Commission staff working document - Summary of the impact assessment Accompanying document to the 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 on an EU Framework for Cross-Border Crisis Management in the Banking Sector {COM(2009) 561 final} {SEC(2009) 1389} {SEC(2009) 1407}
Date: 2009-10-20
Institutions: European Commission
Subjects: credit institution, economic recession, economic reform, financial institution, financial market, impact study

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.10.2009 
SEC(2009) 1390 final 

COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying document to the 

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 

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

{COM(2009) 561 final} 
{SEC(2009) 1389} 
{SEC(2009) 1407} 

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1. 

WHAT  IS  THE  PROBLEM,  WHO  IS  MOST  AFFECTED,  WHY  IS  PUBLIC  INTERVENTION 
NECESSARY? 

Over  the  course  of  this  financial  crisis,  the  ability  of  authorities  to  manage  crises  both 
domestically and in cross-border situations has been severely tested. Financial markets within 
the  EU  have  become  integrated  to  such  an  extent  that  the  effects  on  credit  institutions  of 
problems  occurring  in  one  Member  State  cannot  always  be  contained  and  isolated  and 
domestic shocks may be rapidly transmitted to firms and markets in other Member States.  

While the operation of cross border banks has become highly integrated, (with the result that 
business  lines  and  internal  services  are  deeply  interconnected  and  cannot  be  efficiently 
separated  along  geographical  borders  of  Member  States),  crisis  management  of  banks  has 
remained  national.  As  a  consequence,  in  the  event  of  a  cross  border  bank  failure,  financial 
supervisors and other (resolution) authorities will only concentrate on the operations located 
in  their  respective  territories.  This  may  complicate  cross  border  cooperation  and  lead  to 
inefficient and possibly competing resolution approaches and suboptimal results at EU level. 

One  of  the  most  important  issues  concerning  actions  to  maintain  financial  stability  is  the 
ability  of  authorities  to  pre-empt  (early  intervention1)  or  manage  the  crisis  situations 
(resolution2)  of  banks.  The  involvement  of  authorities  may  be  crucial  to  maintaining  the 
stability of the whole financial system, to protecting the deposits of people and companies and 
to maintaining the continuity of the payment systems and other basic financial services. 

Although  a  number  of  European  supervisors  have  tools  available  to  intervene  in  a  banking 
crisis, the tools which exist may be different between Member States, or in some cases may 
not exist at all. These differences and gaps, including legislative differences between Member 
States and/or a lack of a legislative/institutional basis in some countries, have the potential to 
complicate and even hinder the efficient cross-border handling of a banking crisis. If different 
authorities intervene at different points in time, pursue different objectives and use different 
tools and measures with different criteria conditioning their application according to their own 
understanding of the problem, the results are likely to be suboptimal. 

There is no legislation at EU level governing bank resolution. Beyond introducing a minimum 
set  of  powers  for  supervisory  authorities  aimed  at  restoring  a  situation  in  a  bank3,  coupled 
with  some  recent  changes  to  the  CRD  (rules  on  alerting  other  authorities  in  emergency 
situations,  coordination  of  supervisory  activities  and  exchange  of  information  in  emergency 
situations)  and  establishing  arrangements  for  the  winding-up  and  reorganisation  of  credit 
institutions  with  branches  in  other  Member  States,  no  EU  framework  exists  which  sets  out 
how  and  under  which  conditions  authorities  should  act  in  the  event  of  a  crisis  arising  in  a 
cross-border bank. The management of crises is almost entirely governed by national laws.  

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Early  intervention:  early  remedial  actions  of  banking  supervisors  (e.g.  raising  private  capital, 
modification of business lines, divestiture of assets) which aim at correcting irregularities at banks and 
hence  helping  banks  returning  to  normal  course  of  business  and  avoiding  that  banks  enter  in  a 
resolution stage. 
Bank resolution: reorganisation of ailing banks (in either an administrative or judicial process) that aims 
at maintaining financial stability, the continuity of banking services and the revitalisation of the bank. In 
addition to traditional reorganisation techniques, bank resolution uses specific tools (e.g. bridge banks, 
forced merger, assisted acquisition, partial sale of assets) to reach the above objectives. The process is 
managed by a resolution authority, which can be different in Member States (national bank, financial 
supervisor, deposit guarantee scheme, ministry of finance, special authority). 
In Article 136 of the Capital Requirements Directive 2006/48/EC.  

