.S. money market funds that 
were believed to have invested in Lehman's commercial paper led to rapid liquidation of their holdings 
of all U.S. commercial paper into a falling market.  

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4.6. 

Stakeholders' rights in bank resolution procedures 

Shareholders 

A  robust  framework  of  shareholders'  rights  is  essential  for  good  corporate  governance  and 
also for the free movement of capital. This is especially the case with banks that are public 
listed companies as shares will be listed and traded on capital markets. A balance should be 
struck between protecting the legitimate interests of shareholders and the ability of resolution 
authorities to intervene quickly and decisively to restructure a failing institution or group to 
minimise contagion and ensure the stability of the banking system in affected Member States. 

EU  law  contains  a  number  of  mandatory  requirements  that  confer  rights  on  shareholders. 
These  include  pre-emption  rights,  and  the  requirements  that  any  increase  or  reduction  of 
issued  share  capital  is  approved  by  the  shareholders'  general  meeting.  Shareholders  enjoy 
equivalent  minimum  rights  within  the  EU  as  long  as  the  company  is  a  going  concern.  The 
rights  of  shareholders  accorded  under  EU  law  would  normally  not  pose  an  obstacle  to  re-
organisation  measures  taken  under  a  regular  insolvency  procedure.  Nor  would  those  rights 
necessarily  pose  a  problem  under  a  bank  resolution  process  which  favours  a  graduated 
approach designed to encourage shareholders' consent to restructuring measures or where the 
necessary  time  to  comply  with  such  requirements  is  available.  The  difficulty  arises  if  re-
organisation  takes  place  under  a  bank  resolution  process  which  seeks  to  impose  measures 
without  seeking  prior  consent  of  shareholders.  In  such  a  case,  the  mandatory  nature  of  the 
rights accorded under EU Company law Directives, may undermine attempts by authorities to 
quickly handle a bank crisis. Adjustments may, therefore, be needed to those Directives. The 
nature of those adjustments would have to be such so as to guarantee the ability of national 
authorities  to  intervene  rapidly  in  defined  circumstances,  i.e.  triggers  or  conditions,  without 
having  to  seek  shareholder  approval  in  order  to  ensure  continuity  of  essential  services  that 
have  been  provided  by  the  bank  and  minimising  the  systemic  impact  of  its  failure–  for 
example by orchestrating a private sector purchase.  

Similarly,  any  transfer  of  ownership  or  assets  of  an  ailing  bank  without  shareholders'  prior 
approval  must  also  comply  with  the  shareholders'  right  to  property  under  the  European 
Convention  of  Human  Rights.  Where  rights  granted  by  EU  law  are  affected,  appropriate 
mechanisms for redress and compensation would also need to be addressed. 

Shareholders have the right not to be deprived of their shares, or to suffer a diminution in their 
value,  unless  the  interference  is  justified  in  the  public  interest  and  in  accordance  with 
conditions provided in law and with international law. Uncertainty about whether the terms of 
intervention  strike  a  fair  balance  between  the  demands  of  the  general  interest  of  the 
community  and  the  requirement  of  the  protection  of  the  fundamental  rights  of  individual 
shareholders  may  lead  to  the  risk  that  resolution  measures  could  be  challenged,  in  any 
individual case, before national and European courts.  

Creditors and counterparties 

Bank  resolution  tools  that  involve  transfer  of  assets  may  also  interfere  with  the  rights  of 
creditors  and  market  counterparties,  and  any  EU  resolution  framework  would  need  to 
incorporate  adequate  safeguards  to  protect  those  interests.  Safeguards  for  creditors,  for 
example, might include compensation mechanisms to ensure that no creditor is left worse off 
than it would have been had the bank under resolution been wound up under the applicable 
insolvency  law.  Safeguards  for  market  counterparties  might  include  restrictions  to  prevent 

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disruption  to  set  off  and  netting  arrangements,  security  interests  and  structured  finance 
arrangements. 

Is it necessary to derogate from certain of the requirements imposed by the EU Company 
Law Directives, and if so which conditions or triggers should apply to any such derogation? 
What  appropriate  safeguards,  review  or  compensation  mechanisms  for  shareholders, 
creditors and counterparties would be appropriate? 

4.7. 

Application of resolution measures to a banking group  

The  principal  focus  of  this  Communication  is  cross-border  banks.  If  a  single  legal  entity 
carries on its cross-border business through branches, the principles set out in the Winding-up 
Directive  ('CIWUD')  should  apply  to  extend  measures  adopted  in  the  bank’s  home  State  to 
branches in other Member States. This might involve legislative change since it is not clear 
that EU bank resolution measures would necessarily fall within the scope of CIWUD.  

