Commission staff working document - Impact assessment accompanying 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) 1390} {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) 1389 final 

COMMISSION STAFF WORKING DOCUMENT 

IMPACT ASSESSMENT 

Accompanying 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) 1390} 
{SEC(2009) 1407} 

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This report commits only the Commission's services involved in its preparation and does not 
prejudge the final form of any decision to be taken by the Commission 

TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

3. 

Introduction .................................................................................................................. 4 

Procedural Issues and Consultation of Interested Parties ............................................ 6 

Procedural issues.......................................................................................................... 6 

Consultation of interested parties................................................................................. 6 

Policy context, Problem definition and Subsidiarity.................................................... 8 

3.1. 

Background and context............................................................................................... 8 

3.1.1.  Nature and size of the market concerned ..................................................................... 8 

3.1.2.  Overview of legislative framework.............................................................................. 9 

3.1.3.  Overview of ongoing developments .......................................................................... 13 

3.2. 

Problem definition...................................................................................................... 15 

3.2.1.  General problems ....................................................................................................... 15 

3.2.2.  Drivers and specific problems.................................................................................... 19 

3.2.3.  Baseline scenario........................................................................................................ 34 

3.2.4.  Problem tree ............................................................................................................... 36 

3.3. 

3.4. 

4. 

The EU's right to act and justification........................................................................ 37 

Objectives................................................................................................................... 37 

Policy Options and Analysis of Impacts .................................................................... 39 

4.1. 

General Considerations about the need for a new bank resolution framework ......... 39 

4.1.1.  Baseline Scenario (no changes to current bank resolution arrangements)................. 39 

4.1.2. 

Introduction of an EU bank resolution framework .................................................... 39 

4.1.3.  Scaling back cross-border banking groups in order to manage crises more efficiently 
on a national basis ...................................................................................................... 40 

4.2. 

Early Intervention ...................................................................................................... 42 

4.2.1.  Possible policies to address early intervention conditions, triggers........................... 42 

4.2.2.  Possible policies to address early intervention tools.................................................. 44 

4.2.3.  Possible policies to address misalignment between responsibility of national 

supervision and international business....................................................................... 46 

4.3. 

Bank resolution .......................................................................................................... 47 

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4.3.1.  Possible policies to address bank resolution tools and triggers ................................. 47 

4.3.2.  Possible policies to address misalignment between responsibility of national 

authorities and international business ........................................................................ 49 

4.3.3.  Possible options to address legal obstacles (company, insolvency law) to bank 

resolution.................................................................................................................... 53 

4.3.4.  Possible policies to support financing of cross border resolution.............................. 55 

4.3.5.  Possible policies to support continuity of banking services....................................... 59 

4.4. 

4.5. 

5. 

6. 

7. 

8. 

Impact on EU budget ................................................................................................. 63 

Package and cumulative effects ................................................................................. 63 

Annex I: Glossary ...................................................................................................... 64 

Annex II: Extract from the De Larosière report dealing with Crisis Management and 
Resolution .................................................................................................................. 66 

Annex III: Main elements of a possible future framework (extract from the 
Commission Communication) ................................................................................... 71 

Annex IV. Summary of the public consulation concerning Directive on the 
reorganisation and Winding up of credit Institutions (2001/24/EC).......................... 73 

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1. 

INTRODUCTION 

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.  

The lessons learned during this crisis have prompted the Commission services to examine the 
issue  of  bank  resolution  and  to  give  serious  consideration  about  how  existing  arrangements 
and  cross-border  cooperation  can  be  strengthened  in  such  a  way  as  to  more  appropriately 
reflect  the  degree  of  integration  in  EU  financial  services  market.  The  Commission  services 
believe  that  resolving  these  issues  will  be  key  to  restoring  and  further  consolidating  the 
Internal Market by providing further confidence in the home-host arrangements underpinning 
banking supervision, and ensuring its smooth functioning in stressed situations. 

One  of  the  most  important  issues  concerning  actions  to  maintain  financial  stability  is  the 
ability of authorities to pre-empt or manage the crisis situations 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. 

At international level,  G20-Leaders  have identified  as  a  medium-term  action  the  “review  of 
resolution  regimes  and  bankruptcy  laws  in  light  of  recent  experience  to  ensure  that  they 
permit an orderly wind-down of large complex cross-border institutions.”1 At the Pittsburgh 
summit on 25 September, they 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." 

The Basel Committee is also currently dealing with this issue.2 In the US, the existing crisis 
management system will be further improved and strengthened.3 In the EU, several Member 
States (UK, Spain, Germany etc.) have recently reinforced their systems to enable prompt and 
effective crisis management of banks.  

The  conclusions  of  the  October  2007  ECOFIN  Council  called  for  an  enhancement  of  the 
arrangements for financial stability in the EU and a review of the tools for crisis prevention, 
management and resolution, including a revision of the 2001 Directive on the reorganisation 
and  winding  up  of  credit  institutions.  The  report  of  the  High-Level  Group  on  Financial 
Supervision  in  the  EU  chaired  by  Jacques  de  Larosière4  observed:  “The  lack  of  consistent 
crisis  management  and  resolution  tools  across  the  Single  Market  places  Europe  at  a 

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4 

G20 Leaders' declaration of the Summit on financial markets and the world economy, April 2009. 
A Basel Working Group called Cross-border Bank resolution Group (CBRG) was set up in December 
2007  to  study  the  resolution  of  cross-border  banks.  It  is  comparing  the  national  policies,  legal 
frameworks  and  the  allocation  of  responsibilities  for  the  resolution  of  banks  with  significant  cross-
border  operations.  It  also  promotes  the  use  of  bank  specific  resolution  techniques  for  authorities. 
http://www.bis.org/bcbs/index.htm 
Financial Regulatory Reform; http://www.financialstability.gov/docs/regs/FinalReport_web.pdf 
http://ec.europa.eu/economy_finance/publications/publication14527_en.pdf 

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disadvantage  vis-à-vis  the  US  and  these  issues  should  be  addressed  by  the  adoption  at  EU 
level of adequate measures.”5 

The  Commission  stressed  in  its  4  March  2009  Communication  the  importance  of 
strengthening  the  EU's  crisis  management  arrangements  and  announced  its  intention  to 
publish  a  paper  on  Early  intervention  by  June  2009.  It  subsequently  decided,  due  to  the 
complexity and importance of the issues to be addressed, to precede any policy orientations 
with an open consultative Communication.  

While it is important that an EU approach be consistent with international developments, it is 
also essential and urgent – in light of the greater degree of integration and interconnectedness 
within  the  Internal  Market  –to  carry  out  extensive  work  at  EU  level  to  complement  the 
existing EU prudential framework. 

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 focuses on cross-border banks 
i.e.  those  banks  which  are  internationally  active  and  of  "systemic  importance"  but  also 
considers whether there is a need to cover other banks which are active across borders (but 
not necessarily judged to be systemic)6. The Communication also considers whether there is a 
need to extend the scope of a possible future framework beyond deposit taking banks to other 
types  of  financial  institution  (e.g.  investment  firms  and  insurance  companies).  The 
Communication  proposes  policy  objectives  and  an  overall  approach  without  proposing 
specific  detailed  policy  solutions  at  this  stage.  This  impact  assessment  focuses  primarily  on 
the problem definition and the need for and objectives of EU level action in this area. It also 
explains how EU level action in cross border crisis management would complement the other 
important  changes  (in  the  field  of  deposit  insurance,  capital  requirements,  supervisory 
architecture)  proposed  as  responses  to  the  financial  crisis  in  order  to  strengthen  the  bank 
regulatory  framework.  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.  

Key concepts used in this impact assessment: 

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 

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6 

For  more details,  see  Annex II where  the full  chapter  on crisis  management  and resolution  in  the De 
Larosière report is reproduced. 
More details on the size of the market concerned are to be found under section 3.1. 

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guarantee scheme, ministry of finance, special authority). 

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

2.1. 

Procedural issues 

An Inter-service Steering Committee on early intervention and bank resolution was set up in 
October  2008  comprising  different  Directorate  Generals:  MARKT,  ECFIN,  SG,  SJ,  ENTR, 
EMPL,  COMP,  JLS  and  the  European  Central  Bank  (ECB).  The  steering  committee  met  in 
November 2008, June 2009 and September 2009.  

The  Impact  Assessment  was  submitted  on  10  September  2009  and  discussed  by  the  Impact 
Assessment Board on 23 September 2009. 

The minutes of the last Steering Group meeting were attached to the Impact Assessment at the 
submission to the Impact Assessment Board.  

The comments received from the Impact Assessment Board resulted in the following changes:  

•  More  detailed  description  of  the  relationship  between  early  intervention  and  bank 
resolution  with  other  initiatives  to  address  weaknesses  highlighted  by  the  financial  crisis 
especially concerning the supervisory architecture;  

•  Clarification of the scope of the Communication in terms of banks concerned;  

•  More  explicit  reference  to  the  problems  associated  with  cross-border  crisis  management 

which the case studies seek to highlight ;  

•  Clarification of options concerning bank resolution financing;  

•  Addition of a table showing the impacts of major policy options on each stakeholders; 

•  Addition of tables methodically linking options to the full set of objectives; 

•  Addition  of  an  annex  on  the  main  results  of the public consultation  on the review of the 

reorganisation and winding up of credit institutions Directive. 

•  Addition of an annex with a table which provides an overview of the issues covered in the 
Communication, including the bodies involved at different phases of a developing crisis. 

2.2. 

Consultation of interested parties 

In  the  period  until  September  2009,  the  Commission  services  organised  a  number  of 
consultations with experts and key stakeholders. 

A  working  group  on  Early  Intervention  was  set  up  in  November  2008  which  comprised  of 
experts of all Member States, mostly representing Ministries of Finance. The working group 
met  on  two  occasions  and  provided  important  insight  and  opinion  to  the  matters  under 
examination. Experts commented in writing on the first Issues Paper that was circulated for 
consultation  in  January  2009.  Initial  reactions  suggest  that  Member  State  experts  clearly 
support  the  Commission's  work  on  early  intervention  and  bank  resolution,  considering  the 

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issues  to  be  of  high  importance  and  priority.  They  requested  the  Commission  to  adopt  an 
ambitious approach which at the same time sets the right balance between financial stability 
and the interest of stakeholders. 

In  the  second  half  of  2008,  the  Committee  of  Banking  Supervisors  (CEBS)  conducted  a 
comprehensive survey among all banking supervisors in the EU and delivered its report to the 
Commission  in  March  20097.  The  report  summarises  the  objectives  and  powers,  including 
early  intervention  measures  and  sanctioning  powers  of  financial  supervisors.  The  report  is 
widely quoted in this impact assessment. 

During  technical  meetings  and  continuous  contacts,  the  issues  were  also  discussed  with  the 
European Central Bank. Views were shared on the need for improved early intervention and 
bank resolution in the EU. 

In July 2009, a high level Working Group of the Economic and Finance Committee published 
a  paper  entitled  "Lessons  from  the  financial  crisis  for  European  financial  stability 
arrangements",  containing  10  recommendations  for  improvements  in  the  field  of  crisis 
management.  The  recommendations  are  in  line  with  the  analysis  contained  in  this  impact 
assessment. 

An external legal consultant (DBB Law) was hired in August 2008 to support the work with 
key  inputs,  data  and  legal  analysis.  The  Consultant  summarised  the  legal  frameworks  of  16 
Member  States  regarding  early  intervention  possibilities  by  supervisors,  insolvency 
legislations for banks and banking groups, and special intervention possibilities by resolution 
authorities. The Consultant delivered its interim report in November 20088 and its draft final 
report in July 2009. 

The contributions of DBB Law and CEBS were important in understanding the problems that 
are addressed by this initiative. 

In May 2007, a public consultation9 was launched to seek the views of stakeholders in relation 
to  the  Directive  on  the  reorganisation  and  winding  up  of  credit  institutions  (2001/24/EC).10 
The survey respondents broadly supported the development of a legal framework tailored to 
the winding up and re-organisation of cross-border banking groups. The consultation's result 
suggested  that  the  current  directive  that  deals  with  cross  border  branches  might  need  also 
some  adjustment  (e.g.  investment  firms  are  not  covered  by  the  directive,  home-host 
responsibilities can create problems in managing cross border branches: to determine which 
should be the applicable law and responsible authority). 

The European Banking Federation11 (EBF) set up a special working group to support the work 
of the Commission and provided their views on early intervention and bank resolution. They 
delivered  their  draft  report  in  April  2009.  EBF  expressed  its  support  for  the  work  of  the 

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10 
11 

http://www.c-ebs.org/getdoc/f7a4d0f8-5147-4aa4-bb5b-28b0e56c1910/CEBS-2009-47-Final-(Report-
on-Supervisory-Powers)-.aspx 
http://ec.europa.eu/internal_market/bank/windingup/index_en.htm 
The  summary  of  the  main  findings  can  be  found  in  Annex  IV.  All  consultations  documents  can  be 
found on the following website: http://ec.europa.eu/internal_market/bank/windingup/index_en.htm 
See description of the Directive in sub-chapter: Overview of legislative framework 
Set up in 1960, the European Banking Federation is the voice of the European banking sector (EU & 
EFTA  countries).  The  EBF  represents  the  interests  of  some  5000  European  banks:  large  and  small, 
wholesale and retail, local and cross-border financial institutions. www.fbe.be 

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Commission on early intervention aiming at enhancing the effectiveness of cross-border crisis 
management.  They  also  supported  actions  regarding  coordinated  approaches  in  groups’ 
insolvency.  EBF  called  for  a  clear  policy  around  the  different  stages  of  a  crisis:  who  the 
responsible competent authorities are and what tools are at their disposal at each stage. 

3. 

POLICY CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY 

3.1. 

Background and context 

3.1.1.  Nature and size of the market concerned 

The  Communication  addresses  crisis  management  and  resolution  issues  in  relation  to 
internationally active banks. There are 39 large cross border banks in the EU and around 100 
further banks that have subsidiaries or systemic branches in another Member State. The focus 
is on crisis management for individual banks under normal market conditions, as opposed to 
under conditions of generalised economic and systemic crisis. This is an important distinction, 
as  policy  options  may  differ  according  to  the  market  environment.  Chapter  4  presents 
therefore policy options that primarily applicable in the case of crisis in one individual cross-
border  bank.  The  main  objective  of  such  a  crisis  management  framework  is  to  put  in  place 
arrangements which are capable of handling the failure of even the largest cross-border bank 
without  provoking  wider  systemic  impacts.  Under  generalised  financial  crises,  such  as  the 
recent crisis, there may be no alternative other than to use public funds to support the banking 
sector. Nevertheless, the development of effective crisis management tools should also useful 
in all circumstances. 

EU  financial  markets  are  increasingly  integrated,  especially  at  the  wholesale  level.  The 
banking  and  insurance  markets  are  dominated  by  pan-European  groups,  whose  risk 
management functions are centralised in the group's headquarters. According to the ECB12, in 
2007,  total  assets  of  approximately  8,300  credit  institutions13  in  the  EU27  were  €41,072 
billion with a significant share thereof owned by the 39 large cross-border groups. Their total 
assets  represent  around  68  %  of  the  total  EU  banking  market.  Especially  in  the  EU-12, 
banking  markets  are  dominated  by  foreign  (mostly  Western  European)  financial  groups.  In 
these countries, on average 65% of banking assets are in foreign-owned banks. In countries 
like  Estonia,  the  Czech  Republic  and  Slovakia  over  92%  of  banking  assets  are  in  foreign-
owned banks. 

12 
13 

ECB, EU Banking Structures, October 2008 
At  a  Member  State  level,  this  figure  includes  branches  and  subsidiaries  of  banks  from  other  EU  and 
third countries. Where a foreign bank has several branches in a given MS, they are counted as a single 
branch. 

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Chart 1 Market share of foreign-owned banks (% of total assets) 

Source: European Commission, European Financial Integration Report 2008 (2009) 

The  assets  of  bank  branches  and  subsidiaries  established in  another  Member  State  has  been 
growing  over  the  past  years.  Around  500  foreign  subsidiaries  owned  assets  of  almost  4000 
billion euros in 2006 up from 2000 billion in 2002. 

Chart  2  Branches14  and  subsidiaries  of  credit  institutions  from  other  MS  and  their  cross-
border assets in 2002-2006  

Count

700

650

600

550

500

450

400

350

300

Euro, bln

4.000

3.500

3.000

2.500

2.000

1.500

1.000

500

0

2002

2003

2004

2005

2006

Cross-border branches

Cross-border subsidiaries

Branch assets

Subsidiary assets

Source: ECB 

3.1.2.  Overview of legislative framework 

The  current  EU  financial  stability  framework  is  focused  on  ensuring  banks  are  adequately 
capitalised.  The  Capital  Requirements  Directive  (CRD)15  contains  provisions  aimed  at 

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Where a credit institution has several branches in a given MS, they are counted as a single branch. 

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stabilising  capital  within  banks,  but  it  is  not  prescriptive  about  what  to  do  when  banks  no 
longer  meet  the  8%16  minimum  capital  threshold.  The  management  of  situations  when  the 
bank does not meet the requirements of banking laws (8% CAR) but is still not insolvent is 
left to national legislation. 17  

Presently  at  EU  level,  article  136  of  the  CRD  deals  with  the  early  intervention  powers  and 
tools of banking supervisors in a crisis situation. This article enables the supervisors to oblige 
banks to implement measures that correct irregularities and restore capital requirements, e.g. 
by  requiring  them  to  hold  additional  capital,  improve  governance,  systems  and  internal 
control arrangements, increase reserves, limit business operations and risk exposures, etc. 

The  CRD  also  establishes  rules  about  alerting  other  authorities18  (i.e.  Central  Banks  and 
Ministries  of  Finance)  in  emergency  situations,  requiring  coordination  of  supervisory 
activities and exchange of information in emergency situations19 among Member States.  

National banking legislations enable financial supervisors with different powers and tools to 
intervene  at  an  early  stage  in  the  operation  of  a  bank  in  a  crisis  situation.  The  survey  of 
CEBS (mentioned above) summarises the main differences between national systems. 

In  July  2008,  agreement  was  reached  on  an  EU  wide  Memorandum  of  Understanding 
('MoU')20  setting  out  cross-border  crisis  management  arrangements  and  involving  the 
commitment  of  all  signatories  (e.g.  EU  finance  ministries,  Central  Banks  and  supervisory 
authorities) to cooperate across borders between relevant authorities with a view to enhancing 
preparedness  for  the  management  of  potential  cross-border  crisis  situations.  Although  not 
legally  binding  in  nature,  the  MoU  defines  procedures  for  the  involvement  of  all  relevant 
parties  in  a  crisis  situation,  based  on  the  existing  legal  responsibilities  and  decentralised 
supervisory framework, and building on existing networks of authorities (Domestic Standing 
Groups, colleges of supervisors, and networks of Central banks). It also defines coordination 
mechanisms, relying on a national coordinator in charge of actions to be taken at a national 
level (who may vary according to the nature, the characteristics and stages of the crisis) and 
Cross-Border Coordinator which, as a rule, is one of the authorities of the home country and 
should  efficiently  use  internal  cooperation  mechanisms  of  the  country.  The  MoU  stipulates 
that sufficient cross-border procedures in normal times between all relevant authorities are to 
be  put  in  place  to  enhance  the  availability  of  tools  for  crisis  management;  addressing  the 
issues  of  burden  sharing  between  home  and  host  countries;  and  ensuring  preparedness  for 
financial crisis situations.  