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The diverging approaches and tools, and conflicting interests between authorities is likely to 
lead to inefficient crisis prevention and resolution and deliver sub optimal results at EU level. 
This in turn can produce more costly outcomes for EU citizens and tax-payers, as the bail-out 
of systemically important cross border banks can be extremely costly compared to the cost of 
a timely and effective resolution4. According to the latest IMF5 estimates, crisis related write-
downs  on  assets  originated  globally  will  reach  $ 4.1trillion  by  2010,  with  global  banking 
industry  expected  to  bear  about  two  thirds  of  the  lossess,  half  of  which  (or  $ 1.4  trillion, 
equivalent to 9% of the EU's GDP) is now attributable to European Banks. 

Due to their broad impact on the financial sector and the whole economy, a crisis in a large 
international bank will affect a very wide range of stakeholders throughout the EU, i.e.: 

•  Financial institutions facing difficulties, including their shareholders and employees; 

•  Healthy financial institutions which are reliant on financial stability; 

•  Users  of  financial  services,  including  depositors,  investors,  pensioners,  and  non-financial 

companies, SMEs; 

•  Public authorities, including supervisors, central banks and finance ministries; 

•  Taxpayers. 

The  Communication  on  "A  Bank  Resolution  Framework  for  the  EU",  that  this  impact 
assessment accompanies, presents an overview of the problems, the areas under examination 
related to early intervention measures and bank resolution. It proposes policy objectives and 
an  overall  approach.  It  does  not  propose  specific  detailed  policy  solutions  at  this  stage. 
Consequently,  this  impact  assessment  focuses  primarily  on  the  problem  definition  and  the 
need for and objectives of EU level action in this area. In view of the consultative nature of 
the  Communication,  policy  options  are  only  considered  in  the  broadest  of  terms.  Any 
subsequent policy proposals to emerge as a result of this consultation will be subject to further 
and more thorough impact assessment at the appropriate stage.  

2. 

IS EU ACTION JUSTIFIED ON GROUNDS OF SUBSIDIARITY?  

Action at European level is required in this field in light of the high degree of integration of 
the banking market within the EU. Systems to deal with crises within banks remain nationally 
based and-ill adapted to deal with cross-border situations. Coordination in such circumstances 
is  likely  to  be  complicated  and  the  objectives  pursued  by  each  authority  may  differ.  As  a 
consequence,  the  legal  framework  cannot  ensure  that  critical  problems  arising  in  a  cross-
border  banking  group  will  be  solved  fairly,  effectively  and  expediently  through  robust 
cooperation arrangements. 

Underpinning a new framework with the introduction of incentives necessary to induce cross-
border cooperation is a task which can most effectively be undertaken at European level (this 
is  particularly  true  with  respect  to  addressing  differences  between  national  resolution  and 
insolvency frameworks as well as arrangements for burden sharing). 

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Effective  cross  border  arrangements  should  ensure  a  result  that  is  optimal  at  EU  level,  taking  into 
account the interests of stakeholders in all Member States, and thus minimising the overall cost all. 
IMF,  Responding  to  the  Financial  Crisis  and  Measuring  Systemic  Risk  (Global  Financial  Stability 
Report), April 2009. 

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3. 

OBJECTIVES 

Viewed from an EU perspective, the general objectives of action at EU level could be to:  

•  Maintain financial stability and confidence in banks, avoid contagion of problems; 

•  Minimise losses for society as a whole and especially for taxpayers; 

•  Strengthen the internal market for banking services. 