However,  the  application  of  resolution  measures  to  affiliated  entities  in  a  banking  group  is 
even more complex. Broadly speaking, if the EU is to move beyond nationally-focussed crisis 
management and the understandable tendency to ring-fence assets, there are two approaches 
that might be pursued. The first is to develop a framework for the coordination of measures 
that  would  continue  to  be  applied  at  the  national  level.  The  second  –  a  more  far-reaching 
development of the single-market – would be to provide for the integrated resolution of group 
entities in different jurisdictions by a single resolution authority. 

One option the Commission considers worth exploring would be to assess the feasibility of a 
single  resolution  authority  which  would  be  responsible  for  the  resolution  of  a  cross-border 
group – determined on the basis of rules – to play the lead role in orchestrating a resolution.  

If  the  option  of  a  European  resolution  authority  is  not  considered  feasible,  as  a  minimum 
national resolution measures for a cross-border banking group should be co-ordinated. 

An approach to cross-border resolution based on the coordination of national measures would 
represent a reinforcement of, rather than a radical departure from, current arrangements. The 
Memorandum  of  Understanding23  on  financial  stability,  agreed  in  June  2008,  was  in  place 
during  the  crisis  but  failed  to  provide  a  sufficient  or  useful  basis  for  cooperation  between 
Member States. The orderly resolution of a failing cross-border bank is much more likely to 
be  possible  if  there  is  a  legally  binding  structured  EU  framework  to  cement  cooperation 
arrangements during a crisis. Arrangements for the funding of a cross-border resolution of the 
kind  discussed  in  Section  4.8  below  are  also  likely  to  enhance  the  effectiveness  of 
coordination by getting the incentives right. 

However, under a cooperation and coordination framework, the resolution of a banking group 
will  necessarily  be  carried  out  at  the  level  of  each  legal  entity  in  accordance  with  the 
applicable national regime. Such separate entity resolution, even where coordinated, will not 
necessarily  allow  the  most  efficient  reorganisation.  This  approach  also  fails  to  reflect  the 
commercial  reality  of  the  integrated  EU  banking  sector  that  has  developed  within  the 
framework  of  the  single  market.  Banking  groups  are  increasingly  operationally  and 

23 

Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central 
Banks and Finance Ministries of the European Union on Cross Border Stability (1 June 2008). 

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commercially interdependent, frequently centralise liquidity management in a way that entails 
the  intermingling  of  assets,  and  are  organised  and  operated  in  a  way  that  reflects  business 
lines rather than legal structure.  

These  concerns  can  only  be  fully  addressed  by  greater  structural  integration  of  a  resolution 
framework, possibly by designating a lead authority (determined in accordance with clear ex 
ante  rules)  which  would  orchestrate  the  resolution  of  a  particular  group.  That  authority,  in 
cooperation with the national authorities involved, would apply the EU resolution measures in 
each relevant territory. This approach is clearly ambitious, and it is unlikely to be effective or 
feasible  unless  a  more  integrated  insolvency  treatment  of  banking  groups  is  made  possible. 
This is discussed in section 5 below.  

How  can  cooperation  and  communication  between  authorities  and  administrators 
responsible for the resolution and insolvency of a cross border banking group be improved? 

Is  integrated  resolution  through  a  European  Resolution  Authority  for  banking  groups 
desirable and feasible?  

If this option is not considered feasible, what minimum national resolution measures for a 
cross-border banking group are necessary. 

4.8. 

Financing a cross-border resolution  

Private sector financing 

Funding  arrangements  are  fundamental  to  any  cross-border  resolution  regime.  As  a  primary 
principle, private funding arrangements or private sector solutions are necessary if the costs of 
bank failure are not to be borne by taxpayers (see section 4.2). In addition, in the context of 
the single market the lack of such EU arrangements limits the range of resolution tools that 
authorities will use in a cross-border context. This may prevent authorities from pursuing the 
most effective solution and lead to higher aggregate costs that are borne individually by the 
Member  States  involved.  While  securing  private  sector  involvement  in  bank  resolution  is 
generally  desirable,  the  availability  of  private  sector  options  rapidly  diminishes  as  a  crisis 
deepens.  