15 

16 
17 

18 
19 
20 

Directive  2006/48/EC  relating  to  the  taking  up  and  pursuit  of  the  business  of  credit  institutions  and 
Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions. 
Capital Adequacy Ratio (CAR): bank's capital expressed as a percentage of its risk weighted assets. 
This approach is supplemented by the two "safety net Directives" should preventive measures fail: the 
DGS  Directive  and  the  Re-organisation  and  winding-up of  credit  institutions Directive (2001/24/EC). 
The  latter  Directive  is  limited  to  organising  conflict  of  law  rules  (Which  law  is  applicable  in  the 
procedure: both the host and home Member States (country of origin), or only the home Member States 
(universality and unity principles) but does not govern the actual insolvency laws themselves, which are 
left to the discretion of Member States. Furthermore it caters only for credit institutions with branches 
(not subsidiaries) in another Member State.  
Article 130 CRD 
Article 129(1) CRD 
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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Table 1 Relevant EU and national legislations and agreements 

EU Competence 

Directive/agreement 

Description 

Relevance for this topic 

requirements: 

CRD  establishes  the  authorisation  and  pursuit  of 
business  of  credit  institutions  along  with  the 
principle  of  single  passport  and  home  country 
the  applicable 
control  and  further  sets  out 
prudential 
and 
disclosure  by  competent  authorities,  consolidated 
supervision, capital requirements, reporting of and 
large  exposures  and  non-financial 
limits 
holdings, suitability of managers and shareholders, 
standards  for  the  internal  risk  management  and 
public disclosure to achieve market discipline.  

supervision 

to 

Together,  the  Codified  banking  Directive  and  the 
Capital  Adequacy  Directive 
the 
capital requirement framework based on the Basel 
II  accord  developed  by  the  Basel  Committee  on 
Banking Supervision (BCBS). 

implemented 

that 

establishes 

judicial  authorities  are 

the  home 
The  Directive 
the 
administrative  or 
empowered authorities to decide on reorganisation 
measures  and  winding-up  proceedings  for  credit 
institutions that operate branches in other Member 
States.  The  measures  are  governed  by  a  single 
bankruptcy law, that of the home state. It 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.  

Capital Requirements 
Directive (CRD, 
Directive 2006/48/EC 
and 2006/49/EC) 

Directive on the 
Reorganisation and 
Winding up of Credit 
Institutions (Directive 
2001/24/EC) 

Article  136  lists  the  minimum 
powers supervisors must have to 
correct  irregularities  at  a  bank. 
This  list  could  be  expanded  in 
light  of  the  current  crisis  as  not 
all authorities had adequate tools 
to handle ailing banks. 

about 

alerting 

Article  129  and  130  established 
rules 
other 
authorities  (i.e.  Central  Banks 
and  Ministries  of  Finance)  in 
emergency situations. 

New  provisions  on  home/host 
supervision  have  recently  been 
adopted  (but  not  yet  transposed 
into  national  legislation)  which 
establish  colleges  of  supervisors 
for internationally active banks. 

consolidation 
proceedings 
entities 

This  directive  does  not  provide 
of 
the 
for 
for 
insolvency 
separate 
i.e.: 
subsidiaries  within  a  banking 
group,  and  makes  no  attempt  to 
harmonise  national  insolvency 
laws.  

legal 

Directive on Deposit 
Guarantee Schemes 
(Directive 94/19/EC) 
and its amendment by 
Directive 2009/14/EC 

The Directives  aim  at  safeguarding  deposits  from 
bank  customers.  Each  depositor  is  guaranteed  a 
protection  of  at  least  €  50,000.  Unless  the 
Commission Services finds it differently, the limit 
will  be  increased  to  €  100,000  by  31  December 
2010.  Member  States  are  obliged  to  ensure  that 
one or more deposit guarantee schemes are set up. 
The  schemes  must  also  cover  depositors  at 
branches in other Member States. 

In certain Member States deposit 
guarantee schemes not only have 
the  task  to  pay  out  deposits  but 
also to actively take part in crisis 
management or even to finance a 
resolution. 

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11 

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Memorandum of 
Understanding 
2008 

Second Company 
Law Directive 
77/91/EEC 

Directive 

Description 

Relevance for this topic 

EU Competence 

Building on the existing national and EU legislation, 
the  objective  of  the  Memorandum  is  to  ensure 
cooperation  in  financial  crises  between  Financial 
Supervisory Authorities, Central Banks and Finance 
Ministries 
for 
sharing of information and assessments, in order to 
facilitate  the  pursuance  of  their  respective  policy 
functions  and  to  preserve  stability  of  the  financial 
system  of  individual  Member  States  and of  the  EU 
as a whole.  

through  appropriate  procedures 

of 
cooperation 
Voluntary 
authorities 
be 
to 
proved 
inadequate in the recent financial 
crisis  despite  the  fact  that  the 
MoU was already in force. 

The Directive on coordination of safeguards which, 
for  the  protection  of  the  interests  of  members  and 
others, are required by Member States of companies 
within  the  meaning  of  the  second  paragraph  of 
Article 58 of the Treaty, in respect of the formation 
the 
of  public 
maintenance  and  alteration  of  their  capital,  with  a 
view to making such safeguards equivalent. 

liability  companies  and 

limited 

Shareholder Rights 
Directive 
2007/36/EC 

in 

The  Directive  on  the  exercise  of  certain  rights  of 
shareholders 
listed  companies  establishes 
requirements  for  general  meetings  of  shareholders 
and  in  particular  the  convocation  periods  and  the 
form of the convocation. 

Mandatory  requirements  on  the 
shareholders'  approval  of  any 
increase or reduction of capital as 
well as rules on shareholders' pre-
emption 
hinder 
rights  may 
effective  resolution  measures  of 
public  authorities  in  an  ailing 
bank. 

Long  convocation  periods  may 
slow  down  speedy  actions  of 
authorities  aiming  at  resolving 
ailing banks. 

Legislation 

Banking laws on 
powers of 
supervisors 

Insolvency laws 

National Competence 

Relevance for this topic 

Beyond  the  minimum  requirements  of  the  CRD,  early  intervention  by  supervisors  is 
defined  by  national  supervisory/banking  laws.  These  laws  include  widespread  powers 
which  may  not  be  compatible  across  Member  States  and  may  complicate  cross-border 
supervisory cooperation. 

Bank resolution depends in most Member States on national insolvency provisions. Re-
organisation of different entities of the same cross-border banking group will take place 
according  to  different  national  insolvency  laws.  There  is  no  coordinated  operation  of 
these laws on a cross border level. 

Special bank 
resolutions laws 

Special laws on bank resolution are aimed at optimising the response to a banking crisis, 
allowing  intervention  at  a  stage  before  formal  insolvency  has  been  reached.  Such  laws 
only  exist  in  very  few  Member  States  hence  the  absence  of  special  reorganisation 
techniques for banks can complicate cross-border coordination. 

EN 

12 

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3.1.3.  Overview of ongoing developments 

On 23 September 2009, the European Commission adopted a legislative proposal21 to reform 
the architecture of European financial supervision and address critical weaknesses highlighted 
by  the  financial  crisis  of  2008-2009.  Based  on  the  recommendations  of  the  de  Larosière 
Group,  the  Commission  proposes  to  create  two  new  bodies:  the  European  Systemic  Risk 
Board (ESRB) and the European System of Financial Supervisors (ESFS). As for the latter, it 
is  proposed  to  transform  the  three  existing  European  committees  of  financial  supervisors22 
into  European  Supervisory  Authorities  (ESAs),  (a  European  Banking  Authority  (EBA),  a 
European  Insurance  and  Occupational  Pensions  Authority  (EIOPA),  and  a  European 
Securities  and  Markets  Authority  (ESMA))  with  commensurately  increased  powers  to,  inter 
alia:  

•  co-ordinate the work of national supervisors, in particular in case of adverse developments 
which potentially jeopardise the orderly functioning of the financial system in the EU;  

•  settle disputes between national supervisors in cases of disagreement on supervisory issues 

regarding a cross-border financial institution;  

•  take steps to harmonise national regulatory rules and move towards a common European 

rulebook, and 

•  supervise certain pan-European entities which are regulated at EU level, i.e.: Credit Rating 

Agencies. 

The proposals of the Commission suggest that the ESAs will fulfil an active coordination role 
in emergency situations, while in very exceptional circumstances, the ESAs, which decision-
making  body  consists  of  the  Heads  of  the  relevant  national  supervisory  authorities,  should 
also have the power to require national supervisors to jointly take specific action. Article 10 
of  the  proposed  regulation  establishing  a  Banking  Authority  sets  out  the  role  that  the  new 
authority would play in crisis situations. It envisages that, in the case of adverse developments 
which may seriously jeopardise the orderly functioning and integrity of financial markets or 
the stability of the whole or part of the financial system in the Community, the Commission, 
upon  its  own  initiative  or  following  a  request  by  the  Authority,  the  Council,  or  the  ESRB, 
may adopt a decision addressed to the Authority, determining the existence of an emergency 
situation.  In  such  cases,  the  Authority  may  adopt  individual  decisions  requiring  competent 
authorities  to  take  the  necessary  action  to  address  any  risks  that  may  jeopardise  the  orderly 
functioning  and  integrity  of  financial  markets  or  the  stability  of  the  whole  or  part  of  the 
financial system. 

If a competent authority does not comply with the decision of the Authority, it may adopt an 
individual  decision  addressed  to  a  financial  institution  requiring  the  necessary  action  to 
comply  with  its  obligations  under  that  legislation,  including  the  cessation  of  any  practice. 
Such decisions shall prevail over any previous decision adopted by the competent authorities 
on the same matter. 

21  

22 

Proposal  for  a  REGULATION  OF  THE  EUROPEAN  PARLIAMENT  AND  OF  THE  COUNCIL 
establishing a European Banking Authority, 23 September 2009 
These  are  the  Committee  of  European  Banking  Supervisors  (CEBS),  the  Committee  of  European 
Insurance and Occupational Pensions Supervisors (CEIOPS) and the Committee of European Securities 
Regulators (CESR). 

EN 

13 

   EN 

 
                                                 
Based  on  Article  23  of  the  Proposal,  the  decision  making  power  of  the  EBA  is  however 
subject to a safeguard clause which makes clear that decisions by the EBA should not in any 
way impinge on the fiscal responsibilities of the Member States. In another initiative on crisis 
management,  the  Economic  and  Finance  Committee  has  prepared  a  report  for  finance 
ministers  in  advance  of  the  Informal  ECOFIN  (1  October).  The  report  sets  out  a  suggested 
way  forward  for  an  integrated  framework  for  European  financial  stability  arrangements, 
suggesting a two-strand approach: 

•  developing  a  comprehensive  EU-wide  framework  for  closer  policy  coordination  on 
financial  stability,  in  particular  in  a  financial  crisis,  without    the  need  for  legislative 
proposals, and 

•  further  enhancing  the  EU  regulatory  framework  for  crisis  management  by  developing 

common and interoperable tools, on the basis of EU legislative proposals. 

There is a clear linkage with the Commission's  initiative, and a strong focus on the need to 
make  progress  on  burden  sharing.  The  Commission's  Communication,  on  the  other  hand, 
focuses  less  on  burden  sharing  (although  the  importance  of  progress  in  this  area  is  clearly 
recognised),  and  concentrates  more  on  improvement  of  processes  in  order  to  increase 
efficiency  of  crisis  resolution  and  rely  less  on  public  sector  financing  arrangements.  Both 
initiatives are complementary. 

At international level, the G20 has been discussing crisis management and resolution among a 
host of other issues aimed at addressing shortcomings in the international financial regulatory 
system. At the Pittsburgh summit on 24-25 September 2009, the Leaders' statement called for 
agreement to be reached, inter alia, on: 

"Addressing  cross-border  resolutions  and  systemically  important  financial  institutions  by 
end-2010:  Systemically  important  financial  firms  should  develop  internationally-consistent 
firm-specific  contingency  and  resolution  plans.  Our  authorities  should  establish  crisis 
management  groups  for  the  major  cross-border  firms  and  a  legal  framework  for  crisis 
intervention  as  well  as  improve  information  sharing  in  times  of  stress.  We  should  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. 
Our  prudential  standards  for  systemically  important  institutions  should  be  commensurate 
with the costs of their failure. The FSB should propose by the end of October 2010 possible 
measures including more intensive supervision and specific additional capital, liquidity, and 
other prudential requirements." 

EN 

14 

   EN 

 
 
3.2. 

Problem definition 

3.2.1.  General problems 

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. 

The  existing  framework  has  proved  inadequate  to  deal  with  cross-border  banking  failure. 
While the introduction of the EU Memorandum of  Understanding  on Cross-border Stability 
came  too  late  to  be  effectively  applied  during  the  recent  bank  failures,  it  is  questionable 
whether  voluntary  arrangements  would  have  been  sufficient  to  ensure  smooth  cooperation 
during the fast moving events which characterised this crisis. And while recent amendments 
to the CRD will result in the setting up of colleges for all cross-border groups, in the absence 
of a broader legal framework setting out bank resolution arrangements, there is no guarantee 
that cooperative solutions will be forthcoming during future crises.  

A  key  shortcoming  to  effective  cooperation  is  the  misalignment  of  incentives  between 
national  authorities.  Unless  these  are  better  aligned  (both  within  countries  and  across 
countries),  outcomes  to  crisis  resolutions  will  invariably  fall  short  of  their  potential.  An 
incentive-compatible framework is thus an essential part of broader reform to the framework. 
In particular, trust and confidence in cooperation arrangements need to be underpinned by the 
assurance  that  the  costs  resulting  from  a  cross-border  resolution  can  be  fairly  shared  and 
borne  between  the  various  stakeholders  (including  public  funds  should  private  sector 
solutions prove insufficient).  

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 according to their own understanding of the problem, the results are likely 
to be suboptimal. 

Furthermore,  misalignment  between  the  national  accountability  and  mandate  of  supervisors 
and  the  cross-border  nature  of  the  banking  industry  complicates  co-operation  between 
supervisors of different Member States, and is an additional element leading to a suboptimal 
level of crisis prevention in case of cross-border banks 

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 bank23, 
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 

23 

In Article 136 of the CRD.  

EN 

15 

   EN 

 
                                                 
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.  

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  resolution.24  According  to  the  latest  IMF25  estimates,  crisis  related 
writedowns on assets originated globally will reach $4.1trillion by 2010, with global banking 
industry  expected  to  bear  about  two  thirds  of  the  losses,  half  of  which  (or  $1.4  trillion, 
equivalent to 9% of the EU's GDP) is now attributable to European Banks. 

Effective  cross-border  crisis  resolution  is  also  hindered  by  legal  obstacles  embedded  in 
insolvency  and  company  law  and  legal  uncertainty,  as  well  as  the  lack  of  arrangements  for 
financing  cross-border  resolutions.  Maintenance  of  continuity  of  banking  services,  which  is 
crucial for the preservation of confidence in banks, may be jeopardised if authorities do not 
have tools to keep the going concern status of a bank in a resolution. 

The causal links between the drivers and their consequences in the field of early intervention 
and resolution of banks are described in the problem tree (see section 2.2.4). 

The  current  financial  crisis  has  provided  some  clear  examples  of  just  how  damaging  the 
absence  of  adequate  EU  arrangements  in  the  field  of  cross-border  banking  crisis  resolution 
can be.  

Fortis 

In the case of Fortis, authorities from different Member States were unable to rapidly agree on 
a  rescue  plan  which  could  have  maintained  the  cohesion  of  the  group  structure.  As  a 
consequence  the  group  was  split  up  along  geographical  boundaries  and  not  along  a  more 
logical  and  cost  effective  division  between  business  lines.  The  situation  is  described  in  the 
Fortis  2008  Annual  Review26  as  follows:  The  global  financial  situation  continued  to 
deteriorate.  Alarmist  rumours  affected  Fortis’s  interbank  market  access,  while  it  had  to 
contend  with  an  extremely  substantial  liquidity  requirement.  During  the  weekends  of  27–28 
September and 4–5 October, Fortis had to conclude a number of transactions that ultimately 
led to the sale of its main banking and insurance activities to strong parties. On 29 September 
2008, Fortis announced that the Belgian government would invest EUR 4.7 billion in Fortis 
Bank  SA/NV,  that  the  Dutch  government  would  invest  EUR  4.0  billion  in  Fortis  Bank 
Nederland  (Holding)  N.V.,  and  that  the  Luxembourg  government  would  invest  EUR  2.5 
billion  in  Fortis  Banque  Luxembourg  SA.  These  investments  represented  49.9  %  of  the 
common equity of the respective entities. The parties concerned expected that a solution had 
been found and that matters would resume their normal course. In the days that followed, the 
parties  negotiated  the  implementation  of  these  agreements  with  both  the  Luxembourg 
government and the Dutch government. A term sheet was signed on 30 September 2008 with 
the Luxembourg government. The agreement with the Dutch state, by contrast, could not be 

24 

25 

26 

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 
http://www.holding.fortis.com/shareholders/media/pdf/EN_AnnualReview_2008_1.pdf 

EN 

16 

   EN 

 
                                                 
implemented.  Despite  hopes  at  the  beginning  of  the  week,  the  situation  continued  to 
deteriorate,  due  to  tensions  in  the  interbank  market.  Fortis  found  it  extremely  difficult  to 
regain  the  confidence  of  the  market  and  its  share  continued  to  decline,  reaching  a  closing 
price on 29 September 2008 of EUR 3.97. In terms of liquidity,  the situation was extremely 
uncertain and it was necessary to negotiate new conditions with the Belgian central bank and 
to  obtain  an  Emergency  Liquidity  Agreement  with  the  Dutch  central  bank.  Withdrawals  by 
institutional  clients  and  by  companies  had  increased  substantially.  This  situation  led  on  3 
October  to  the  sale  of  Fortis  Bank  Nederland  (Holding)  N.V.,  Fortis  Verzekeringen 
Nederland  N.V.  and  Fortis  Corporate  Insurance  N.V.  to  the  Dutch  state  for  a  total 
consideration of EUR 16.8 billion, which was allocated as follows : 

•  EUR  12.8  billion  received  for  the  Dutch  banking  activities  (including  ABN  AMRO) 

remained within Fortis Bank; 

•  EUR  4  billion  received  for  the  Dutch  insurance  activities  went  to  the  Fortis  holding 

company.  

Following  the  transfer  of  the  operations  in  the  Netherlands  to  the  Dutch  state,  Fortis  was 
obliged to review its options : 

•  Continue  on  a  stand-alone  basis  with  the  Belgian  state  as  a  minority  shareholder  in  the 

bank;  

•  Find a strategic partner for Fortis Bank and for all or part of Fortis’s other operations; 

•  Sell the remaining 50 % of the Belgian bank to the Belgian state, prior to a possible resale 

to a private investor" 

How does this example illustrate the issues highlighted in the problem definition? 

The Fortis case is a clear illustration of many of the problems which can arise during a cross 
border banking crisis. It shows the tendency of authorities to adopt territorial approaches in 
crisis  resolution  and  how  the  consequent  competition  for  assets  can  lead  to  sub-optimal 
results. Absence of complete information, exacerbated by the  complex  business  structure of 
Fortis,  compromised  the  early  burden  sharing  arrangement,  and  ultimately  resulted  in  the 
splitting  of  the  group.  The  misalignment  of  responsibilities  between  authorities  gave  rise  to 
tensions  which  further  compromised  cooperation.  The  absence  of  a  clear  legal  framework 
under  which  resolution  measures  could  be  taken  resulted  in  legal  challenges  from 
shareholders which created a protracted period of legal uncertainty. 

Iceland 

In the case of the Icelandic banks, the inability to deal with problems at an early stage in a 
cooperative manner led to the subsequent disorderly resolutions and disputes between national 
authorities,  in  particular  about  who  should  bear  the  costs  which  were  incurred.  "After  five 
years  of  brisk  expansion,  the  country’s  three  main  banks,  representing  85%  of  the  banking 
system, all collapsed during the same week in October 2008 […] Upon their failure, the three 
banks were put into receivership and new banks were formed to enable the domestic payment 
system to continue to function smoothly. Complex negotiations between the new banks and the 
creditors of the old banks were needed to reach a final settlement. With hindsight, it appears 
that  the  Icelandic  financial  supervisory  authorities  had  become  overwhelmed  by  the 
complexity of the national banking system, and had been unable to stop their expansion. […] 
An  important  cross-border  banking  issue  raised  by  the  financial  crisis  was  that  national 

EN 

17 

   EN 

 
 
deposit guarantee systems may not have enough resources to honour the minimum EU deposit 
guarantee  obligations.  The  government  was  obliged  to  stand  behind  Iceland’s  Depositors’ 
and Investors’ Guarantee Fund (DIGF) to enable it to meet these obligations, thus exposing 
Icelandic taxpayers to a large cost."27 

How does this example illustrate the issues highlighted in the problem definition? 