In the context of early intervention, specific objectives could be to: 

•  Develop tools and triggers to detect problems in banks and intervene at an early stage 

•  Ensure  efficient  cooperation  between  national  financial  supervisors  responsible  for  cross 

border banks in crisis situations. 

For bank resolution, specific objectives could be to: 

•  Develop tools and triggers to ensure reorganisation and resolution of cross border banks in 

a timely and robust manner; 

•  Improve  cooperation  of  national  resolution  authorities  to  deliver  optimal  solutions  at  EU 

level; 

•  Create certainty and predictability around bank resolutions for all stakeholders; 

•  Ensure continuity of basic banking services during resolution. 

4. 

POLICY OPTIONS  

For the purposes of this impact assessment, the analysis of options is restricted to a general 
assessment about the introduction of a new framework and the alternatives. A number of areas 
which might be dealt with under a new framework are also considered - but without favouring 
or proposing any concrete measures. The list of policy options is not closed and should further 
options come to light as a result of the stakeholder consultation, these may be assessed at a 
later stage when the Commission makes firm proposals.  

General Considerations about the need for a new bank resolution framework 

The starting point for the Communication is that a framework for bank resolution is needed at 
EU level. It should address the shortcomings which have been extensively identified as part of 
the  problem  definition,  and  it  should  be  designed  in  such  a  way  as  to  fulfil  a  commonly 
agreed set of objectives about how to deal with ailing banks. This option is compared against 
two alternative options. The first is the baseline scenario, which would mean that cross-border 
cooperation for bank resolution would depend on voluntary arrangements set out in the 2008 
Memorandum  of  Understanding  (MoU)  coupled  with  newly  introduced  rules  in  the  Capital 
Requirements Directive which establish colleges for cross-border banking groups, new alert 
and  information  exchange  obligations  and  provisions  on  joint  decision-taking.  The  second 
alternative  would  be  to  scale  back  cross-border  banking  groups  in  order  to  manage  crises 
more  efficiently  under  current  national  regimes.  The  advantages  and  disadvantages  of  this 
latter option are assessed, with particular stress on the fact that such an option would require a 
Treaty change and drive up the cost of banking services. 

Early Intervention 

Options  relating  to  three  broad  policy  areas  are  considered:  options  to  address  differences 
between the way supervisory actions are triggered, options to address differences in tools and 

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options to address the misalignment between national responsibilities and the global nature of 
banking business. 

With respect to the triggers for supervisory actions, two alternatives to the baseline scenario 
are considered. One would entail harmonising a minimum set of early warning indicators and 
developing  a  framework  for  common  assessment  as  a  means  of  facilitating  cooperation  in 
such a way as to enable joint responses but maintaining a sufficient degree of flexibility and 
discretion.  The  second  would  involve  developing  a  set  of  hard  automatic  triggers  which 
determine the point at which supervisory action would need to occur – in order to provide a 
clear (but non-discretionary) framework under which coordinated supervisory actions would 
take place.  

With respect to the differences between early intervention tools, beyond the baseline scenario 
consideration two possible options are considered. One would supplement the tools listed in 
Article 136 of the CRD with additional tools that are not currently available to authorities in 
all Member  States - such as powers  to  require submission of  a restoration plan, wind  down 
plans as a precaution against possible failure of a banking group or enhanced powers towards 
the  banks  management.  The  alternative  considered  is  the  agreement  of  a  single  set  of  fully 
harmonised  early  intervention  tools.  This  second  option  has  the  advantage  that  such  an 
approach would eliminate differences between authorities, but the disadvantage that it might 
be  very  difficult  to  implement  given  the  general  differences  between  supervisory  and  legal 
systems. 

With  respect  to  the  misalignment  between  national  responsibilities  and  the  global  nature  of 
banking business, the baseline scenario would entail reliance on the 2008 MoU, although the 
planned changes to supervisory architecture would bring a more active role for the soon to be 
created  European  Banking  Authority.  An  alternative  option  would  be  to  build  on  the  recent 
changes, but also to develop rules which would require supervisors to take joint decisions on 
the  basis  of  a  common  assessment  and  a  common  restoration  plan  submitted  by  the  parent 
company for the group as a whole.  