It  would  be  useful  to  explore  the  feasibility  of  establishing  ex-ante  mechanisms  that  could 
ensure  that  private  sector  funds  would  be  available  in  times  of  crisis.  Deposit  guarantee 
schemes  could  include  the  possibility  of  funding  resolution  measures.  This  would  have  the 
advantage  that  the  banking  sector  would  contribute  directly  to  ensuring  its  own  stability. 
However, this should not be to the detriment of compensating retail depositors in the event of 
a  bank  failure.  In  its  review  of  the  operation  of  deposit  guarantee  schemes  to  be  brought 
forward in early 2010, the Commission will examine the use of deposit guarantee schemes in 
the  context  of  the  crisis.  Alternatively,  as  some  Member  States  do,  the  Commission  could 
explore  the  creation  of  a  resolution  fund,  potentially  funded  by  charges  on  financial 
institutions which might be calibrated to reflect size or market activity.… 

In addition, a facilitating framework for intra-group financing after the commencement of an 
insolvency  procedure  could  be  explored.  In  the  context  of  its  work  on  the  treatment  of 

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corporate groups in insolvency, UNCITRAL24 is considering how to facilitate the continuous 
operation of the business under reorganisation or liquidation by securing continuous access to 
funds.  

Finally,  any  risk  that  resolution  measures  might  be  subsequently  unwound  through  legal 
challenge  may  seriously  restrict  the  willingness  of  private  sector  entities  to  invest  in  asset 
purchases  or  to  take  over  all  or  part  of  an  ailing  bank.  A  framework  that  confers  legal 
certainty on the measures taken is therefore likely to facilitate private sector solutions.  

Burden sharing 

As  recent  experience  has  clearly  demonstrated,  private  sector  solutions  will  not  always  be 
available.  Intense  work  is  therefore  needed  to  develop  principles  setting  out  how  financial 
burdens should be shared between Member States where resolution measures are applied to a 
cross-border banking group. Urgent and rapid progress is needed to establish clear obligations 
between Member States for the equitable sharing of the fiscal costs of any such resolution.25 
The importance of concrete progress on this issue cannot be underestimated. It would not be 
desirable  at  this  stage  to  try  to  define  precise  ex-ante  formulae  for  the  distribution  of  costs 
involved  in  public  rescue  operations  across  borders.  However,  Member  States  should  know 
whether they would, in principle, be required to contribute, how such burden sharing would 
be organised, who would be responsible for triggering discussions on burden sharing and who 
would  co-ordinate  such  discussions.26  In  addition,  reciprocal  rights  –  in  terms  of  access  to 
data  etc.  -  for  any  Member  State  accepting  the  obligation  to  share  a  burden  should  be 
considered.  An  ex-ante  agreement  setting  out  the  principles  for  fair  burden  sharing  is  a 
necessary  "safety-net"  that  will  ensure  that  the  authorities  involved  have  the  necessary 
incentives to cooperate under the crisis prevention and resolution framework. The absence of 
progress  in  this  area  risks  putting  the  fundamental  Treaty  principles  of  freedom  of 
establishment and services and free capital movements under intolerable stress. 

What  is  the  most  appropriate  way  to  secure  cross-border  funding  for  bank  resolution 
measures? What role is there for specific private sector funding? 

Is  establishing  ex-ante  crisis  funding  arrangements  practical?  If  not,  how  could  private 
sector solutions best address the issue? Is there scope to achieve greater clarity on burden 
sharing? If so, would the first priority be to define principles for burden sharing? 

5. 

INSOLVENCY  

At  present,  any  liquidation  in  the  context  of  a  resolution  will  necessarily  be  carried  out  in 
accordance  with  national  insolvency  procedures,  and  any  coordination  depends  on  the 

24 
25 

26 

Working Group V of UNCITRAL – United Nations Commission on International Trade Law. 
A  recent  report  to  the  Economic  and  Finance  Committee  recommended  that  the  EU  framework  for 
financial  stability  should  include  voluntary  ex  ante  arrangements  for  burden  sharing  regarding  cross-
border  financial  groups,  supported  by  an  EU-wide  terms  of  reference,  with  newly  established  cross-
border  stability  groups  playing  a  key  role  in  monitoring  their  implementation  (Lessons  from  the 
financial  crisis  for  European  financial  stability  arrangements,  EFC  High-Level  Working  Group  on 
Cross-Border Financial Stability Arrangements, July 2008).  
Such measures must, of course, comply with State Aid rules. 

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voluntary  cooperation  between  different  national  insolvency  authorities  and  officers.27 
Cooperation  between  national  insolvency  authorities  is  often  uneasy  and  imperfect,  and 
cannot deal effectively with financial conglomerates, international holding structures and the 
organisation of financial groups according to business lines.28  

As  a  minimum,  therefore,  an  EU  bank  resolution  framework  should  be  supported,  by  a 
binding  framework  for  cooperation  and  exchange  of  information  between  courts  and 
insolvency practitioners responsible for proceedings relating to affiliated entities in a banking 
group. Other options that might be explored include provision for the coordination of national 
proceedings by a 'lead administrator'. 