An  absence  of  cooperation  mechanisms  and  early  intervention  tools  prevented  an  early  and 
possibly less costly resolution to the Icelandic Banking Crisis. There was also a clear problem 
associated with financing the resolution, and the cross-border arrangements were limited to a 
Deposit Guarantee Scheme which was inadequately financed.  Assets of the Icelandic banks 
were  ring  fenced  in  the  absence  of  satisfactory  cooperative  arrangements  –  with  counter 
productive effects for the Icelandic banks and their creditors.  

Lehman Brothers 

The chaotic way in which Lehman Brothers was placed into bankruptcy led to a significant 
loss of value for unsecured creditors, and highlighted the extreme market disruption caused by 
uncertainties about the location and return of client assets held by Lehman as prime broker, 
and  about  the  contractual  positions  of  Lehman's  counterparties  and  the  status  of  their 
outstanding  trades.  The  administrators  overseeing  the  winding  down  of  Lehman  Brothers, 
have described the complexity of the task they are faced with as follows28: "Lehman Brothers 
was a very significant and complex global organisation, operating in multiple territories and 
across  most  areas  of  financial  services.  Its  collapse  also  coincided  with  a  period  of 
unprecedented turmoil in financial markets. The US operations of Lehman Brothers, and the 
UK  and  European  Lehman  Brothers’  entities  in  administration,  are  now  being  dealt  with 
through separate legal procedures and it is as if they are no longer part of the same group. 
This has significant practical consequences for the Administrators in meeting their objectives. 
As with most global financial services organisations, on a day to day basis Lehman Brothers 
was  previously  managed  and  run  mainly  along  global  product  lines.  Following  Lehman 
Brothers’ bankruptcy in the US, and the UK and European Lehman Brothers' entities being 
placed into insolvency proceedings, a legal entity focus is now paramount and all information 
relating to the group’s activities now has to be captured and assessed on a legal entity basis 
instead. Funding, and other interdependencies, existed between the US and various UK and 
European  Lehman  Brothers’  entities  and  these  links  are  now  broken.  These  factors  add 
further complexity to the administration. The sale of the North American investment banking 
and capital markets business of Lehman Brothers to Barclays also complicates the situation 
faced by the Administrators." 

How does this example illustrate the issues highlighted in the problem definition? 

Lehman  was  an  internationally  active  bank,  with  a  highly  complex  organizational  structure 
and was supervised by a number of different authorities. The case is a good illustration of the 
failure  of  cooperation  and  information  sharing  at  a  critical  moment  prior  to  and  during 
insolvency.  It  also  illustrates  how  difficult  ring  fencing  of  assets  can  be  in  practice  –  as 
liquidity was moved rapidly around the organization it was impossible for authorities to keep 

27 

28 

EN 

Policy 

Brief, 
OECD 
http://www.oecd.org/dataoecd/29/8/43455728.pdf 
www.pwc.co.uk/eng/issues/lehman_faq_1008.html 

September 

2009, 

Economic 

survey 

of 

Iceland 

2009, 

18 

   EN 

 
 
                                                 
track  of.    The  challenge  to  wind  up  the  organization  in  the  wake  of  a  disorderly  failure 
provides  evidence  of  the  inadequacies  of  the  current  territorial  approach  to  cross-border 
resolution  and  winding  up  rules.  Finally,  the  chaos  caused  by  the  collapse  of  Lehman  is  a 
strong  illustration  of  the  disruptive  impact  of  the  failure  of  a  highly  connected  financial 
institution and the potential damage disorderly resolutions can have on market confidence. 

The  absence  of  adequate  cross-border  crisis  management  arrangements  has  almost  certainly 
resulted in higher costs which have ultimately fallen on taxpayers. Although it is difficult to 
estimate  with  any  degree  of  accuracy  the  extent  of  the  cost  savings  that  might  result  from 
effective  cross-border  arrangements,  it  can  be  expected  –  given  the  overall  costs  associated 
with  banking  crises  -  that  these  would  be  significant.  Since  October  2008,  the  European 
Commission  has  approved  €3.6  trillion  (equivalent  to  30.5%  of  EU's  GDP)  of  state  aid 
measures  to  financial  institutions,  of  which  €1.5  trillion  has  been  effectively  used  by  June 
2009. 

The IMF has recently estimated the cost of banking crises as a whole since the 1970s29 and 
concludes  that  on  average  the  fiscal  costs,  net  of  recoveries,  associated  with  crisis 
management average around 13.3 % of GDP, and can be as high as 55.1 % of GDP. Output 
losses average around 20 % of GDP during the first four years of the crisis. If this study had 
incorporated data from the current crisis, the costs would doubtless have been even higher30.  

3.2.2.  Drivers and specific problems 

There are two key aspects which need to be considered in the context of a framework for bank 
resolution:  early  intervention  (or  early  remedial  actions)  and  bank  resolution  measures. 
Although  both  aim  at  stabilising  the  financial  situation  of  a  bank  and  thus  avoiding  market 
disruption, they can be prompted in different situations. 

Early  interventions  or  remedial  actions  can  be  prompted  by  financial  supervisors  when  the 
bank is not threatened with immediate insolvency. In such situations supervisors can ask the 
banks to implement certain measures (to hold additional capital, improve governance, systems 
and  internal  control  arrangements,  increase  reserves,  limit  business  operations  and  risk 
exposures)  to  ward  off  the  problems.  Such  measures  leave  control  of  the  institution  in  the 
hands  of  the  management,  and  do  not  represent  a  significant  interference  with  the  rights  of 
shareholders or creditors.  

When banks are close to insolvency, actions and measures need to be more severe in order to 
pre-empt potential instabilities in the banking and the whole financial system resulting from 
bankruptcy.  In  such  situations,  public  authorities  (central  banks,  finance  ministries,  deposit 
guarantee  schemes,  judicial  and  supervisory  authorities)  might  need  to  take  over  certain 
decisions  on  the  business  operation  of  a  bank  and  implement  far  reaching  restructuring, 
reorganisation measures. 

29 
30 

Systemic Banking Crises: A New Database Luc Laeven and Fabian Valencia, IMF, November 2008 
For more detailed quantification of the costs of the financial crisis, see also the European Commission's 
report "Public Finances in EMU 2009", 
http://ec.europa.eu/economy_finance/publications/publication_summary15289_en.htm 

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3.2.2.1.  Early intervention 

Driver: Lack of effective early warning indicators and early-intervention triggers 

Problems: Sub-optimal effectiveness in prevention of crisis situations in cross-border banks 

Effective  prevention  of  crisis  situations  is  conditional  on  accurate  and  early  detection  of 
stress situations. Early intervention measures are activated by different triggers developed by 
each Member State. Results of a recent CEBS survey31 shows that only a few Member States' 
domestic  legal  frameworks  specify  the  triggers  that  lead  to  automatic  corrective  action. 
Supervisors  are  obliged  to  act  if  an  indicator  hits  a  threshold).32  However,  CEBS 
acknowledges  that  such  threshold  levels  for  above  indicators  are  too  low  for  remedial 
measures to be considered true early intervention measures and supervisory action will need 
to be taken long before the situation of an individual institution deteriorates to such a level.  

More commonly, early intervention measures are activated by ongoing prudential supervision 
whereby analysis is performed on the basis of financial and prudential information collected 
either during on-site inspections or via regular off-site communication. In this regard, in order 
to  detect  potential  problems  most  EU  supervisory  authorities  have  developed  Risk 
Assessment  Systems33  (RAS)  that  play  an  important  role  in  the  Supervisory  Review  and 
Evaluation  Process  (SREP)34  (part  of  Pillar  235  of  the  CRD).  RAS  are  typically  geared 
towards assessing a broad range of risk factors based on a set of quantitative,36 qualitative and 
supervisory indicators.  

The  events  of  2008  have  demonstrated  that  effectiveness  of  current  early  warning  systems 
employed  by  the  supervisory  community  is  sub-optimal.  Certain  risks  were  underestimated 
because  smaller-than-warranted  importance  had  been  assigned  to  them  while  the  signalling 
capacity of some risk indicators has been erroneously overlooked. This may have interfered 
with a timely undertaking of appropriate actions and in turn necessitated more intrusive and 
costly – for  many  stakeholders involved - intervention measures. "Once  problems escalated 

31 

32 

33 

34 
35 
36 

http://www.c-ebs.org/getdoc/f7a4d0f8-5147-4aa4-bb5b-28b0e56c1910/CEBS-2009-47-Final-(Report-
on-Supervisory-Powers)-.aspx 
For instance, in Czech Republic, the supervisory authority must impose remedial measures (e.g. capital 
increase,  acquisition  of  assets  having  a  risk  weighting  of  less  than  100%,  prohibition  to  acquire  any 
interest in any other legal entity, prohibition to grant a loan to a person having a special relation with 
the institution) if it becomes aware that an institution's capital is lower than two thirds of the minimum 
required capital; in Hungary, the supervisory authority shall use corrective measures if the own funds 
are  less  than  75%  or  less  than  50%  of  the  capital  requirements;  while  in  Slovakia,  the  supervisory 
authority shall place a credit institution under forced administration if the own funds of the institution 
concerned fall below 50% of the minimum requirement. 
For  more  on  features  of  Risk  Assessment  Systems  please  see  http://www.c-ebs.org/Supervisory-
Disclosure/Supervisory-review.aspx 
See Glossary 
See Glossary 
Quantitative indicators (e.g., capital ratios, composition of own funds) are often analysed by comparing 
them against those of peer institutions. This allows authorities to identify worst performers or a relative 
strength of an institution vis-à-vis a peer group average. In some Member States, statistical models (For 
instance,  Sytème  d'Aide  à  Analyse  Bancaire  (SAABA)  used  by  the  French  Commission  Bancaire, 
forecasts  likely  evolution  of  an  institution's  solvency  and  quality  of  its  credit  portfolio.)  are  used  to 
conduct a more-in-depth quantitative analysis of the soundness of credit institutions. Such quantitative 
analysis  is  then  complemented  with  a  qualitative  review  of  risk  management  and  internal  control 
systems.  

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into specific crises, there were real problems of information exchange and collective decision 
making  involving  central  banks,  supervisors  and  finance  ministries…Regulators  and 
supervisors  focused  on  the  micro-prudential  supervision  of  individual  financial  institutions 
and  not  sufficiently  on  the  macro-systemic  risks  of  a  contagion  of  correlated  horizontal 
shocks."37 

More specifically, the crisis has demonstrated that current approaches focus too narrowly on 
capital ratios while underestimating the effects of leverage and liquidity on the 'soundness' of 
an  institution  as  perceived  by  market  participants.  In  this  regard,  the  predictive  power  of 
certain  market-based  indicators  has  not  been  given  due  attention.  Tier  1  capital  ratio38  at 
Fortis, Dexia and Hypo Real Estate Holding were at 9.1%, 11.3% and 8.6%, respectively, at 
the  time  when  their  share  price39  was  experiencing  a  precipitous  decline,  eventually 
prompting national governments to take action in late September 2008. This raises a question 
about the risk capture of capital requirements under the Basel II framework and, in retrospect, 
underscores the merit of certain forward-looking market-based indicators that might be used 
to supplement the more traditional warning tools that are based on the past data.  

Empirical  studies  provide  some  support  for  the  above  observations.  A  recent  study 
(Poghosyan, Čihák, 2009)40 on bank distress events in the EU from 1997 until 2008 looked at 
a  range  of  potential  indicators  and  possible  threshold  levels  that  could  be  used  to  identify 
weak banks. The analysis found that indicators linked to bank leverage and liquidity (defined 
as  the  share  of  wholesale  financing  of  liabilities41)  have  a  significant  predictive  power. 
Indicators  based  on  asset  quality,  bank  profitability,  market  discipline,  contagion  effect  and 
stock price were found to be relevant as well. With regard to 19 distress events that took place 
in 2008, the study showed that while some mechanics identified over the entire observation 
period remained in place, certain differences existed. More specifically, a managerial quality-
based indicator was found to have a significant predictive potential for the most recent bank 
distress events. 

Driver: Divergence in national early warning indicators and early-intervention tools 

Problems:  Sub-optimal  level  of  supervisory  cooperation  and  effectiveness  in  prevention  of 
crisis situations at cross-border banks 

It  is  evident,  that  all  Member  States  operate  some  form  of  pre-intervention  mechanism  in 
order  to  handle  a  crisis  in  an  ailing  bank.  But  the  nature  of  the  measures,  the  criteria 

37 
38 

39 

40 

41 

De Larosière report – CH I Causes of the financial crisis, pp 10-11. 
Tier 1 capital ratio - definition. Average Tier 1 ratio for 35 large diversified and internationally active 
EU banks was equal to 7.6% at the end of June 2008 (source: ECB, CEBS). 
Dexia's stock came under pressure following a series of financial commitments aiming at maintaining 
the AAA credit rating at its bond insurance unit Financial Security Assurance Inc. Fortis' problems were 
linked mainly with the financing (€24 billion) of its commitment to buy Dutch operations of the ABN 
AMRO  bank.  Difficulties  of  Hypo  Real  Estate  Holding  were  predominantly  linked  to  its  exposure  to 
collateralised debt obligations (CDOs) and short-term liquidity shortage. 
Poghosyan, T., and Čihák, M., Distress in European Banks: An Analysis Based on a New Data Set, IMF 
Working Paper, January 2009 
Banks' dependence on wholesale funding was acknowledged by the FSA as one of the main culprits for 
distress events at the UK banks during the current crisis (speech by Hector Sants, Chief Executive of 
the FSA, to the Associate Parliamentary Group on Business Finance & Accountancy Banking Reform, 
October 14, 2008). 

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conditioning  their  application  and  the  moment  at  which  measures  are  activated  are  not 
harmonised and consequently differ across Member States.  

Divergence  in  national  approaches  to  early  intervention  arises  in  all  phases  of  the  process. 
Early warning indicators and their threshold levels that prompt supervisors to take appropriate 
measures  vary  across  Member  States  as  they  are  embedded  in  the  Pillar  2  process.  In  this 
regard, CEBS42 has observed that currently there is no minimal common set of early warning 
indicators and no commonly agreed definition for each of them.  

With regard to the toolkit of measures and powers available to supervisors, Article 136 of the 
CRD already specifies some of these. It stipulates that in order to address a distress situation 
at  an  early  stage,  supervisory  authorities  should  be  able  to  require  banks  to  hold  additional 
capital,  improve  governance,  systems  and  internal  control  arrangements,  increase  reserves, 
limit  business  operations  and  risk  exposures  stemming  therefrom.  The  stocktaking  of 
supervisory objectives and powers conducted by CEBS43 revealed that several Member States 
implemented  this  Article  differently,  hence  supervisory  authorities  have  slightly  different 
tools, and that a number of authorities lacked certain powers. Further convergence might be 
needed  in  this  respect  if  such  differences  have  the  potential  to  complicate  cross-border 
cooperation between authorities.  

In order to intervene effectively and promptly to restore the soundness of a bank, supervisors 
might  also  need  to  resort  to  additional  domestic  measures  that  go  beyond  the  legal 
requirements  of  the  EU  legislation.  In  fact,  some  supervisors  are  entrusted  with  regulatory 
powers in the field of prudential supervision which enable them to issue mandatory secondary 
legislation and non-mandatory rules and principles. All authorities have a "general power" to 
ensure compliance with the laws and regulations governing the activities of a bank. However, 
a number of supervisors either cannot achieve certain measures through general powers or do 
not have access to the same specific powers that are available to the supervisory authorities in 
other Member States (see Chart 1). Specific circumstances that trigger application of a given 
power may also differ, therefore, contributing to the divergence of practices. 

42 

43 

CEBS,  Mapping  of  supervisory  objectives  and  powers,  including  early  intervention  measures  and 
sanctioning powers, January 2009  
CEBS,  Mapping  of  supervisory  objectives  and  powers,  including  early  intervention  measures  and 
sanctioning powers, January 2009  

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Chart 3 Supervisory authorities' access to selected powers and measures 

Source: CEBS 

Certain  supervisory  powers  (e.g.  suspending  voting  rights,  transfer  of  shares,  changing 
ownership, prohibiting dividends) impacting on shareholder rights can be also exercised with 
a view to achieving wider public policy objectives, such as maintaining financial stability and 
protecting depositors' interests. Most of these powers are not prevented by EU rules and are 
used – to a varying degree – by national supervisors or other authorities. 

Some  of  these  powers  can  be  viewed  as  alternative  means  to  arrive  to  the  same  end.  For 
instance,  authorities  who  do  not  have  powers  to  require  a  transfer  of  shares  or  change  in 
ownership may use the suspension of rights to indirectly incite a change in ownership (AT), 
or,  by  limiting  distribution  of  profits  may  indirectly  achieve  an  increase  in  capital  (MT). 
Nevertheless,  a  number  of  authorities  lack  access  to  some  of  these  powers  and,  as  a  result, 
cannot  attain  –  directly  or  indirectly  –  the  same  outcomes  as  their  counterparts  in  other 
Member States44. 

Given that a speedy action is often critically important to the survival of an institution and to 
the  ability  for  supervisors  to  minimise  costs  associated  with  its  failure45,  differences  in 
national pre-intervention approaches have the potential to complicate or impair efficient and 
coordinated cross-border crisis handling. 

Driver: Misalignment between national accountability and mandate of supervisors and cross-
border nature of the industry 

Problems: Sub-optimal level of supervisory cooperation impairing the effectiveness of cross-
border crisis prevention and counterproductive ring fencing of assets 

As  a  result  of  industry  consolidation  over  the  recent  years,  large  cross-border  banks  now 
dominate the European banking landscape (see section 2.1).  

44 

45 

For  example,  NL  and  DK  have  neither  a  power  to  limit  profit  distributions  nor  a  power  to  require 
shareholders to provide financial support to an institution (Authority in LU may limit, but not prohibit 
distribution of profits). 
This was particularly evident during the resolution of Fortis (see section 2.2.1). 

EN 

23 

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Given the degree of banking market integration, it has been argued for some time that the key 
hurdle in developing a functional and effective EU financial stability framework is rooted in 
the fact that fiduciary responsibilities of national authorities are towards national governments 
limiting  their  incentives  to  work  towards  a  common  EU  stability  framework46.  Before  the 
current crisis, national authorities were reluctant to develop commonly binding EU principles 
and procedures for cross-border financial crisis prevention and resolution and often resorted 
to  introducing  their  own  national  legislation  to  achieve  home  Member  State-oriented 
objectives. As a result behaviour during a financial crisis has tended to be nationally focused. 
According to the IMF : "the dominant strategy for supervisors in an LCFI47 crisis will likely 
be  to  look  out  for  the  national  treasury,  using  informational  advantages  to  that  effect, 
notwithstanding  MoUs on information  sharing and cooperation. A scramble for  assets in an 
LCFI  crisis  is  thus  likely  and  would  have  significant  cross-border  spill  over,  preventing 
efficient  and  effective  crisis  management  and  resolution.  In  this  set-up,  it  is  natural  for 
national  prudential  authorities  to  fear  loss  of  control  over  domestically-active  financial 
players"48.  

This  conflict,  whereby  host  Member  States  have  an  incentive  to  ring-fence  assets  (i.e.  keep 
them  within  their  jurisdiction)  whereas  home  Member  States  have  an  incentive  to  seek  the 
centralisation  of  assets  while  keeping  liabilities  decentralised,  is  of  most  relevance  for 
'significant' subsidiaries.  