Bank resolution  

Options  to  address  identified  problems  in  the  following  five  broad  policy  areas  are 
considered:  bank  resolution  tools  and  triggers,  misalignment  between  responsibility  of 
national  authorities  and  the  global  nature  of  banking  business,  broader  obstacles  (company, 
insolvency law) to bank resolution, the financing of cross-border resolution and continuity of 
banking services. 

With respect to bank resolution tools and triggers, consideration is given to the development 
of  a  minimum  set  of  tools  (powers  to  arrange  acquisition  by  a  private  sector  purchaser,  to 
transfer assets and liabilities to a bridge bank or good bank/bad bank, assisted sale of part of 
the  business  to  a  private  sector  purchaser,  or  nationalisation)  designed  to  enable  fast  and 
effective  intervention  by  resolution  authorities.  Such  tools  could  either  supplement  existing 
leave 
national 
differences/discrepancies between national toolkits in place), or alternatively a set of common 
tools  could  be  developed  for  all  national  authorities  and  used  under  the  same  conditions 
(meaning that extensive changes to national laws on resolution would be necessary). 

(which  would  be  an  easier  course  of  action  but  would 

tools 

With  respect  to  the  misalignment  between  national  responsibilities  and  the  global  nature  of 
banking  business,  consideration  is  given  to  developing  cooperation  arrangements  between 
resolution authorities (on the basis of a set of legally binding obligations), as well as between 
judicial  authorities  (courts  and  insolvency  practitioners).  This  could  entail  a  coordination 
framework for cooperation and exchange of information (backed by new EU rules), or (more 

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ambitiously) a more directed coordination of national proceedings in relation to group entities 
by  a  lead  administrator  or  liquidator.  Consideration  is  also  given  to  the  possibility  and 
challenges of tasking an EU body (possibly the new European Banking Authority) with a role 
in the resolution of a cross-border institution. 

With  respect  to  options  to  address  broader  obstacles,  consideration  is  given  to  whether 
company law needs to be amended in order to allow resolution authorities to override certain 
shareholder rights (but subject to appropriate compensation and redress mechanisms) and to 
whether insolvency laws might also be amended so as to allow resolution of an ailing bank 
under a special procedure, or to be able to cater with the resolution of the group as a whole. 
Consideration  is  also  given  to  whether  a  separate  and  self-contained  insolvency  regime  for 
cross-border banking groups, replacing national regimes is necessary to enable an integrated 
reorganisation  or  winding  up  of  a  cross-border  group.  This  approach  too  would  pose 
considerable challenges. 

With respect to options to support financing of cross-border resolution, a number of possible 
and  not  mutually  exclusive  options  are  considered,  including  the  support  of  private  sector 
financing  solutions  through  adjustments  to  company  and  insolvency  law,  introducing  a 
framework  to  facilitate  intra-group  asset  transferability  after  the  commencement  of  an 
insolvency procedure, exploring the feasibility of using DGS beyond their traditional paybox 
function and developing public funding arrangements through an agreement of clear burden 
sharing arrangements. 

Finally, with respect to policies to support continuity of banking services, possible measures 
to  support  the  application  of  certain  resolution  tools  are  considered.  These  include 
modifications  to  company  and  insolvency  law  to  ensure  continued  provision  of  support 
services in the event a bank is split (as a result of resolution involving a bridge bank or partial 
sale of assets); restriction of termination rights for a short period in order to allow time for the 
resolution authority to transfer parts of business to another entity (such as a bridge bank) and 
a coordinated imposition of a moratorium across a banking group. 

This  impact  assessment  supports  a  Commission  Communication  which  is  consultative  in 
nature  and  open  as  regards  the  possible  options  which  could  be  pursued.  Further  and  more 
assessment will be necessary should the Commission decide to come forward with concrete 
policy proposals. 

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