Integrated treatment of corporate groups 

It  may,  however,  be  desirable  to  go  further  in  facilitating  a  more  integrated  treatment  of 
corporate  groups  in  insolvency.  This  might  involve  –  in  clearly  specified  circumstances  - 
treating the group as a single enterprise in order to overcome the perceived inefficiency and 
unfairness  of  the  traditional  single  entity  approach.  While  techniques  to  achieve  this  are 
available under some national law, their application is necessarily restricted to entities within 
the same jurisdiction, and subject to the same insolvency regime. If similar measures were to 
be developed for use in insolvency proceedings for cross-border banking groups, the fact of 
different  insolvency  regimes  -  with  different  substantive  rules  on,  for  example,  priority  and 
avoidance powers – would need to be addressed. 

A harmonised EU insolvency regime for banks 

Techniques for a more integrated treatment of groups in insolvency might assist in addressing 
some of the inequities that might arise from winding up highly integrated banking groups on a 
separate  entity  basis.  There  is  a  growing  body  of  academic  and  professional  opinion  that 
suggests  that  separate  entity  insolvency  cannot  adequately  deal  with  complex  corporate 
structures  where  form  does  not  follow  function,  and  that  international  work  on  the 
harmonisation of insolvency rules is now needed. Without such harmonisation, it will remain 
very difficult to re-structure a cross-border banking group. 

The difficulty and sensitivity of such work should not be underestimated. Insolvency law is 
closely  related  to  other  areas  of  national  law  such  as  the  law  of  property,  contract  and 
commercial  law,  and  rules  on  priority  may  reflect  social  policy.  Accommodating  particular 
national concepts such as "trusts" or "floating charges" in a unified code would be complex.  

Such  a  project  might  take  the  form  of  a  separate  and  self-contained  insolvency  regime  that 
would  be  available,  and  would  replace  the  otherwise  applicable  national  regimes,  for  the 
reorganisation  and  winding  up  of  cross-border  banking  groups  in  the  EU.  Such  a  regime 

27 

28 

Directive  2001/24/EC  on  the  Reorganisation  and  Winding  Up  of  Credit  Institutions  prohibits  the 
application of separate insolvency measures to branches under the law of the host State. It ensures the 
mutual recognition and coordination of procedures under home country control, imposes a single-entity 
approach  by  which  all  the  assets  and  liabilities  of  the  'parent'  bank  and  its  foreign  branches  are 
reorganised or wound up as one legal entity under, subject only to exceptions specified in the Directive, 
the law of the home State. However, this directive does not provide for the consolidation of insolvency 
proceedings  for  separate  legal  entities  within  a  banking  group,  and  makes  no  attempt  to  harmonise 
national insolvency law.  
The  complex  and  protracted  insolvency  of  Lehman  Brothers  is  a  clear  illustration  of  the  difficulties 
faced by administrators in complex winding up procedures. 

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would  only  fully  address  the  problems  associated  with  the  separate  entity  approach  under 
national insolvency  law if it  permitted an  integrated treatment of  the group  entities.  Careful 
thought would need to be given to the application of such a regime and the extent – if at all – 
to which it should be optional for systemically important cross-border banking groups.  Any 
imposition  of  a  new  EU  insolvency  regime  on  existing  entities  would  raise  transitional 
problems, including the impact on creditors and counterparties.  

Is a more integrated insolvency framework for banking groups needed? If so, how should it 
be designed? 

Should there be a separate and self contained insolvency regime for cross-border banks? 

6. 

FOLLOW-UP 

The Commission invites both general views and detailed comments on the matters discussed 
in  this  Communication  by  20th  January  2010.  Further  details  on  the  issues  raised  in  this 
Communication,  together  with  specific  questions  are  to  be  found  in  the  accompanying  staff 
working document. 

The  Commission  plans  to  organise  a  public  hearing  in  early  2010  in  order  to  present  the 
results  of  the  consultation  and  to  set  out  how  it  intends  to  proceed.  This  will  feed  into  the 
preparation of a roadmap of follow up initiatives in the areas of early intervention, resolution 
and  insolvency  in  order  to  build  a  crisis  management  framework  that  would  ensure  that,  in 
future, all competent authorities effectively coordinate their actions and have the appropriate 
tools for intervening quickly to manage the failure of a bank. 

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