Currently, while supervisory authorities in all Member States have a power to limit or prohibit 
intra-group  transfers  and  transactions49,  no  framework  currently  exists  to  facilitate  cross-
border  intra-group  asset  transfers.  This  is  especially  problematic  for  intra-group  financing 
across  borders.  Company  law  requirements  (directors'  liability)  and  different  insolvency 
measures (intra-group transfers in suspect period) can severely restrict any potential for using 
intra-group asset transfer as a tool for averting or managing a developing liquidity crisis in a 
group  entity.  There  is  currently  no  EU  authorisation  regime  for  asset  transfers  (although  in 
some Member States authorisation by supervisory authorities is required), and EU legislation 
does  not  provide  a  general  framework  of  terms  and  conditions  for  transfers.  In  some  cases 
Member  States  prohibit  'disadvantageous'  transactions  or  transactions  at  undervalue,  while 
others  impose  the  principle  that  transactions  must  be  made  at  'arms  length',  on  standard 
commercial  terms.  In  many  cases,  procedural  requirements,  such  as  authorisation  by  the 
General Assembly of the supervisory board may be triggered by the size of the transfer, the 
fact  that  the  transfer  was  not  concluded  in  the  ordinary  course  of  business,  or  because  the 
transfer is made between connected parties. As there is no concept of 'group interest’ at EU 
level, directors of a company are neither responsible to other group entities, nor to the group 
as  a  whole.  Indeed,  should  they  act  to  promote  the  interests  of  the  group  in  a  way  that  is 
detrimental to their own company, they would likely be in breach of their duties and at risk of 
liability  under  national  company  law  or  even  civil  or  criminal  liability  under  national  law. 
Under national insolvency laws, transfers carried out during the 'suspect' period preceding the 
commencement  of  winding  up  proceedings  may  be  retroactively  invalidated,  or  else  the 
transfer may be set aside or challenged if it was made at an undervalue or was detrimental to 
the  transferor  or  its  creditors.  As  a  consequence,  cross-border  banking  groups  are  unable  to 

46 
47 
48 
49 

IMF Country Reports No. 07/260, July 2007, and No.08/262, August 2008 
LCFI - large and complex financial institutions 
IMF Country Report No. 07/260, paragraph 26 
CEBS,  Mapping  of  supervisory  objectives  and  powers,  including  early  intervention  measures  and 
sanctioning powers, January 2009  

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mobilise  available  assets  in  one  part  of  the  group  in  support  of  another  part  of  the  group 
which may be encountering liquidity shortfalls.  

Disincentives to cooperate have implications not only for shareholders, but also creditors and 
employees  of  cross-border  banks,  as  an  uncooperative  crisis  management  process  between 
national authorities may undermine the effectiveness of pre-intervention measures and banks’ 
private crisis resolution solutions, with the ultimate financial burden falling on taxpayers.  

Recent changes to the legislative framework have resulted in some important progress to put 
in  place  cooperation  arrangements  aimed  at  enhancing  EU-wide  financial  stability.  The 
CRD50 already requires that supervisory authorities coordinate in gathering and dissemination 
of  relevant  information  and,  more  generally,  coordinate  their  supervisory  activities  in  both 
going  concern  and  emergency  situations.  However,  the  Directive  does  not  specify  the 
conditions that trigger the application of such measures, and how joint assessment should be 
conducted.  If  national  law  or  national  supervisors  interpret  those  conditions  differently, 
coordinated action by supervisors of different group entities might be difficult. 

A  number  of  revisions  to  the  existing  CRD  provisions,  designed  to  i)  enhance  work 
organisation  and  information  sharing  in  supervisory  colleges,  including  obligation  to  alert 
peer  supervisory  authorities  if  financial  stability  in  their  respective  Member  State  is 
jeopardised and ii) clarify rights and responsibilities of home and host supervisors, including 
host supervisors of  significant  branches, have recently been adopted  51 (they  will  come  into 
effect  in  2010).  The  establishment  of  colleges  of  supervisors  will  improve  cooperation  and 
coordination  of  national  supervisors  in  the  cases  of  cross  border  banks,  including  situation 
when  early  intervention  might  be  needed.  Cooperation  may  however  not  grant  always  a 
common  conclusion  and  joint  actions  in  a  crisis  situation  when  national  interests  confront 
with each other. 

To  facilitate  more  effective  supervisory  cooperation  on  these  and  other  issues  in  a  cross-
border context, CEBS has developed a Template Multilateral Cooperation and Coordination 
Agreement52  that  was  field-tested  by  eight  supervisory  colleges  in  2008.  The  guidelines, 
however, are not legally binding and supervisors are supposed to implement them on a best 
efforts basis only, thereby impeding effectiveness of the initiative. To date, currently only six 
supervisory  authorities  (CZ,  FI,  LU,  SI,  SK,  and  UK)  have  been  explicitly  mandated  with 
promoting convergence of supervisory practices53.  

The  new  European  Banking  Authority  (EBA)  will  further  foster  the  cooperation  among 
supervisors  and  ensure  the  consistent  application  of  Community  rules  including  technical 
standards developed by the Authority. The EBA will contribute to promoting the efficient and 

50 
51 
52 

53 

Article 129 (1) 
http://ec.europa.eu/internal_market/bank/docs/regcapital/crd_proposal_en.pdf  
This  agreement  lays  out  the  basis  for  the  cooperation  between  the  competent  authorities  and  the 
practical  organization  of  the  supervisory  activities  on  a  specific  group  in  going-concern  as  well  as  in 
emergency situations. These activities include, but are not necessarily limited to, the role of the college 
of supervisors, the role and responsibilities of the competent authorities, information exchange among 
supervisors, communication with a specific group, sharing and delegation of tasks, Basel 2 validation 
procedures concerning internal models for credit, market and operational risks, Supervisory Review and 
Evaluation  Process  (SREP),  and  crisis  management.  http://www.c-ebs.org/getdoc/aaafdb97-f131-4af6-
96b5-34720c1bd2ad/CEBS-2007-177-rev-4-_template-for-written-agreemen.aspx  
CEBS,  Mapping  of  supervisory  objectives  and  powers,  including  early  intervention  measures  and 
sanctioning powers, January 2009 

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consistent  functioning  of  colleges  of  supervisors  and  monitor  the  coherence  of  the  work 
across colleges. In adverse developments which potentially jeopardise the functioning of the 
financial system in the EU, the EBA will fulfil and active coordination role between national 
supervisors. In exceptional situations EBA will have the power to require national supervisors 
to jointly take specific actions. 

3.2.2.2.  Bank resolution  

There is currently no EU framework which deals with problems in a bank once it approaches 
insolvency  as  this  stretches  beyond  the  sphere  of  supervisory  competence.  Consequently 
Member States have adopted very different approaches to bank resolution, both with respect 
to  the  tools  available  and  the  conditions  determining  their  application.  The  diversity  of 
national crisis intervention arrangements and gaps in the tools provided under Member States’ 
legal  frameworks  makes  cross-border  management  of  intervention  measures  particularly 
challenging  in  an  increasingly  integrated  Internal  Market.  Any  inadequacies  in  cooperation 
arrangements, different crisis management toolkits and conditions under which tools may be 
applied, lacking financing arrangement have the potential to complicate or even compromise 
effective crisis management.  

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Driver: Lack of effective tools and powers and diverging national resolution tools & powers  

Problems: Inefficient cross-border bank crisis resolution process and suboptimal outcomes 

A  study  carried  out  on  behalf  of  the  Commission  services54  describes  the  extent  to  which 
Member States' arrangements differ: they are based on different approaches, pursue different 
goals  and  have  been  designed  to  fit  with  the  different  wider  legal  systems  of  each  country 
(e.g. provisions governing areas such as commercial and contract law, ownership law, labour 
law, netting and set-off,55 tax law, etc.). The powers to manage bank crises are split between 
different  domestic  authorities,  ranging  from  supervisory  authorities,  to  central  banks,  to 
government ministries, judicial authorities and in some cases deposit guarantee schemes, and 
the  extent  of  powers  and  the  conditions  governing  their  use  also  differ  according  to  each 
national system. 

As regards reorganisation tools, general insolvency frameworks enable the use of certain tools 
to be applied to banks. These include: 

–  mergers or acquisitions (transfer of all shares to the third party on an ongoing basis) 

–  agreements  with  creditors,  concerning  reduction  of  debt,  debt  restructuring,  debt-equity 

conversion 

–  assets sales 

–  closure of non viable part of the business 

In  certain  Member  States,  more  specific  techniques  for  bank  restructuring  may  also  be 
available:  

–  purchase-and-assumption transactions (transfer of assets and liabilities to a purchaser; the 
transfer may include all the assets and liabilities or part of the assets with certain liabilities) 

–  “Good-Bank/Bad-Bank”  separation  and  bridge  banks56  (selling  of  non-performing  loans 
and other substandard assets for collection or transferring viable assets to a newly set up 
bank) 

–  nationalisation. 

In  the  EU,  only  the  UK  Banking  Act  200957  explicitly  lists  specific  bank  restructuring 
techniques  which  can  be  applied  by  the  authorities  without  the  consent  of  the  shareholders 
under  the  Special  Resolution  Regime.  In  other  Member  States,  although  specific  tools  may 
not  be  explicitly  prescribed  in  the  legislation,  specific  restructuring  techniques  may  also  be 
available either under administrative or judicial proceedings applied to banks.  

54 

55 
56 
57 

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", 2009. 
See Glossary 
See Glossary 
http://www.opsi.gov.uk/acts/acts2009/pdf/ukpga_20090001_en.pdf 

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–  In  Italy,  for  example,  the  law  does  not  specify  which  techniques  the  appointed  special 
administrator may use, but the powers are set more broadly with the law stipulating that the 
administrator  must  promote  helpful  solutions  in  the  interest  of  depositors.  Possible  wide 
interpretations  may  include  a  merger,  acquisition  or  partial  sales  of  assets.  However  an 
important  difference  compared  to  the  UK  system  is  that  shareholders  retain  the  right  for 
final approval of any reorganisation measure. 

–  In  France,  the  provisional  administrator  nominated  by  the  banking  supervisor  may 
conclude  transactions  in  the  ordinary  course  of  business.  However  a  more  intrusive 
intervention entailing a transfer of shares without the shareholders’ authorisation, requires 
the  administrator  to  obtain  a  court  order.  Settlements  with  creditors  may  be  achieved 
through  various  types  of  proceedings  at  the  initiative  of  the  debtor58.  Specific  bank  re-
structuring techniques may only be used under an insolvency proceeding.  

–  In  Germany,  the  legal  framework  does  not  provide  a  bank  specific  administrative 
reorganisation, however under the corporate insolvency law certain techniques (e.g. asset 
sales) are possible subject to the approval of creditors. 

–  In Sweden, no formal reorganisation proceedings are possible for banks – they can only be 
reorganised  on  a  voluntary  basis  through  negotiations  with  shareholders  and  creditors. 
Under a judicial insolvency, only liquidation is possible.  

In  certain  Member  States  however,  reorganisation  of  banks  is  not  an  option  at  all,  as  only 
liquidation is possible under insolvency proceedings. 

Differences  in  the  availability  of  tools,  the  extent  of  powers  held  by  authorities  and  the 
conditions  under  which  they  can  be  exercised  is  likely  to  give  rise  to  tensions  in  a  cross-
border resolution and hamper efficient cooperation: 

–  If national authorities are equipped with different tools and powers, certain measures can 
be impossible to implement. As a basic example, if one national authority has the power to 
transfer  part  of  the  business  to  a  third  party  purchaser  by  executive  order,  while  another 
cannot  do  so,  a  rapid  and  coordinated  intervention  by  those  two  authorities  to  deal  with 
affiliated  banks  in  their  respective  jurisdictions  might  be  difficult.  If  cross  border 
reorganisation  measures  are  impossible  to  implement,  national  authorities  are  left  with 
limited choices, among which the very expensive bail-out is the most likely outcome. 

–  Different  types  of  procedure  can  slow  down  the  overall  crisis  resolution  process  for  a 
group. Where the necessary measures require judicial approval, or have to be taken with in 
the  framework  of  court-directed  insolvency  proceedings,  they  may  not  necessarily  lend 
themselves  to  a  quick  handling  of  a  crisis  situation  (e.g.  in  France).  In  other  countries, 
administrative  processes,  managed  by  the  supervisor  or  central  bank  can  implement 
measures  more  rapidly.  The  interaction  of  judicial  and  administrative  processes 
implemented in different countries can thus harm efficiency and risk loosing value during a 
prolonged resolution process. 

58 

For instance, France has three types of proceedings provided by the commercial code and applicable to 
banks,  aimed  at  a  settlement  with  creditors:  the  "ad  hoc  mandate",  the  composition  procedure  and 
safeguard procedure.  

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28 

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–  Diverging  threshold  conditions  –  which  when  reached  (in  different  points  in  time  in 
different  Member  States)  permit  a  national  resolution  authority  to  intervene  and  take 
control of a troubled institution in specified ways – may also prevent coordinated action at 
cross  border  level.  Not  all  Member  State  authorities  have  the  power  to  intervene  to 
stabilise  and  reorganise  an  ailing  bank  at  an  early  stage  before  the  formal  point  of 
insolvency (as defined in national law) is reached. The diverging conditions for prompting 
resolutions may reduce the chances of immediate actions at group level. 

Until  recently,  cross-border  banking  failures  were  extremely  rare  events,  and  consequently 
many  Member  States’  crisis  resolution  arrangements  have  never  been  tested.  However 
experiences  during  the  crisis  have  exposed  a  number  of  serious  shortcomings  in  certain 
Member States and demonstrate how damaging the absence of adequate EU arrangements can 
be.  

The  examples  (Fortis,  Lehman,  Icelandic  banks)  listed  in  the  general  problem  description 
chapter  also  show  how  diverging  tools  can  undermine  optimal  results.  Most  recently,  in 
Germany, there has been an intense debate about how to improve the existing bank resolution 
framework,  in  light  of  subprime-related  losses  faced  by  the  banking  sector  (e.g.,  at 
Landesbanken, such as Sachsen LB and WestLB, as well as at IKB and Hypo Real)59. 

Driver: Misalignment between national responsibility, accountability of authorities and cross-
border nature of the industry 

Problems: Suboptimal level of cooperation between authorities 

Despite the agreement of July 2008 on an EU wide Memorandum of Understanding ('MoU')60 
setting out cross-border crisis management arrangements, as mentioned above, recent events 
have highlighted the limits of a framework based on voluntary cooperation between national 
authorities. There has been inadequate transmission of information to other interested parties 
in other Member States and the agreement to open, full, constructive and timely cooperation 
is  weakened  by  a  legal  framework  that  militates  towards  national  approaches.  In  times  of 
crisis,  national  interest  has  proved  much  stronger  than  the  broader  general  interest.  The 
limitations of the MoU have been recognised recently in a report to the Economic and Finance 
Committee61,  "The  MoU  framework  has  not  played  a  key  operational  role  in  the 
management of the crisis. Its limited relevance in the financial crisis is partly explained by 
the  fact  that  it  was  designed  as  a  tool  primarily  aimed  at  dealing  with  crises  limited  to 
individual cross-border financial institutions and not with a global systemic crisis in mind. In 
addition, the implementation of the MoU is still ongoing, particularly regarding the voluntary 
establishment of Cross-Border Stability Groups (CBSGs) and Voluntary Specific Cooperation 
Agreements (VSCAs). 

National interest is reinforced by the EU legal framework for company and insolvency law, 
which  is  based  around  individual  legal  entities  and  the  rights  of  the  stakeholders  – 
shareholders and creditors – of those individual entities. 

59 

60 

61 

See IMF working paper "Financial Stability Frameworks and the Role of Central Banks: Lessons from 
the Crisis", P. 21, author: Walter Neir 
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). 
Report  from  the  EFC's  High  level  Working  Group:  Lessons  from  the  financial  crisis  for  European 
financial stability arrangements 

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Different  insolvency  procedures  are  also  a  significant  obstacle  to  the  ability  of,  or  the 
incentives  for,  Member  States  to  adopt  resolution  measures  in  respect  of  a  cross-border 
banking group. Any reorganisation or liquidation will necessarily be carried out in accordance 
with  national  insolvency  procedures,  and  any  coordination  must  be  based  on  the  voluntary 
cooperation  between  different  national  insolvency  authorities  and  officers.62  Under  current 
arrangements  insolvency  proceedings  are  only  effective  in  the  country  where  they  are 
initiated,  and  will  administer  only  those  assets  that  are  located  within  that  jurisdiction.63 
However, in practice 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. 

Reorganisation measures that concentrate only on one entity without taking into account the 
interests of the broader group risk the possibility of value loss for certain parts of the group. 
The value of synergy, goodwill and certain immaterial assets could decrease leaving creditors 
and shareholders with lower collateral against their claims.  

At EU level and in most of the Member States' company laws, there is no concept of 'group 
interest’  which  might  otherwise  facilitate  the  resolution  of  cross-border  banking  groups. 
Directors of a company are neither responsible to other group entities, nor to the group as a 
whole.  Indeed,  should  they  act  to  promote  the  interests  of  the  group  in  a  way  that  is 
detrimental to their own company, they would likely be in breach of their duties and at risk of 
liability under national company law or even civil or criminal liability under national law. As 
the legal basis of group treatment is missing, it is very problematic to handle banking groups 
as a single economic entity during a resolution. Such limitations might undermine a universal 
approach which has the potential to reach a more optimal result at EU level. 

The Fortis case provided a good example how the lack of cooperation structures can result in 
a suboptimal solution for both Member States. The failure of joint reorganisation resulted in 
separation of the group along geographical borders (ignoring coherence of business lines) and 
costly bailout by the governments involved. 

Driver: Lack of adequate arrangements for financing a cross border resolution 

Problems:  Suboptimal  level  of  cooperation  between  authorities  and  Inefficient  cross  border 
bank resolutions process and suboptimal outcomes. 

The  current  financial  crisis  is  of  such  severity  that  Member  States  have  needed  to  take 
exceptional  measures,  such  as  capital  injections  and  guarantees  of  banks'  debt,  to  protect 
financial  stability  and  to  combat  the  economic  downturn.64  Such  measures  fall  outside  the 
scope  of  the  Commission's  Communication,  and  are  already  the  subject  of  Commission 

62 

63 

64 

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.  
This is subject to the exception under Directive 2001/24/EC of branch assets that are located in another 
Member State. 
Such bank re-structuring measures are considered in the context of EU rules on state aid.  

EN 

30 

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communications on measures taken in relation to financial institutions, on recapitalisation, on 
the treatment of impaired assets and on rescue and restructuring aid. The Communication on 
bank resolution explores the contours of a resolution regime that would ensure that authorities 
have the appropriate tools for intervening quickly to stabilise and restructure a failing cross-
border  bank,  with  the  objective  of  minimising  the  need  for  States  to  resort  to  the  kind  of 
exceptional measures that have been used in this crisis.  

The  provision  of  funding  in  a  resolution  may  come  from  intra-group,  external  or  public 
sources. Financing a resolution for a cross-border bank raises particular challenges compared 
with  domestic  banks,  and  the  first  real  experiences  of  cross-border  bank  failures  have 
confirmed serious shortcomings in this area. 

Cross-border intra-group financing may be an alternative to public funding, but its potential 
is  currently  limited  by  the  obstacles  to  intra-group  asset  transfer.  As  insolvency  legislations 
and procedures are national, domestic authorities have a legitimate interest, and are likely to 
be motivated by a political imperative, 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. At the same time however, it also limits feasibility of asset transfer between 
group  entities  as  a  means  of  addressing  liquidity  problems  within  other  parts  of  the  group, 
even if such action would be in the interests of the group as a whole. 

Most Member States' legislations do not provide incentives for private investors to finance 
an ailing bank under resolution. Private financing sources may not have adequate incentives 
and  guarantees  in  insolvency  proceedings  (no  priority  in  the  ranking  of  claims  in  many 
Member States, or possibility for collateral), which may consequently discourage risk-taking. 
Consideration  could  be  given  whether  and  how  incentives  should  be  in  place  for  private 
financing during such proceedings. 

In certain Member States, funds of the deposit guarantee scheme can be used not only to pay 
out  depositors  when  a  bank  fails  but  also  to  finance  reorganisation  of  an  ailing  bank.  Such 
transactions  may  be  rational  if  the  cost  of  financing  -  taking  into  account  the  probability  of 
successful reorganisation - is smaller for the DGS than the total payout to all depositors of the 
same bank in the event of bankruptcy. Only a few Member States (e.g. Spain, Italy and more 
recently UK) currently allow this possibility. Lack of coherence between national DGS roles 
may further impede coordinated actions on a cross border basis.  

In terms of public funding, while the general interest may entail maintaining different parts 
of  a  financial  group  together  as  a  coherent  whole,  action  by  national  authorities,  who  are 
accountable  to  their  own  national  taxpayers,  may  be  dictated  by  narrower  domestic 
considerations.  In  the  absence  of  burden  sharing  arrangements  and  aligned  incentives  to 
cooperate, the likely outcome to a cross-border intervention will be a series of uncoordinated 
and potentially competitive actions taken by authorities with a view to minimising losses for 
their own taxpayers, but with no – or at best limited – regard to the consequences for citizens 
outside their jurisdiction. This may raise the overall cost of a resolution, and limit the possible 
spectrum of stabilisation measures involving public financing as a result of ring fencing and 
national solutions. 

Driver: Legal obstacles to effective and efficient bank resolution 

Problems:  Lack  of  legal  certainty  and  Inefficient  cross  border  bank  resolutions  process  and 
suboptimal outcomes. 

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31 

   EN 

 
The current crisis has shown that legislation does not always strike the right balance between 
achieving  objectives  such  as  financial  stability  and  adequate  safeguarding  of  different 
stakeholders'  rights.  This  issue  has  given  rise  to  substantial  legal  uncertainty  for  many 
stakeholders  in  the  recent  crisis  and  has  the  potential  to  cause  further  uncertainties  in  the 
future. 

There are 2 major conflicts of interest: 

1. 

2. 

Shareholders' versus authorities' (public) interest 

Legal entity's versus banking group's interest 

1. Shareholders' versus authorities' (public) interest 

Banks  are  subject  to  general  company  law  rules  and  in  particular  certain  rules  aimed  at  the 
protection  of  the  company's  shareholders.  At  European  level,  there  are  mandatory 
requirements on the shareholders' approval of any increase or reduction of capital as well as 
rules  on  shareholders'  pre-emption  rights  in  the  Second  Company  Law  Directive65. 
Furthermore,  the  Shareholder  Rights  Directive66  -  which  had  to  be  transposed  by  Member 
States by 3 August 2009 - establishes requirements for general meetings of shareholders and 
in  particular  the  convocation  periods  and  the  form  of  the  convocation.  As  regards  re-
organisation  measures,  the  general  meeting  of  shareholders  has  a  decision  making  role 
according to the Third67 and the Tenth68 Company Law Directives if mergers are concerned, 
and in the Sixth69 Company law Directive in the case of divisions. These rules on mergers and 
divisions need not however apply in cases where the company or companies are the subject of 
bankruptcy  proceedings,  proceedings  relating  to  the  winding-up  of  insolvent  companies, 
judicial  arrangements,  compositions  and  analogous  proceedings.  Finally,  there  are  also 
requirements at national level in a number of Member States, such as the requirement to have 
any material transaction approved by the general meeting. 

The present crisis has shown that interventions by public authorities to ailing banks need to be 
implemented in a very short period of time (within 24-72 hours). If interventions need to be 
delayed  due  to  constraints  in  the  legislation  (e.g.  need  to  obtain  shareholders’  approval  at  a 
general meeting) there is a risk that banks might already fail before the necessary procedures 
have  been  complied  with70.  Banks,  and  especially  large  systematically  important  banks,  are 
susceptible  to  bank-runs,  and  the  in  view  of  the  degree  of  interconnectedness  of  financial 
markets, the knock-on effects could lead to the collapse of other institutions and hence to a 

65 

66 
67 

68 

69 

70 

Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for 
the  protection  of  the  interests  of  members  and  others,  are  required  by  Member  States  of  companies 
within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of 
public  limited  liability  companies  and  the  maintenance  and  alteration  of  their  capital,  with  a  view  to 
making such safeguards equivalent  
Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies 
Third  Council  Directive  78/855/EEC  of  9  October  1978  based  on  Article  54  (3)  (g)  of  the  Treaty 
concerning mergers of public limited liability companies 
Directive  2005/56/EC  of  the  European  Parliament  and  of  the  Council  of  26  October  2005  on  cross-
border mergers of limited liability companies 
Sixth Council Directive 82/891/EEC of 17 December 1982 based on Article 54 (3) (g) of the Treaty, 
concerning the division of public limited liability companies  
Convocation of the general meeting of a company shall be issued not later than on the 21st day before 
the day of the meeting 

EN 

32 

   EN 

 
                                                 
general  banking  crisis.  Public  authorities  and  many  analysts71  argue  that  due  to  the  special 
nature and high importance of the banking sector in the broader economy, financial stability 
must  take  precedence  over  shareholders'  rights  in  such  situations72.  There  needs  to  be  a 
balance found between shareholders' right and the common interest of financial stability. 

The Fortis case has demonstrated that resolution-measures of authorities can be attacked by 
shareholders  through  the  courts  and  in  the  absence  of  a  clear  legal  framework  they  can  be 
ruled retroactively void. 

2. Legal entity's versus banking group's interest 

In a crisis situation, all members of a banking group might not have identical interests. While 
certain subsidiaries  might  be financially strong, the parent may  be  faced  with difficulties or 
vice-versa.  Although  the  economic  rationale  could  justify  a  group-wide  solution  for  the 
problems, legal provisions can block such outcomes. 

Reorganisation measures under insolvency law only cater for national legal  entities. This 
means that the national conditions for reorganisation would have to be met for each relevant 
group  entity,  separate  proceedings  would  need  to  be  opened  and  managed  and  that  the 
relevant authorities in Member States where legal entities of the group are incorporated would 
concentrate solely on that respective entity. 

The  Winding-up  and  Reorganisation  Directive  introduces  the  universality  principle73  in 
insolvency for the EU but it only governs credit institutions with branches in other Member 
States,  and  not  subsidiaries.  Furthermore,  the  Directive  never  intended  to  harmonise 
insolvency proceedings, as national laws were at the time believed to be sufficient. However 
the lack of insolvency legislation dealing with groups with subsidiaries limits the possibilities 
to reorganise a cross-border banking group, in a market which has since become increasingly 
integrated and consolidated. 

Driver: Barriers to maintaining continuity of banking services 

Problems: Interruption of continuous banking services 

To maintain confidence in the banking and financial system, customers of banks, especially 
depositors  need  to  be  assured  that  they  can  have  uninterrupted  access  to  banking  services, 
especially  to  their  deposits.  Although  Deposit  Guarantee  Schemes,  which  guarantee  re-
imbursement of deposits up to a certain limit, are in place in all Member States, basic banking 
services,  such  as  bill  payments,  credit  cards,  transfers  are  equally  important  for  (especially 
retail) customers. Similarly a reorganisation or liquidation of a bank may cause disruption of 
services  to  other  market  participants,  provoking  loss  of  confidence,  bank  runs  and  hence 
instability  in  the  financial  system.  The  new  Banking  Act  in  the  UK,  which  introduced  a 

71 

72 

73 

E.g.: An Overview of the Legal, Institutional, and Regulatory Framework for Bank Insolvency, Staff of 
IMF and World Bank, April 17, 2009. 
If  the  bank  fails  and  undergo  an  insolvency  proceeding,  shareholders  would  immediately  loose  their 
rights  in  any  case.  In  a  situation  when  banks  need  public  intervention,  they  are  technically  insolvent 
(imminent insolvency). 
See Glossary 

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33 

   EN 

 
                                                 
Special  Resolution  Regime,  has  explicitly  addressed  this  issue  by  setting  the  continuity  of 
banking services as an objective74 in a bank resolution process. 

Present  arrangements,  legislations,  and  resolution  systems  do  not  necessarily  enable 
authorities to maintain basic banking services when a bank reaches the point of insolvency75. 
Banks may be forced to stop providing services and make deposits unavailable if insolvency 
proceedings are initiated against them. The moratorium, while an important tool at the initial 
stages  of  a  bank  insolvency  (by  providing  the  re-organising  authority  sufficient  time  and 
opportunities  to  take  necessary  measures),  may  explicitly  prohibit  customers  to  access  their 
deposits, or make payments. Consequently not only deposits will be blocked for private and 
corporate customers but also other services like direct debit, standing orders, payments, credit 
cards  would  stop.  This  may  incur  further  problems  for  customers  e.g.  utilities  may  be 
switched off.  

In  addition  to  the  above  problems,  certain  bank  resolution  tools  (e.g.  bridge  banks)  would 
need to be supplemented by other measures to ensure the continuity of banking services. In 
the event of the transfer of business to a bridge bank or a partial sale to a private sector entity, 
the  residual  company  would  need  to  provide  support  necessary  to  ensure  the  continuity  of 
banking services offered by the bridge bank or purchaser. Such support might be necessary, 
for  example,  where  certain  systems,  contracts  or  services  necessary  to  the  operation  of  a 
bridge bank have not been transferred from the residual company. This however may not be 
possible  in  all  Member  States  if  the  residual  company  is  placed  under  an  insolvency 
procedure. 

Continuity of banking services may also be jeopardised by the actions of third parties should 
they  decide  to  terminate  contracts  under  certain  circumstances,  for  example  where  the 
contracts are transferred to a bridge bank, before the actions of the resolution authority have 
been completed.  

3.2.3.  Baseline scenario 

The baseline scenario would be one in which the EU would continue to rely on the existing 
narrow (or non existing) EU legislation and widespread national legislations and arrangement 
in crisis situation of cross border banks.  

In the case of early intervention by supervisors, this would mean that supervisors in different 
Member  States  would  continue  to  have  different  powers  and  intervention  tools  against 
different  members  of  the  same  cross  border  banks  that  breach  certain  regulation  or  become 
financially  weaker.  They  would  intervene  at  different  times,  under  different  conditions  and 
trigger mechanisms and implement different measures. This would probably not ensure that 
problems of cross border banks could be effectively stopped before they became more serious 
and started affecting other members of the group located in different Member States. 

When cross border banks approach insolvency, different national authorities would continue 
to focus their resolution activities only on the respective subsidiary or mother of the banking 

74 
75 

Article 4 (9) of Banking Act 2009 
A recent study by the IMF on bank insolvency (“An overview of the legal, institutional, and regulatory 
framework for bank insolvency”, April 2009) argues that the aim of a bank restructuring should be to 
secure  the  continuation  of  the  bank’s  business  in  a  way  that  minimizes  disruptions  to  the  financial 
system and limits costs to depositors, other creditors, and taxpayers. 

EN 

34 

   EN 

 
                                                 
group that are located in their territory. Conflicting interests would be likely to impede a more 
optimal  reorganisation  solutions,  optimised  at  the  group  level,  taking  into  consideration  the 
interest  of  all  Member  States.  National  solutions  would  probably  be  more  costly  for  the 
citizens and taxpayers of the EU than if the group were reorganised at EU level. 

At the same time we assume that proposals of the Commission aiming at improving the macro 
warning systems would create an improved environment. The proposed European System of 
Financial Supervisors (ESFS), and the new European Supervisory Authorities (ESAs), would 
help cooperation of supervisors and better functioning of Colleges. The ESAs should fulfil an 
active  coordination  role  between  national  supervisory  authorities,  in  particular  in  case  of 
adverse developments which potentially jeopardise the orderly functioning and integrity of the 
financial system in the EU. However, in some emergency situations, coordination may not be 
sufficient,  notably  when  national  supervisors  alone  lack  the  tools  to  respond  rapidly  to  an 
emerging cross-border crisis. The ESAs should therefore, in such exceptional circumstances, 
have  the  power  to  require  national  supervisors  to  jointly  take  specific  action.  The 
determination  of  a  cross-border  emergency  situation  involves  a  degree  of  appreciation,  and 
should  therefore  be  left  to  the  European  Commission.  Moreover,  given  the  fact  that  no 
decision by the Authorities should impinge on the fiscal responsibilities of the Member states, 
the Authorities cannot make any decisions related to resolution processes, as this will almost 
always entail the possibility that public funds are used. 

EN 

35 

   EN 

 
3.2.4.  Problem tree 

PROBLEM 
DRIVERS 

Misalignment between 
national accountability and 
mandate of supervisors and 
cross-border nature of the 
industry 

Lack of effective early 
intervention triggers & tools 

Diverging national early 
intervention triggers & tools  

Misalignment b/w national 
responsibility and interest of 
authorities and cross-border 
nature of the industry 

Lack of adequate 
arrangements for financing 
cross border resolution 

Lack of effective resolution 
tools & powers 

Diverging national 
resolution tools & powers 

Legal obstacles (insolvency 
and company law) to 
effective and efficient bank 
l ti

Barriers to maintaining 
continuity of banking 
services 

E
A
R
L
Y
-
I
N
T
E
R
V
E
N
T
I
O
N 

B
A
N
K 

R
E
S
O
L
U
T
I
O
N 

EN 

PROBLEMS

Increased risks to 
financial stability 

Reduced societal 
welfare (shareholders, 
creditors, customers, 

Implications on int'l 
competitiveness of EU 
banking industry

   EN 

Sub-optimal level of 
supervisory cooperation 
impairing the effectiveness 
of cross-border crisis 
prevention and 
counterproductive ring 
fencing of assets

Sub-optimal level of crisis 
situation prevention for 
cross-border banks 

Suboptimal level of 
cooperation between 
authorities 

Inefficient cross-border 
bank crisis resolution 
process and suboptimal 
outcomes 

Lack of legal certainty 

Interruption of continuous 
banking services 

36 

 
 
 
 
 
 
 
3.3. 

The EU's right to act and justification  

Action  at  European  level  is  required  in  this  field  due  to  the  high  integration  of  the  banking 
market  within  the  EU  (see  section  2.1).  However,  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, Member State authorities cannot be sure that critical problems 
arising  in  a  cross-border  banking  group  can  be  solved  fairly,  effectively  and  expediently 
through robust cooperation arrangements. Unless these flaws in the framework are adequately 
addressed,  national  authorities  will  be  left  in  practice  with  only  two  alternatives:  they  can 
either  take  the  politically  unpopular  option  of  using  public  money  to  bail  out  banks  or  they 
can decide to ring fence assets in a cross-border bank and apply national resolution tools at 
each  entity  level  –  which  may  drive  up  the  overall  cost  of  the  resolution.  Limited  options 
available to authorities would increase the risk of moral hazard and generate an expectation 
that large banks would be bailed out in the event of problems. 

The  financial  crisis  has  underlined  the  importance  of  strengthening  cross-border  crisis 
management  arrangements.  It  is  a  matter  of  priority  to  address  these  shortcomings  which 
undermine  the  Internal  Market,  by  considering  the  introduction  of  new  crisis  management 
arrangements and tools at EU level, as well as the changes that may be needed to the broader 
legal framework in order to underpin cross-border cooperative solutions. 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).  

3.4. 

Objectives 

Viewed from an EU perspective, it would seem that the general objectives 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 while maintaining a level playing field. 

Within the context of early intervention, the following specific objectives could be: 

•  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. 

The  table  below  links  the  problem  drivers  for  early  intervention  with  a  possible  set  of 
operational and specific objectives in this area. 

EN 

37 

   EN 

 
Table 2 Problem drivers and possible objectives for early intervention: 

Problem drivers 

Specific objectives 

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

Efficient 
cooperation of 
supervisors 

Misalignment  between  national  accountability  and  mandate  of 
supervisors and cross-border nature of the industry 

Lack of effective early intervention triggers & tools 

Diverging national early intervention triggers & tools 

v 

v 

v 

v 

v 

v 

For bank resolution specific objectives could be: 

•  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. 

The  table  below  links  the  problem  drivers  for  bank  resolution  with  a  possible  set  of 
operational and specific objectives in this area. 

Table 3 Problem drivers and possible objectives for bank resolution: 

Specific objectives 

Develop tools and 
triggers to ensure 
reorganisation and 
resolution of cross 
border banks in a timely 
and robust manner 

Efficient 
cooperation 
of resolution 
authorities 

Legal 
certainty 

Continuity 
of banking 
services 

v 

v 

v 

v 

v 

v 

38 

v 

v 

v 

v 

v 

v 

v 

v 

v 

   EN 

Problem drivers  

Misalignment 
national 
responsibility of authorities and cross-
border nature of the industry 

b/w 

Lack  of  adequate  arrangements  for 
financing cross border resolution 

Lack  of  effective  resolution  tools  & 
powers 

Diverging  national  resolution  tools  & 
powers 

Legal  obstacles 
efficient bank resolution 

to  effective  and 

Barriers  to  maintaining  continuity  of 
banking services 

EN 

 
 
 
 
 
 
 
 
 
 
4. 

POLICY OPTIONS AND ANALYSIS OF IMPACTS 

For the purposes of this impact assessment, the analysis of options is restricted at this stage to 
a general assessment about the introduction of a new framework and the alternatives. Some 
areas  which  could  be  dealt  with  under  a  new  framework  are  also  assessed  -  but  without 
favouring  or  proposing  any  concrete  measures.  Indeed  policy  options  which  are  considered 
should not be interpreted as a closed list of options, 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.  

4.1. 

General Considerations about the need for a new bank resolution framework  

4.1.1.  Baseline Scenario (no changes to current bank resolution arrangements) 

Under this scenario, no new framework for bank resolution is introduced at EU level. Crisis 
management remains a national competence, combined with a limited set of arrangements at 
EU  level  –  in  particular  as  agreed  in  the  2008  Memorandum  of  Understanding  on  Cross-
border Stability, and supplemented by recent changes to 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 fundamental problems resulting from misalignment of responsibilities and accountability 
between  different  authorities,  differences  between  national  tools  and  powers  and  conditions 
determining their use, absence of cross-border financing arrangements and the broader legal 
obstacles  which  hamper  cross-border  cooperation  are  not  addressed.  Recent  experiences 
during  the  crisis  have  provided  clear  evidence  that  such  a  situation  is  not  sustainable,  and 
have  resulted  in  very  considerable  additional  costs  for  the  economy  (see  section  2.2.3  for  a 
quantitative indication of costs). 

4.1.2. 

Introduction of an EU bank resolution framework 

Under this scenario, an EU bank resolution framework is introduced which seeks to achieve 
the objectives set out in Section 3. The details of what such a framework might contain are 
explained  in  the  Communication  and  the  specific  options  are  assessed  in  more  detail  in  the 
following  sections.  The  framework  would  need  to  be  designed  to  address  the  problems 
identified in section 2, and to fulfil the key objectives for a bank resolution process. However 
putting  in  place  of  such  a  framework  would  entail  considerable  challenges  –  especially  in 
those areas where there is currently no harmonisation at EU level.  

As to the feasibility of such an approach, it needs to be recognised that certain aspects of such 
a  framework  may  entail  fundamental  changes  to  existing  approaches  to  bank  resolution  at 
national level. On the other hand, changes to national systems would be kept to the minimum 
absolutely necessary to ensure coherent application at EU level, and the introduction of new 
tools  need  not  necessarily  require  the  phasing  out  of  existing  tools.  National  approaches  to 
resolution  could  be  retained  to  deal  with  purely  domestic  banking  crises.  The  framework 
could be designed in such a way as to ensure complementarity between existing rules and the 
new  tools,  although  some  changes  may  be  necessary  in  order  to  eliminate  potential  areas 
where conflicts would be likely to occur. Furthermore the depth and seriousness of the current 
crisis has already prompted a number of Member States to embark on significant reforms of 
their current systems, and early consultations with Member States have suggested there would 
be strong support to develop common approaches at EU level.  

EN 

39 

   EN 

 
With regard to the level of ambition achievable for such a framework, much will depend on 
the outcome of consultations with Member States – which is the reason that the Commission's 
position  remains  open  at  this  stage.  This  is  especially  the  case  with  respect  to  options  to 
address differences between bank insolvency laws, and the choice of tools for bank resolution.  

Introduction of a bank resolution framework would affect the rights of certain stakeholders – 
in particular those of creditors and shareholders. In this respect, there is an important debate 
which needs to be held about striking the correct balance between those rights and the broader 
societal  interest.  The  Communication  recognises  this  and  considers  the  need  for  the 
introduction  of  appropriate  safeguards  whenever  bank  resolution  measures  impact  on 
stakeholders' rights. 

4.1.3. 

Scaling back cross-border banking groups in order to manage crises more efficiently 
on a national basis 

An  alternative  and  opposite  possibility  to  the  introduction  of  an  EU  bank  resolution 
framework would be to recognise the limitations of the existing arrangements (as described in 
the baseline scenario) and to require changes to cross-border banking structures in such a way 
that  they  no  longer  posed  any  threat  to  an  efficient  resolution  process.  Such  an  approach 
would have the advantage of resolving any uncertainties about crisis resolution which would 
remain  a  purely  national  competence  without  the  need  for  new  cross-border  cooperation 
arrangements. During a crisis resolution process, assets would be ring fenced, banks would be 
re-organised  along  national  lines  and  winding  up  would  take  place  in  accordance  with 
national insolvency law. 

However, for the resolution process to remain truly national, it would be necessary to require 
banking  structures  which  ensured that  all  legal  entities  within  a  cross-border  banking  group 
could continue to operate on a stand-alone basis – in the event of failure of other parts of the 
group. This approach would ignore the fact that cross-border banking groups, for reasons of 
efficiency,  tend  to  centralise  certain  functions  (liquidity  management,  IT,  etc.)  in  specific 
parts  of  the  group.  In  a  modern  global  banking  environment,  many  of  the  assets  may  be 
located in different jurisdictions and thus subject to different insolvency proceedings – some 
form  of  cooperation  between  insolvency/resolution  authorities  could  not  be  avoided. 
Furthermore,  applying  restrictions  to  cross-border  provision  of  services  or  establishment 
would run counter to the basic  principles in the EU Treaty which guarantee such freedoms. 
Any  such  approach  would  necessarily  entail  a  modification  of  the  Treaty  –  in  a  way  which 
would  fundamentally  undermine  the  Internal  Market.  Finally,  insistence  on  autonomous 
national  banking  structures  would  obviate  economies  of  scale,  drive  up  costs  of  banking 
services and place EU banks at a competitive disadvantage in a global market.  

EN 

40 

   EN 

 
Table 4: Summary of impacts on stakeholder groups of the introduction of a new crisis management framework 
                           Key 
           Stakeholders 

Banking Industry 

Creditors 

Shareholders 

Bank Employees 

Depositors 

Bank customers 

Taxpayers 

Supervisors/Crisis 
management 
authorities 

Policy options 

Baseline  

Introduction of an 
EU bank resolution 
framework 

+/- 
Expectation that in 
the absence of 
alternatives, banks 
will be saved, but 
risks to financial 
stability 

- 
Absence of clear 
incentives to fully 
cooperate and 
coordinate 
combined with 
lack of harmonised 
tools 

+/- 
Improved financial 
stability, but no 
bank would be  too 
big to fail and 
resolution 
outcomes could 
entail radical 
changes in 
operation and 
structure. 

+ 
Improved 
incentives and 
ability to 
cooperate. Better 
chances for 
optimal solutions 
(all interests taken 
into consideration 
and solutions 
optimised at EU 
level) 

-  
Legal uncertainty 

+ 
Clearer framework 
would improve 
prospects of equal 
treatment across 
the group, with 
better prospects for 
maintenance of 
continuous 
operation 

Scaling back of 
cross border 
groups 

- 
Damage to cross-
border bank 
business models 
and to international 
competitiveness, 
higher cost, lower 
synergies, lower 
profitability. 

+ 
Less need to 
cooperate, reduced 
risk of conflicts, 
clearer 
responsibilities. 

+/- 
More certainty 
about treatment, 
but possible 
unequal treatment 
across the group 

Legend: + overall positive effect, - overall negative effect, +/- overall mixed effect 

EN 

+/- 
Continued 
protection of rights 
under EU and 
national legislation, 
but uncertainty 
about how 
resolution measures 
will be applied 
+/- 
Potential loss of 
protection under 
EU and national 
laws, but greater 
certainty about 
when and how 
authorities are 
allowed to act, 
backed, when 
necessary, by 
safeguards and 
compensation 
mechanisms 

-/+ 
Less profitable 
firms as a result of 
less efficient 
business models, 
but greater certainty 
about how 
resolution would 
apply at national 
level,  more adapted 
to national 
circumstances 

41 

- 
Uncertainty about 
how a banking 
group would be 
resolved and how it 
might impact 
employees  

- 
Uncertainty 
about how cross-
border deposits 
would be treated 
in event of bank 
failure 

-  
Uncertainty around 
the continuity of 
the banking 
operation in a 
crisis situation. 

- 
Absence of clear 
framework tailored 
for ailing banks 
will result in 
increased fiscal 
burdens 

+/- 
Ability of 
authorities to 
cooperate and 
manage problems 
in a group would 
increase chances 
of effective early 
intervention but 
enhancing the 
option to  allow a 
bank to fail may 
result in job losses. 

+/- 
More clarity that 
resolution will take 
place at national 
level – but 
possible negative 
impacts on cross-
border business 
models and 
competitiveness 

+ 
More certainty 
about effective 
cross-border 
handling and 
focus on 
continuity of 
services should 
allow depositors 
to benefit from 
cross-border 
competition 

+/- 
More clarity 
about deposit 
protection, but 
fewer cross-
border 
opportunities 
and   higher 
prices for 
services due to 
reduced 
competition  

+ 
Maintenance of 
continuous 
banking services. 

+  
A new framework 
to enable effective 
crisis management 
should reduce 
fiscal burdens 

-  
Limited choices for 
banking products 
and potentially 
higher pricing due 
to lower 
competition 

+/-  
National solutions 
maybe suboptimal 
at EU level, certain 
countries may bear 
higher fiscal cost.   
More certainty 
would reduce risk 
that national 
taxpayers might 
contribute to 
resolution in other 
Member States  

EN 

 
  
 
 
4.2. 

Early Intervention 

In the following section, options addressing problems at early intervention are analysed. They 
are separated according to the following areas: policies to address the problem of differences 
in  triggers,  policies  to  address  the  problem  of  differences  in  tools  and  policies  to  address 
misalignment. 

4.2.1.  Possible policies to address early intervention conditions, triggers 

4.2.1.1.  Baseline scenario (no changes) 

Recent  events  have  shown  that  the  soundness  of  individual  firms  has  been  too  often 
supervised in isolation with little focus on the degree of interdependence within the financial 
system.  In  order  to  ensure  a  more  timely  detection  and  prevention  of  risks  to  financial 
stability, the Commission recently adopted a regulation on establishing a European Systemic 
Risk Board (ESRB)76. The ESRB will enhance the effectiveness of early warning mechanisms 
by  improving  interaction  between  micro-  and  macro-level  prudential  analyses.  The 
participation of the European Banking Authority and national supervisors in the work of the 
ESRB  will  ensure  that  assessment  of  macro-prudential  risks  is  based  on  complete  and 
accurate information about developments in the financial system. At the same time, based on 
its  analysis,  the  ESRB  will  be  able  to  issue  risk  warnings  and  recommendations  which  will 
have a specified timeline for a policy response and could be addressed to, among others, the 
EBA and national supervisors.  Were the addressees of such warnings and recommendations 
to  choose  not  to  act,  reasons  for  inaction  would  have  to  be  explained  to  the  ESRB.  Such 
mechanism should partially contribute to a more effective identification of potential problems 
at individual institutions.  

However  at  micro  level,  national  supervisors  of  the  same  banking  group  would  continue  to 
use different indicators for detecting problems in banks. They would continue to assess these 
indicators  with  diverging  methodology  and  assessment  process.  Different  understanding  of 
the  problem  would  prompt  diverging  actions  at  different  times,  which  could  weaken  the 
effectiveness of measures against a bank with liquidity or solvency problems. The proposed 
European Banking Authority may help in developing common indicators and understanding. 

4.2.1.2.  Common assessment of common early warning indicators 

Under this option, a harmonised minimum set of early warning indicators could be developed 
in  the  EU  taking  into  account  the  existing  methodologies  of  national  supervisors.  However, 
not only the indicators but also their assessment could be harmonised. Common assessment of 
the situations could be developed to ensure coordinated actions that are optimal for the cross 
border group as a whole.77 The decision on which would be the necessary measures to correct 

76 

77 

Proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council  on  Community  macro 
prudential  oversight  of  the  financial  system  and  establishing  a  European  Systemic  Risk  Board,  COM 
(2009) 499 
In support of a joint assessment framework, the Commission is planning to include new changes into 
the CRD which would introduce new complementary prudential measures designed to capture at least 

EN 

42 

   EN 

 
 
 
                                                 
the  situation  at  a  bank  would  be  however  left  to  the  discretion  of  the  national  supervisors 
concerned. 

Impacts: 

Compared to the baseline scenario this option would ensure that different supervisors of the 
same cross border banking group would use the same methodology when analysing problems 
in the operation. This would facilitate cooperation among them as the common indicators and 
their  common  understanding  would  substantially  ease  the  communication  and  the  joint 
conclusion making. Common practices would also help banks as they would face the same (or 
at  least  very  similar)  of  indicators  that  different  supervisors  in  different  countries  would 
follow. This would contribute to the stability of the system and could help towards ensuring 
more  optimal  solutions  at  EU  (or  group)  level  for  all  stakeholders  if  banking  groups  need 
corrective actions from supervisors.  

4.2.1.3.  Automatic, hard triggers 

It is possible not only to harmonise indicators and assessments but also to oblige authorities to 
act if certain thresholds of indicators are hit (hard triggers). Mostly quantitative indicators can 
be applied for implementing such hard triggers based on solvency (such as a capital adequacy 
or leverage) or liquidity indicators. It is also possible to tie supervisory actions to thresholds 
i.e. obliging supervisors to implement predefined measures without any discretion regarding 
the  concrete  situation  and  specificity  of  the  banking  group.  In  the  US  under  the  Prompt 
Corrective  Action  (PCA)  framework,  critically  undercapitalised  banks  (having  a  tangible 
equity to total assets ratio equal to or less than 2 percent and those banks that do not have an 
adequate  plan  to  restore  capital  to  the  required  levels)  are  prohibited  from  continuing 
activities, and banks must be placed under receivership within 90 days. 

Impacts: 

Compared to the baseline scenario the use of hard triggers would bring all the benefits as the 
previous  option  and  would  create  and  even  clearer  situation  for  all  stakeholders.  The  same 
hard  triggers  applied  in  all  Member  States  would  be  an  effective  means  of  synchronising 
actions  of  supervisors  and  facilitate  cooperation.  Conditions  and  possible  actions  of 
supervisors  would  be  known  ex-ante  to  the  whole  industry,  greatly  decreasing  the 
uncertainties around intervention of supervisors and thus compliance cost. 

At the same time, advance knowledge of the basis for supervisory intervention could provide 
opportunities  for  regulatory  arbitrage  on  the  part  of  banks.  Knowledge  that  the  supervisor 
focuses  on  certain  indicators,  might  lead  to  banks  manipulating  their  balance  sheets  to  hide 
deviations. Moreover, hard indicators / benchmark ratios could reduce supervisors’ incentives 
to  maintain  comprehensive  oversight  of  financial  institutions,  thereby  allowing  potential 
problems elsewhere to escape detection. 

Moreover,  it  is  very  difficult  to  identify  single  indicators  that  would  be  adequate  to  detect 
every  possible  technical  problem  and/or  incorporate  all  the  possible  relevant  data  and 
information  for  a  proper  supervisory  assessment.  As  each  case  is  different,  indicators  that 

the effects of leverage and liquidity risks. These harmonised measures would usefully supplement the 
indicators  that  form  part  of  the  'early  warning  system'  that  will  facilitate  the  joint  assessment  of 
emergency situations. 

EN 

43 

   EN 

 
                                                                                                                                                         
efficiently  detect  problems  in  a  specific  case  can  be  also  different78.  A  single  set  of  hard 
triggers  could  thus  prove  to  be  a  blunt  instrument  for  use  in  complex  and  developing 
situations. 

If not only the need for actions is tied to quantitative levels, but also the measures/tools to be 
applied by supervisors are pre-defined, the certainty of intervention is even higher.  

While  this  would  protect  supervisors  from  possible  litigation  by  stakeholders  who  are 
negatively affected by the interventions (where that is possible under national law) and also 
bring certainty for ailing banks that can be fully aware of the consequences of their incorrect 
operation,  supervisors  would  on  the  other  hand  loose  the  flexibility  for  their  interventions, 
increasing  the  risk  that  problems  are  inappropriately  handled  and  hence  resulting  in 
suboptimal outcomes.  

4.2.2.  Possible policies to address early intervention tools  

4.2.2.1.  Baseline scenario (no changes) 

If no action is taken, national authorities will continue to have diverging tools and powers to 
correct irregularities at different members of the same cross border banking group. This could 
lead  to  situations  where  certain  parts  of  the  same  banking  group  could  not  participate  in  a 
coordinated stabilisation because banking supervisors of those Member States do not have the 
powers to implement measures. This would risk suboptimal outcomes for certain stakeholders 
in the EU. 

The  continued  uncertainty  around  the  possibility  to  transfer  asset  within  a  cross  border 
banking group would continue to impede optimal allocation of liquidity in a crisis situation.  

4.2.2.2.  Expanded minimum set of early intervention tools  

The list of minimum supervisory tools and powers to correct the operation of a banking group 
provided  for  by  Article  136  of  the  CRD  could  be  further  expanded.  Based  on  existing 
practices  of  national  supervisors,  it  is  possible  to  expand  the  minimum  set  of  supervisory 
tools. It is important for an effective intervention at group level that all European supervisors 
have  appropriate  enforcement  actions  at  their  disposal.  The  aim  would  not  be  to  equip 
supervisors with exactly the same tools, but rather that tools available for supervisors should 
deliver  the  same  result.  In  addition  to  the  minimum  set  of  harmonised  tools  and  powers, 
national supervisors may have additional tools not necessarily available for everybody. 

In particular, the list of supervisory tools in Article 136 does not include the power to require 
the  submission  of  a  restoration  plan  for  a  group.  A  number  of  national  supervisors  already 
have the power to require the individual entities that they  supervise to develop such a plan, 
but there is no clear framework to do this at the level of a cross-border group. 

It  may  be  also  be  useful  to  explore  whether  large  banks  should  be  obliged  to  prepare  in 
advance and submit to authorities plans which detail the arrangements for winding down the 
institution should it fail. Such plans could in particular look at cross-border dependencies of 

78 

The current crisis drew attention to the importance of liquidity indicators since capital ratios were not 
informative this time. In the future, it is not evident which indicators will have larger importance. 

EN 

44 

   EN 

 
                                                 
the  institution,  the  implications  of  legal  separateness  in  case  of  resolution  and  the  possible 
exercise of resolution powers. 

Consideration could also be given as to whether the power to change the management of the 
bank  by  nominating  a  special  representative  (an'  administrator'  or  'manager')  with  the 
objective of restoring the financial situation of the institution in the context of common group 
restoration plan should be granted. 

Impacts: 

An expanded harmonised set of early intervention tools that can achieve the same results to 
pre-empt  or  correct  problems  at  supervisory  level  could  greatly  increase  the  overall 
effectiveness  of  crisis  management  in  the  EU.  It  could  improve  cooperative  actions  of 
different supervisors and enable important actions/measures that are presently not available in 
all Member States where a cross border banking group may operate. Joint restoration plan for 
a  group  (for  example)  would  ensure  that  resources  available  at  different  subsidiaries  in 
different Member States may be optimally reallocated at EU level by using the synergies of 
the group. 

Coordinated  early  remedial  actions  would  contribute  to  the  stability  of  the  banking  and 
financial  system  in  all  Member  States  concerned  and  could  help  prevent  problems  evolving 
and resulting in bank-resolution. If done at the appropriate moment, early supervisory actions 
can result in substantial cost savings for society and taxpayers and avoid the need for bail-outs 
(of systematically important cross border banks)79 . 

4.2.2.3.  Single set of early intervention tools 

An alternative approach to ensuring that all national authorities have tools that achieve similar 
results would be to agree on a fully harmonised list of supervisory tools and powers that need 
to  be  made  available  for  all  European  banking  supervisors.  This  could  also  include  any 
additional  tools  presently  not  available  for  any  national  supervisor.  Such  new  tools  would 
mainly relate to early remedial actions for cross border banking groups. 

Compared to the baseline scenario, a single set of supervisory early intervention tools would 
deliver  all  the  benefits  which  are  outlined  in  the  previous  option.  Having  exactly  the  same 
tools  and  powers  in  all  Member  States  would  reinforce  further  chances  of  developing 
cooperative  early  remedial  actions  for  the  same  banking  group.  This  could  also  enable 
effective  solutions  to  prevent  escalation  of  problems  and  hence  assure  stability  for  all 
stakeholders. 

Legal  implementation  of  such  a  solution  might  however  pose  problems  for  certain  Member 
States. Due to differences in legal systems (e.g. constitutional limitations) and arrangements 
for  banking  supervision  (single  supervisor  or  shared  competences  among  supervisor  and 
national bank and DGS), setting exactly the same tools and powers (and not tools that achieve 
the same results) in all Member States could be difficult to reach. 

79 

See the cost of the current in Chapter 2.2.1.General problems 

EN 

45 

   EN 

 
                                                 
4.2.3.  Possible  policies  to  address  misalignment  between  responsibility  of  national 

supervision and international business 

4.2.3.1.  Baseline scenario (no changes) 

The  voluntary  cooperation  between  supervisors  in  crisis  situations  has  proved  to  be 
inadequate in ensuring a co-ordinated reaction which led to suboptimal results and high costs 
for Member States. As national authorities are accountable only to their national Parliaments, 
and as no clear ex ante burden sharing arrangements have yet been developed, host authorities 
can  only  hope  that  home  authorities  will  take  their  situation  into  account  in  the  event  of  a 
crisis.  The  imbalance  between  home  and  host  countries  may  be  further  deepened  by 
differences in size between countries. 

If no adjustments to the existing arrangements are made, there will be no improvement in the 
prospects that that cooperation will work better in a future crisis when the there are once again 
likely to be competing interests between Member States. Prudential supervision, as well as the 
capacity to manage the stability of the financial system, is highly dependent on the quality of 
co-operation and information exchange between supervisors. Problems of communication, or 
a  lack  of  trust  between  supervisors,  can  severely  endanger  the  effective  control  of  the 
institutions or financial systems concerned. 

The Commission has recently proposed to create a European Banking Authority by 
transforming the Committee of European Banking Supervisors (CEBS)80. It is proposed that 
the Authority81  should be able to require national supervisory authorities to take specific 
actions to remedy an emergency situation. As the determination of an emergency situation 
involves a significant degree of discretion, this power is therefore left to the Commission82.  

The power of the Authority to make decision in crisis situation would ensure timely decision-
making  and  coordinated  actions.  As  a  crisis-situation  can  evolve  in  days  (evidenced  by  the 
recent  crisis)  prompt  supervisory  actions  could  be  more  effectively  implemented  at  the  EU 
level.  

From the point of view of effectively protecting depositors, the prime objective is to respond 
to  crisis  situations  with  highly  coordinated  and  harmonised  measures.  The  fact  that  the 
responsibility  for  crisis  management  over  locally  incorporated  and  supervised  entities  of 
cross-border  groups  is  predominantly  national-based  heightens  the  need  for  close  EU 
coordination and action.  

80 
81  

82 

See more details above in Chapter 3.2.2.1.  
Recital  21  of  Proposal  for  a  REGULATION  OF  THE  EUROPEAN  PARLIAMENT  AND  OF  THE 
COUNCIL establishing a European Banking Authority, adopted on 23 September 2009. 
The explanatory memorandum of the Commission's proposed regulation establising an European 
Banking Authority states that "the ESAs shall fulfil an active coordination role between national 
supervisory authorities, in particular in case of adverse developments which potentially jeopardise the 
orderly functioning and integrity of the financial system in the EU. However, in some emergency 
situations, coordination may not be sufficient, notably when national supervisors alone lack the tools to 
respond rapidly to an emerging cross-border crisis. The ESAs should therefore, in such exceptional 
circumstances, have the power to require national supervisors to jointly take specific action. The 
determination of a cross-border emergency situation involves a degree of appreciation, and should 
therefore be left to the European Commission. This is subject to the safeguard clause (see 6.2.11). In 
parallel, work should be accelerated to build a comprehensive cross-border framework to strengthen 
the European Union's financial crisis management/resolution systems, including guarantee schemes 
and burden sharing". 

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4.2.3.2.  Improved cooperation between supervisors in crisis situation 

In addition to the proposed changes in the architecture of supervision and the proposed set up 
of  the  European  Banking  Authority,  certain  elements  of  supervisory  cooperation  in  crisis 
situations could be further improved.  

Consideration could be given as to whether, when a crisis begins to develop in a cross-border 
group, supervisors should be required to come to a joint decision, on the basis of a common 
assessment and a restoration plan submitted by the parent company for the group as a whole. 
A joint decision would only make sense where different legal entities of a  group are  facing 
similar stress events, and require similar restoration measures. Recently agreed changes to the 
Capital Requirements Directive will require consolidating supervisors to plan and coordinate 
joint  assessments  in  emergency  situations,  exceptional  measures,  the  implementation  of 
contingency  plans  and  communication  to  the  public83.  However,  the  Directive  does  not 
specify the conditions that trigger the application of such measures, and how joint assessment 
should  be  conducted.  If  national  law  or  national  supervisors  interpret  those  conditions 
differently, coordinated action by supervisors of different group entities might be difficult. 

It  would  also  be  possible  to  increase  the  role  and  power  of  home  supervisors  in  crisis 
situations where the problems affected more than one Member State and a joint prompt action 
were needed to prevent escalation. 

Impacts: 

Joint  decision  might  ensure  that  measures  taken  by  different  national  supervisors  reach  an 
optimal outcome for the group as a whole. This would provide a more advantageous outcome 
for all stakeholders. Concerned banks could face a more efficient procedure. 

At the same time, voluntary cooperation has its limits when interests and important issues are 
at stake. Even with an improved cooperation framework, agreement on actions is not assured 
which can still result in suboptimal results at EU level. 

The increased role of home supervisors in a crisis situation would however limit the powers 
of  host  supervisors  and  would  result  in  a  misalignment  between  the  accountability  of  host 
authorities  to  their  taxpayers  and  their  (decreasing)  competences  in  terms  of  prudential 
requirements.  In  this  respect,  this  option  could  have  a  particularly  negative  impact  on  the 
Member States in Central Europe.  

4.3. 

Bank resolution 

4.3.1.  Possible policies to address bank resolution tools and triggers 

4.3.1.1.  Baseline scenario (no changes) 

Under  the  baseline  scenario  bank  resolution  would  be  left  to  the  competence  of  national 
resolution  authorities  (national  banks,  supervisors,  judges,  DGS  etc.)  which  have  different 
procedures for ailing or insolvent banks. Resolution of a  cross  border banking  group would 
remain  fragmented  by  national  borders  where  authorities  would  follow  diverging  goals  and 

83 

Article  129(1)(c)  of Directive  2006/48/EC  as  re-casted  in 2009  (Publication  in  the  Official  Journal  is 
still pending). 

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apply  diverging  measures.  Certain  authorities  could  reorganise  banks  in  a  special  bank 
resolution  framework  (e.g.  UK),  others  could  prompt  a  special  administration  (e.g.  Italy); 
many  would  need  to  initiate  a  judicial  insolvency  proceeding  (e.g.  Germany).  In  several 
countries,  reorganisation  would  remain  as  a  missing  option  (e.g.  in  SE  only  liquidation  is 
possible). This would not deliver an optimal outcome for all stakeholders in the EU. 

4.3.1.2.  Minimum set of harmonised bank resolution tools and clear triggers 

While  it  may  be  appropriate  to  preserve  a  wide  range  of  possibilities  in  Member  States' 
national toolkits, consideration should be given to equipping all resolution authorities with a 
minimum  set  of  core  tools  with  a  view  to  meeting  the  common  objectives  of  an  EU  bank 
resolution  framework.  Effective  tools  could  enable  authorities  to  implement  measures  other 
than public financial support and liquidation to address problems in an ailing bank. In order to 
preserve  financial  stability,  they  could  enable  authorities  to  intervene  rapidly,  ensure  the 
continuity of essential banking services, and give authorities the time to organise an orderly 
resolution. Such tools84 could include:  

–  The power to arrange acquisition by a private sector purchaser; 

–  The power to transfer assets and liabilities to a bridge bank; 

–  The power to partially transfer assets to a 'Bad bank' or 'Good bank'; 

–  Assisted sale of part of the business to a private sector purchaser; 

–  Nationalisation. 

The goal would not be that each authority should have exactly the same tool, but rather that 
measures implemented by different authorities should deliver the same or equivalent results. 
In  addition  to  the  minimum  set  of  resolution  tools,  national  authorities  could  keep  their 
specific tools and powers in relation to bank resolution. 

Impacts: 

The  introduction  of  special  bank  resolution  tools  in  all  Member  States  would  significantly 
increase the chances of authorities to achieve a successful resolution. By introducing a special 
resolution  procedure  for  cross  border  banks,  authorities  could  pre-empt 
initiating 
reorganisation under insolvency laws. This would save time (in terms of fulfilment of more 
lengthy  procedures  under  insolvency  laws)  enable  techniques  which  are  more  suited  to  the 
needs of a bank resolution (e.g. bridge  bank85) to be used and allow for a more appropriate 
balance  of  priorities  to  be  exercised  with  regard  to  stakeholders  (depositors,  continuity  of 
services for all customers) as opposed to only creditors as under an insolvency procedure. 

If  banks  can  be  reorganised  in  a  timely  and  effective  manner,  financial  stability  would  be 
substantially strengthened and the probability of fiscal consequences of a bank failure would 

84 

85 

In case public resources are involved, such tools would need to be undertaken in compliance with State 
Aid rules. 
A bridge bank can keep the going concern status of the viable part of the banking business, and help 
avoiding formal insolvency. 

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diminish.  It  would  also  mean  less  need  to  support  weakened  financial  institutions,  more 
competition and consequently the internal market would be strengthened. 

Since  the  aim  of  resolution  is  to  as  far  as  possible  avoid  that  costs  are  borne  by  taxpayers, 
losses  are  imposed  in  the  first  instance  on  shareholders.  However  the  above  techniques,  if 
applied  at  a  point  before  the  bank  is  technically  balance  sheet  insolvent,  may  constitute  a 
limitation  to  their  rights.  If  public  interest  were  best  served  by  ensuring  the  continuity  of 
banking services and  an  orderly resolution, this may be justified and intervention should be 
possible at a stage before the bank is “balance sheet” insolvent: that is, before the bank has 
reached the relevant threshold for the purposes of ordinary insolvency proceedings. The use 
of resolution tools would thus need to be fully justified, on the basis of commonly agreed and 
legally  sound  conditions  set  out  in  a  bank  resolution  framework.  In  particular,  a  clear 
demonstration  would  be  needed  that  an  action  which  limited  the  rights  of  stakeholders  was 
proportionate to the seriousness of the problems in the institution and driven by clear public 
interest.  

4.3.1.3.  Single set of bank resolution tools 

Under  this  option  a  closed  list  of  tools  and  powers  could  be  defined  for  all  resolution 
authorities dealing with cross border banks. Under an EU framework tools and powers could 
be harmonised to a maximum extent. 

Impacts: 

Maximum harmonisation could bring all the benefits of the previous option compared to the 
baseline  scenario.  This  would  create  an  even  clearer  system  for  bank  resolution.  Practical 
implementation  of  such  a  maximum  harmonisation  would  however  most  likely  cause 
problems  in  many  Member  States  because  of  differences  between  legal  systems  (e.g. 
constitutional  limitations)  and  differences  in  responsibilities  of  authorities  (banking 
supervisor, national bank, ministry of finance, deposit guarantee scheme). 

4.3.2.  Possible  policies  to  address  misalignment  between  responsibility  of  national 

authorities and international business 

4.3.2.1.  Baseline scenario (no changes) 

Under this option, national authorities would keep their focus on banking entities located on 
their respective territory. The geographical separation of resolution measures implemented by 
national  authorities  would  probably  continue  to  be  misaligned  with  the  highly  integrated 
operation  of  a  cross  border  banking  groups.  Reorganisation  procedures  and  actions  would 
differ  in  all  Member  States  concerned  which  would  result  in  different  outcomes.  Separate 
procedures  would  probably  not  take  into  account  the  positive,  synergic  effects  of  possible 
resolution at group level. The lack of agreement (or binding decision) would risk that national 
authorities  implement  uncoordinated  measures  resulting  in  suboptimal  outcomes  (e.g.  Fortis 
case).  

The  2008  Memorandum  of  Understanding  that  created  a  cooperation  framework  between 
different authorities (Ministries of Finance, Central Banks, supervisors) in crisis situations did 
not  prove  to  be  effective  in  practice.  On  the  basis  of  recent  experience,  the  Commission 
believes it unlikely that in the future when Cross Border Stability Groups have been created in 

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accordance  with  the  MoU,  the  voluntary  cooperation  under  this  framework  will  manage  to 
reach the objectives of coordinated cross-border resolution. 

The proposal of the Commission to establish the European System of Financial Supervisors 
(ESFS), does not foresee any role for these Authorities in a resolution process. Hence apart 
from their coordinating and decision-making role in supervisory actions in case of emergency 
situations, these Authorities will not have any power in a resolution. The safeguard clause of 
the  proposal  makes  clear  that  decisions  by  the  ESAs  in  no  way  impinge  on  the  fiscal 
responsibilities of the Member States. This also constrains the Authorities from making any 
decisions related to resolution processes, as this will almost always entail the possibility that 
public funds are used. 

4.3.2.2.  Improved cooperation between resolution and other authorities 

Cooperation between resolution authorities 

Cooperation could be further improved if there were more binding obligations. For example, 
supervisors could be legally obliged to alert resolution authorities where they consider that a 
cross border bank is failing or is likely to get into difficulties and that it is reasonably unlikely 
that the bank will be able to turn itself around, while resolution authorities of different legal 
entities within a group could be legally obliged to consult each other before taking measures 
on a legal entity of the group. It could be a precondition before the taking of any resolution 
measures at cross-border level that a discussion takes place between the resolution authorities 
on the situation of the bank (e.g. taking into account its ability to meet threshold conditions 
assessed by supervisors), while acknowledging that specific circumstances may require rapid 
decisions.  Consideration  could  also  be  given  as  to  whether  resolution  authorities  should  be 
obliged to consider (but not necessarily apply) joint resolution measures which would be to 
the benefit of the group as a whole. 

Voluntary  cooperation  could  be  further  improved  if  decisions  made  by  certain  authorities 
were  to  be  made  binding.  Home  resolution  authorities  might  also  nominate  a  "lead 
administrator"  for  the  banking  group  who  would  be  responsible  for  coordinated  resolution. 
More radically, this approach could provide for the nomination of the same administrator to 
all group members concerned. Those proceedings would be conducted in accordance with the 
applicable national legal regime. 

Finally, cooperation would be significantly enhanced if it were clear in advance that if public 
money  needed  to  be  spent,  the  costs  would  be  shared  fairly  across  countries.  This  would 
create  the  correct  incentives  and  ensure  that  it  was  in  everyone's  interest  to  cooperate  fully 
towards the minimisation of the total social cost. 

Cooperation of judicial authorities 

Not only resolution authorities but also courts and insolvency practitioners could be required 
to exchange information and coordinate actions on a cross border basis in respect of different 
group entities under resolution. Proposals to facilitate cooperation between administrators and 

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courts  located  in  different  jurisdictions  have  been  or  are  being  developed  by  UNCITRAL86 
and  could  provide  useful  models  for  an  EU  cooperation  framework  for  the  resolution  and 
liquidation of cross border banking groups. Two principle approaches might be explored: 

86 

United Nations Commission on International Trade Law, www.uncitral.org 

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•  Coordination framework for cooperation and exchange of information 

This would entail the conduct of territorial proceedings, in relation to separate legal 
entities, in accordance with the applicable national insolvency regime. New EU rules 
would  establish  requirements  for  courts,  insolvency  practitioners  and  (where 
applicable) resolution authorities to exchange information in respect of the different 
group entities under resolution. 

Going further, a new EU instrument could also provide a framework for coordinated 
stabilisation  or  reorganisation  plans  and  facilitate  the  coordination  of  the  use  and 
disposition of assets, use of avoidance powers87 and distributions to creditors. Such 
measures  might  address  some  of  the  problems  experienced  in  the  liquidation  of 
affiliated entities where there has been significant co-mingling of assets88. 

•  Coordination of national proceedings by a “lead administrator”  

This approach would facilitate a more directed coordination of national proceedings 
in relation to group entities by a 'lead' administrator or liquidator (possibly that of the 
parent  company,  although  some  flexibility  might  be  appropriate),  or  by  a  lead 
national authority for the purposes of stabilisation measures. EU rules would, among 
other  things,  set  out  procedures  for  the  adoption  of  a  coordinated  stabilisation  or 
reorganisation plan and for decision-taking within agreed objectives. 

Increased coordination for bank resolution would improve chances for an optimal outcome at 
EU level. Measures that take into account other parts of a cross border bank group could be 
more efficient (e.g. lower cost by using collaterals available internally) and more effective in 
reaching better outcomes for all stakeholders (e.g. ensuring continuity of banking services for 
customers by maintaining uninterrupted intra-group support). 

Impacts: 

Binding decisions taken by certain (home) authorities instead of the lack of agreement in case 
of voluntary cooperation would improve the effectiveness of resolution measures at EU level. 
They could increase promptness of actions instead of enduring and non conclusive decision-
making. At the same time, Member States would probably be reluctant to shift their powers 
over  their  banks  in  a  resolution  process  to  other  Member  States.  One  of  the  most  crucial 
questions  here  is  who  should  finance  the  resolution,  if  public  funds  are  needed.  Would  the 
country that makes the final binding decision also assume the (financial) consequences for its 
decisions? 

4.3.2.3.  Increased powers to EU institutions in bank resolution 

Under a new European framework, EU bodies could be given decision-making roles in a cross 
border bank resolution. Consideration should be given as to whether any EU institution (the 
new European Banking Authority or any other existing authorities) should be empowered to 
coordinate and/or lead a resolution of banking groups. If national resolution authorities were 

87 
88 

Transactions executed in the suspect period e.g. 6 months before insolvency may be ruled void or null. 
Assets are intermingled if it is impossible or too costly to separate assets of two legal entities. 

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unable  to  reach  agreement,  an  EU  body  might  be  best  placed  to  make  the  final  binding 
decision. 

Impacts: 

This  option  would  bring  all  the  benefits  (i.e.:  effectiveness  and  efficiency)  of  the  previous 
option  for  all  stakeholders.  The  European  Council,  in  its  conclusions  of  19  June  2009, 
recommended  that  a  European  System  of  Financial  Supervisors  (ESFS),  comprising  three, 
new  European  Supervisory  Authorities  (ESA),  be  established,  while  stressing  that  decisions 
taken by the latter should not impinge on the fiscal responsibilities of Member States. Against 
this background, it is unlikely that Member States would currently be in the position to shift 
their powers on bank resolution to any EU body. To come to a situation where an EU body 
could  decide  on  these  issues,  further  steps  are  needed  to  come  to  robust  burden-sharing 
arrangements between Member States. 

4.3.3.  Possible  options  to  address  legal  obstacles  (company,  insolvency  law)  to  bank 

resolution 

4.3.3.1.  Baseline scenario (no changes) 

Under the baseline scenario, Member States' diverging national legislations would continue to 
govern  cross-border  bank  resolutions.  Company  law  provisions  would  continue  to  hinder 
authorities  from  implementing  prompt  actions  without  consulting  shareholders.  National 
insolvency  laws  would  continue  to  focus  only  on  maximizing  value  for  creditors  without 
taking  into  account  financial  stability  and  other  stakeholders  such  as  taxpayers.  Different 
national  resolution  or  insolvency  systems  would  probably  have  encounter  difficulties  to 
cooperate. Any reorganisation or liquidation would necessarily be carried out in accordance 
with national insolvency procedures, and any coordination would be based on the voluntary 
cooperation  between  different  national  insolvency  authorities  and  officers.  Under  current 
arrangements  insolvency  proceedings  are  only  effective  in  the  country  where  they  are 
initiated, and will administer only those assets that are located within that jurisdiction.89 

4.3.3.2.  Adjustments in company and insolvency laws to support bank resolution 

Company  law  at  EU90  and  national  level91  could  be  amended  in  such  a  way  as  to  enable 
authorities  to  take  rapid  and  decisive  actions.  This  might  entail  limiting  certain  rights  (to 
decision  and  property)  of  bank  shareholders.  Such  measures  and  thus  limitations  to  rights 
could be implemented only in the public interest of financial stability. 

89 

90 

91 

This is subject to the exception under Directive 2001/24/EC of branch assets that are located in another 
Member State. 
The capital maintenance regime under the Second Company Law Directive requires the approval of the 
shareholders'  general  meeting  for  any  increase  or  reduction  of  issued  share  capital  and  confers  pre-
emption  rights  for  existing  shareholders.  The  Shareholder  Rights  Directive  sets  out  requirements 
relating  to  the  general  meeting  of  shareholders  of  listed  companies,  and  in  particular  specifies  the 
convocation periods and the form of the convocation. 
There  are  domestic  requirements  in  the  company  law  or  listing  rules  in  a  number  of  Member  States, 
such as the requirement that material transactions be approved by the general meeting. 

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Convocation periods for the general meeting of shareholders that could prolong key resolution 
decisions could be decreased or in exceptional cases shareholders' approval could be totally 
abolished. 92 

Measures  (like  transfer  of  ownership  or  assets  of  an  ailing  bank)  must  comply  with 
shareholders'  right  to  property  under  Article  1,  Protocol  1  ('A1P1')  of  the  European 
Convention of Human Rights ('ECHR'). A1P1 does not prevent the use by national resolution 
authorities of intrusive measures that interfere with shareholders' property rights in a bank, if 
it strikes a “fair balance” between “the demands of the general interest of the community and 
the  requirement  of  the  protection  of  the  individual's  fundamental  rights”.93  However,  a 
stabilization  and  resolution  framework  would  need  to  respect  constitutional  limitations  of 
Member  States'  laws  –  as  guaranteed  under  the  EU  Treaty  –  and  would  need  to  contain 
appropriate safeguards to ensure that the rights of shareholders are given proper weight. 

For losses suffered as a result of resolution measures, bank shareholders should be entitled to 
compensation.  Where  rights  granted  by  EU  law  are  affected,  appropriate  mechanisms  for 
redress and compensation would need to be agreed and set out at EU level. The question for 
further consideration is whether for all other cases, appropriate mechanisms could be left to 
the  discretion  of  Member  States.  If  resolution  measures  are  applied  at  a  cross-border  level, 
involving  entities  in  more  than  one  Member  State,  it  seems  logical  that  redress  possibilities 
and compensation for shareholders of the affected entities should be determined in the same 
way. 

Insolvency  laws  could  be  amended  to  support  coordination  of  resolution  measures  and 
reorganisation  at  group  level.  Reorganisation  might  be  carried  out  under  an  administrative 
process or under a judicial insolvency procedure. In the first case insolvency laws would need 
to be adjusted to allow resolution of an ailing bank under a special procedure. In the second 
case, insolvency procedures would need to be amended to cater for the group as a whole.  

4.3.3.3.  Developing new EU legislation for resolution of cross border banks 

Instead of amending existing EU and national legislations governing company and insolvency 
law  provisions  to  facilitate  coordinated  cross  border  bank  resolution,  a  new  EU  legislative 
framework could be developed. The administrative special framework would deal only with 
the resolution of cross border banking groups and regulate commencement and management 
of  procedures;  resolution  tools  and  powers  of  EU  and  national  authorities;  shareholders' 
rights;  compensations;  ranking  of  creditors;  group  interest,  intragroup  transactions.  Certain 
contracts  (e.g.  employment,  set  off,  netting,  etc.)  would  however  continue  to  be  settled 
according to national  laws. Similarly, employees' information and consultation rights  would 
continue to be ruled by national laws (which in many instances implement Community law). 

92 

93 

With a view to the requirement established by the Second Company law Directive, the European Court 
of Justice has clarified that neither the Treaty nor the Second Directive itself provide for a possibility 
for  Member  States  to  derogate  from  this  rule  in  crisis  situations  and  where  the  company  undergoes 
serious  financial  difficulties,  judgment  of  the  ECJ  in  the  joined  cases  C-19/90  and  C-20/90,  "Karella 
and Karellas". 
Sporring and Lonnroth v Sweden (1982) 5 EHRR 35  

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Impacts: 

The introduction of such a legislative framework would create a clear and transparent system 
for  the  resolution  of  cross  border  banking  groups;  all  stakeholders  would  have  an  overview 
about their rights and obligations. The new system would be effective as the tools of the new 
procedure  would  enable  reaching  the  specific  goals  of  a  bank  resolution.  It  would  also  be 
efficient  as  a  speedy  administrative  process  could  replace  a  number  of  diverging  national 
processes. 

The  difficulty  of  developing  such  a  'quasi'  harmonised  insolvency  system  for  cross  border 
banks cannot 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 aspects such as 
priority  reflect  social  policy.  Accommodating  distinct  national  concepts,  such  as  trusts  or 
floating  charges,  in  a  unified  code  would  be  complex.  Furthermore,  it  is  recognised  that  if 
convergence is desirable it should ideally be global. However, work in the EU could allow it 
to shape any subsequent global initiatives.  

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 
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.  It  is 
recognised  that  any  imposition  of  a  new  EU  insolvency  regime  on  existing  entities  would 
raise transitional problems, including the impact on creditors and counterparties. 

4.3.4.  Possible policies to support financing of cross border resolution 

The  policies  listed  below  are  not  necessarily  mutually  exclusive  solutions.  Financing  from 
private  sources  does  not  mean  that  the  involvement  of  public  sources  can  not  become 
unavoidable  at  a  certain  point  of  the  resolution.  However  one  of  the  main  objectives  for  a 
bank  resolution  framework  is  to  minimize  losses  for  society  as  a  whole  and  especially  for 
taxpayers.  This  implies  that  finding  solutions  to  facilitate  resolution  measures  for  a  cross-
border bank should be considered a last – and not first – resort. As a consequence the focus in 
the first instance is on how to increase the chances of a resolution without recourse to public 
funds.  Public  financing  solutions  –  in  particular  making  progress  on  burden  sharing  –  are 
considered,  in  particular  because  clarifications  in  advance  on  how  costs  may  be  shared 
between  Member  States  should  instil  additional  confidence  into  a  resolution  process  which 
can in turn enhance the prospects for a successful resolution at minimal cost to the taxpayer. 

4.3.4.1.  Baseline scenario (no changes) 

Under current rules, financing of a cross border resolution is not assured from either private or 
public sources. The absence of funding arrangements underpinning intervention measures in a 
cross-border context limits the range of resolution tools that authorities may use, potentially to 
the detriment of the cost minimisation objective. 

Most Member States' legislations do not provide incentives for private investors to finance an 
ailing  bank  under  resolution.  Intra-group  financing  would  continue  to  generate  legal 
uncertainty  due  to  the  risk  of  retroactive  invalidity.  Financing  from  other  private  sources 

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would continue not to have adequate incentives and guarantees in insolvency proceedings (no 
priority in the ranking of claims in many Member States, collateral provision). 

The  use  of  public  funds  in  a  cross  border  case  would  continue  to  be  possible  on  a  national 
basis,  which  entails  that  resolution  measures  would  also  be  divided  along  geographical 
borders. This would maintain the risk for suboptimal reorganisation results at banking group 
level. 

4.3.4.2.  Adjustments in company law and insolvency laws to support private sector financing 

of resolution 

Private sector funding should be the most favoured of solutions in terms of bank resolution as 
it  avoids  the  use  of  public  sources.  Legal  certainty  surrounding  the  actions  taken  by  bank 
resolution authorities can be key in reinforcing opportunities for private sector solutions. Any 
risk  that  restructuring  measures  might  be  subsequently  unwound  through  court  appeal 
processes  may  seriously  restrict  the  readiness  of  private  sector  parties  to  invest  in  asset 
purchases or to take over all or part of a rescued credit institution (the Fortis resolution and 
eventual  sale  to  a  private  sector  purchaser  was  plagued  by  legal  uncertainty).  Legal 
uncertainty that discourages private sector financing solutions of ailing banks due to the high 
risk and lack of assurance for repayment should be addressed. 

Impacts: 

Adjustments to company and insolvency laws would facilitate private sector solutions which 
carry the financial cost of a bank resolution. Compared to the baseline scenario, preferential 
treatment  of  private  funds  financing  a  resolution  could  be  cost  efficient,  especially  for 
taxpayers.  If  incentives  and  guarantees  could  be  provided  in  order  to  encourage  private 
investment, increase legal certainty and reduce the risks for investors associated with a bank 
insolvency  procedure,  the  use  of  public  funds  would  be  more  likely  to  be  minimised  or 
avoided.  Introducing  changes  to  insolvency  and  company  laws  so  as  to  give  preferential 
treatment  to  private  sector  financing  provided  in  the  context  of  a  bank  resolution  would 
however  negatively  impact  existing  unsecured  creditors  of  the  ailing  bank  in  a  possible 
subsequent liquidation. 

4.3.4.3.  Intra-group asset transferability framework 

Added impetus could be given to work on the feasibility of introducing a framework to allow 
intra-group  cross-border  asset  transferability  after  the  commencement  of  an  insolvency 
procedure. 

A clear framework regulating the transfer of assets as a means of intra-group financial support 
and  a  measure  for  stabilising  entities  in  a  banking  group,  could  assist  groups  in  liquidity 
management  and  in  some  cases  could  help  in  the  management  of  a  developing  crisis. 
However  if  transfers  are  executed  on  preferential  terms,  there  is  a  risk  of  challenges  from 
minority shareholders, creditors or insolvency administrators.94 Directors bearing liability for 
their own company may be exposed to civil or criminal liability.  

94 

Intragroup transactions taking place prior to insolvency (in the suspect period e.g. in 6 months) could be 
retroactively ruled null and void. 

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According  to  the  UNCITRAL,  the  following  guarantees  could  be  granted  for  such  "post 
commencement  financing"95  in  an  insolvency  procedure  (or  in  a  special  bank  resolution 
framework): 

•  A  priority  in  the  order  of  creditors  may  be  established  in  a  subsequent  liquidation  (e.g. 
ahead  of  ordinary  unsecured  creditors,  including  those  unsecured  creditors  with 
administrative priority) 

•  A  security  interest  may  also  be  granted  for  the  lender  on  unencumbered  assets96  or  as  a 

junior or lower security interest on already encumbered assets 

•  The group member subject to insolvency proceedings may also guarantee or provide other 

assurance of repayment for post-commencement finance. 

Impacts: 

The synergies generated by reallocated funds within a group could contribute significantly to 
the  reorganisation  of  a  group  without  the  need  for  public  funds,  and  allow  continuous 
operation of the group while a solution was being found for the business. This would help to 
preserve  value  in  the  ailing  bank.  The  cross  border  transfer  of  funds  between  entities  after 
commencement of insolvency proceedings however could be contrary to the interests of the 
Member State and creditors from where the transfer is executed. Consideration could be given 
to constructing a framework that allows such a transfer and at the same time grants sufficient 
(above listed) guarantees for certain stakeholders.  

4.3.4.4.  Financing through Deposit Guarantee Schemes 

The feasibility of using Deposit Guarantee Schemes beyond their traditional paybox function 
could be explored. In some Member States (e.g. Spain), the deposit insurance fund may assess 
whether it is more cost efficient to finance a resolution of an ailing bank or to let the bank fail 
and  pay  out  to  depositors.  The  Commission  is  currently  preparing  a  report97  on  further 
amending the Directive 94/19/EEC on Deposit Guarantee Schemes (DGS). One of the issues 
under examination is whether the scope of the DGS should be extended beyond the paybox 
function. 

Impacts: 

Financing through DGS would have the advantage that the banking sector would contribute 
more  directly  to  ensuring  its  own  stability,  and  lessen  the  potential  burden  on  taxpayers.  In 
order to play a meaningful role in crisis intervention, substantial additional funding resources 
would  be  necessary,  compared  to  what  is  currently  available.98  Reliance  solely  on  ex  ante 
funds (which currently amount to an estimated €13 billion in all DGS combined99 ) would be 
quite  simply  inadequate.  However,  DGS  are  not  solely  reliant  on  ex  ante  funds,  and  by 

95 
96 
97 

98 
99 

Financing provided after the insolvency procedure begins. 
Not used as a collateral to secure payments of the debtor. 
More  information,  including  the  public  consultation  results  on  the  DGS  review  can  be  found  on  the 
following website: http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm 
Even more so in the case of large, complex cross-border financial groups 
See Commission Communication on the review of Directive 94/19/EC on Deposit Guarantee Schemes: 
http://ec.europa.eu/internal_market/bank/docs/guarantee/comm9419_en.pdf 

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pooling the financing capacities of all DGS and sufficiently strengthening the funding base, it 
might be feasible to address the problems in a large cross-border banking group. Use of DGS 
funds to rescue ailing banks would need to comply with State Aid rules in order to ensure a 
level playing field across banks and Member States. 

4.3.4.5.  Developing public funding arrangements 

Although  one  of  the  major  motivations  for  developing  a  cross-border  bank  resolution 
framework  would  be  avoidance  of  the  use  of  public  funds,  it  needs  nevertheless  to  be 
recognised  that  bank  resolution  measures  may  ultimately  require  public  funding  -  in 
compliance  with  State  Aid  rules  -  should  private  sector  solutions  prove  insufficient.  This 
implies further development of arrangements which set out how financial burdens should be 
shared if resolution measures need to be applied to a cross-border group. A recent report to 
the  Economic  and  Finance  Committee100  has  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 
their 
implementation.  In  light  of  experiences  during  the  recent  crisis,  more  clarity  about  cost 
sharing  would  be  an  essential  part  of  any  new  framework,  and  would  assist  in  building  a 
robust  framework  for  cooperation  and  provide  further  incentives  to  converge  national 
systems.  Conversely,  the  putting  in  place  of  coherent  sets  of  tools  should  provide  the 
necessary  assurance  about  the  capacity  of  other  national  authorities  to  act  in  an  appropriate 
manner  and  at  an  appropriate  time.  Finally,  the  existence  of  clear  burden  sharing 
arrangements  would  be  an  important  enhancement  to  the  Internal  Market,  especially  with 
respect  to  addressing  particular  concerns  about  the  current  structure  of  the  Internal  Market 
(e.g.  the  issue  of  smaller  countries  and  the  relative  size  of  their  banking  sector,  and  the 
predominance of foreign owned banks in some host countries). 

in  monitoring 

Impacts: 

An  agreement  on  burden  sharing  -  in  compliance  with  EU  State  Aid  rules  -  would 
substantially  increase  the  effectiveness  of  cross  border  resolution  measures.  Establishing 
clarity about the financing arrangements would provide the right incentives so that Member 
States would be more likely to cooperate in a cross border bank resolution and to implement 
measures  that  bring  optimal  solutions  at  EU  level.  The  mere  existence  of  burden  sharing 
arrangements  could  also  serve  to  reinforce  the  viability  of  private  sector  solutions.  Greater 
clarity  would  also  contribute  to  the  efficiency  of  the  resolution,  as  speedy  decisions  and 
actions  have  higher  chances  for  successful  early  reorganisation  where  the  involvement  of 
public  funds  can  be  avoided.  On  the  other  hand,  advance  commitment  between  Member 
States on precise modalities would be particularly challenging given that each crisis situation 
differs. Burden sharing arrangements would need to be tailored to each institution and agreed 
in the appropriate forum. Safeguards would also be needed to ensure that Member States did 
not walk away from non-binding arrangements. 

100 

Lessons  from  the  financial  crisis  for  European  financial  stability  arrangements,  EFC  High-Level 
Working Group on Cross-Border Financial Stability Arrangements, July 2008. 

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4.3.5.  Possible policies to support continuity of banking services 

4.3.5.1.  Baseline scenario (no changes) 

If no changes in EU or national legislations are implemented, continuity of banking services 
in  a  crisis  situation  or  in  an  insolvency  of  a  cross  border  bank  would  not  be  assured  in  all 
Member  States.  Formal  reorganisation  or  liquidation  of  banks  could  freeze  assets  of  certain 
customers  or  impede  any  payment  transactions  in  one  part  of  the  banking  group,  while 
allowing it in an other. The lack of regulation about the bridge bank's contractual relationships 
with the residual company (in particular with regard to the need to provide continuous mutual 
support of operations) would render such a resolution technique obsolete, limiting the choices 
of authorities and resulting in higher costs. 

4.3.5.2.  Adjustments in company laws and insolvency laws to support continuity of services 

Amendments  might  need  to  be  implemented  to  company  and  insolvency  laws  in  certain 
situations to ensure continuity of basic banking services: 

1. 

Bridge bank solution and partial sales of assets (operation) 

For  an  effective  implementation  of  a  bridge  bank  solution,  certain  adjustments  in 
legislation would need to be implemented. Both the residual company (in the event 
of the transfer of business to a bridge bank or a partial sale to a private sector entity) 
and  the  transferred  part  needed  to  provide  support101  to  each  other,  which  are 
necessary to ensure the continuity of banking services. General insolvency law and 
company  law  does  not  necessarily  allow  such  service  provision  in  an  insolvency 
proceeding, which is special for bridge banks or partial sales under bank resolution. 
Both  insolvency  laws  and  company  laws  could  be  amended  to  support  such 
resolution techniques. This should apply irrespective of whether the entity providing 
the support is located in the same Member State as the bridge bank or purchaser. 

2. 

Termination of contracts by third parties 

In  order  that  continuity  of  banking  services  is  not  jeopardised  by  the  sudden 
termination  of  contracts  by  third  parties,  it  might  be  also  necessary  to  restrict 
termination rights under certain circumstances, for example where the contracts are 
transferred to a bridge bank. 

3. 

Insolvency proceedings prompted by resolution measures 

In  order  to  avoid  that  additional  insolvency  proceedings  are  not  opened  once  the 
relevant  national  authorities  have  decided 
to  apply  a  resolution  measure, 
modifications to national insolvency laws might be needed. Considerations should be 
given  whether 
the  possibility  of  simultaneously  applying  a 
moratorium102 to a cross-border banking group undergoing resolution for the purpose 

introduce 

to 

101 

102 

Such support might be necessary, for example, where certain systems, contracts or services necessary to 
the operation of a bridge bank have not been transferred from the residual company, or where essential 
support services were formerly provided to former bank by another group entity. 
A legal official (usually a judge) can order a delay of payment due to extenuating circumstances that 
make one party unable to give payment to another. 

EN 

59 

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of  ensuring  continuity  of  services  and  ensuring  an  orderly  resolution  process.  This 
would need to be very short in duration, if the intention was to re-structure the group 
as a going concern. 

Impacts: 

The  above  options  could  help  to  achieve  continuity  of  services,  which  could  be  one  of  the 
main  objectives  of  a  special  bank  resolution  framework.  Customers,  mostly  private  persons 
and  SMEs  are  often  dependent  on  services  of  one  particular  bank.  In  case  of  failure,  many 
could  suffer  further  financial  losses  in  addition  to  the  risk  to  their  deposits.  If  payment 
services are blocked, private persons may face difficulties keeping up their mortgage or other 
loan payments, or face being cut off by public utility services (gas, water, electricity). SMEs' 
business can seriously suffer if they can not pay their suppliers on time. Thus policies above 
would  have  positive  effects  on  the  stability  of  the  financial  sector  as  a  whole  and  benefit 
especially households and smaller companies. 

If  the  relation  between  a  bridge  bank  and  the  residual  company  is  clearly  established  by 
legislation, authorities can apply this technique in a bank resolution. A "Bridge bank" solution 
(putting the viable part of the business in a new bank) can give time for authorities for finding 
the best reorganisation solution hence increases the efficiency of the procedure. 

Such  changes  would  however  require  Member  States  to  change  general  insolvency 
legislations and/or introduce special administrative bank resolution frameworks.  

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4.3.5.3.  Linkage between objectives and options  

Early intervention 

Objectives  

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

Ensure  efficient  cooperation  between 
national 
supervisors 
responsible for cross border banks in 
crisis situations. 

financial 

Policy options 

Possible policies to address early intervention conditions, triggers 

Common assessment of common early 
warning indicators 

Automatic, hard triggers 

Possible policies to address early intervention tools  

Expanded minimum set of early 
intervention tools 

Single set of early intervention tools 

● 

● 

● 

● 

○ 

○ 

Possible policies to address misalignment between responsibility of national supervision and international business 

Baseline scenario with setting up 
European Banking Authority 

Improved cooperation between 
supervisors in crisis situation 

● Direct link       ○ Indirect link 

● 

● 

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Bank resolution 

Objectives 

Policy options 

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 

Possible policies to address bank resolution tools and triggers 

Minimum set of 
harmonised bank 
resolution tools and clear 
triggers 

Single set of bank 
resolution tools 

● 

● 

○ 

○ 

● 

● 

● 

● 

Possible policies to address misalignment between responsibility of national authorities and international business 

Improved cooperation 
between  resolution and 
other authorities 

Increased powers to EU 
institutions in bank 
resolution 

● 

● 

○ 

○ 

Possible options to address legal obstacles (company, insolvency law) to bank resolution 

Adjustments in company 
and insolvency laws to 
support bank resolution 

Developing new EU 
legislation for resolution 
of cross border banks 

○ 

○ 

Possible policies to support financing of cross border resolution 

○ 

○ 

○ 

○ 

Adjustments in company 
law and insolvency laws 
to support private sector 
financing of resolution 

Intra-group asset 
transferability framework 

Financing through 
Deposit Guarantee 
Schemes 

Developing public 
funding arrangements 

● 

● 

● 

● 

Possible policies to support continuity of banking services 

Adjustments in company 
and insolvency laws to 
support continuity of 
services 

● Direct link       ○ Indirect link 

● 

● 

○ 

○ 

○ 

○ 

○ 

● 

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4.4. 

Impact on EU budget 

The above policy options do not have any implications for the budget of the European Union. 
Early intervention and bank resolutions would be primarily managed by national authorities.  

4.5. 

Package and cumulative effects 

The  issues  listed  above  comprise  wide  legislative  areas  and  touch  upon  substantial 
responsibilities of authorities. Many policies address problems that have emerged over recent 
times and have never been analysed and attempted to be solved before. Early intervention and 
bank  resolution  are  however  so  interconnected  with  all  the  issues  described  in  this  impact 
assessment that policies could not be introduced in isolation. If special bank resolution tools 
are  provided  for  authorities,  cross  border  cooperation,  financing,  company  law,  insolvency 
law areas need to be adjusted accordingly. 

To reach the general and specific objectives defined above, amendments in EU and national 
laws  would  be  substantial.  Granted  rights  and  interests  could  be  sacrificed  for  financial 
stability and cooperation structures need to be reshaped to reach optimal results. 

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5. 

ANNEX I: GLOSSARY 

Bad bank – Good 
Bank 

Bad  or  Good  bank  is  created  when  authorities  separate  good  from  bad  assets  by  selling  non-
performing loans and 'toxic' or difficult-to-value assets to a separate asset management vehicle 
(often referred to as a 'bad bank'). The aim is to sanitise the balance sheet of the failing bank in 
order to restore it to viability or with a view to facilitating a private sector solution 

Bank resolution 

Basel II 

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). 

Basel II is the second of the Basel Accords, which are recommendations on banking laws and 
regulations  issued  by  the  Basel  Committee  on  Banking Supervision.  The  purpose of Basel  II, 
which was initially published in June 2004, is to create an international standard that banking 
regulators can use when creating regulations about how much capital banks need to put aside to 
guard against the types of financial and operational risks banks face. The Basel II framework 
has  3  pillars:  Pillar  I  Minimum  Capital  Requirement,  Pillar  II  Supervisory  Review  Process, 
Pillar III Market discipline. 

Bridge bank 

A 'bridge bank' is a temporary licensed banking institution created, and generally owned by or 
on behalf of, the national authority to take over the viable business of the failing institution and 
preserve it as a going concern while the authority seeks to arrange a permanent resolution, such 
as to a suitable private sector purchaser. 

Capital adequacy 
ratio 

Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a 
percentage of its risk weighted credit exposures. A bank's capital is the "cushion" for potential 
losses, which protect the bank's depositors or other lenders. 

Consolidating 
supervisor 

The supervisor responsible for the supervision on a consolidated basis of a banking group. As a 
rule, this is the supervisor of the Member State where the parent bank of the group is based 

Early 
intervention 

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. 

European 
Banking 
Authority (EBA) 

The  objective  of  the  Authority  shall  be  to  contribute  to:  (i)  improving  the  functioning  of  the 
internal  market,  including  in  particular  a  high,  effective  and  consistent  level  of  prudential 
regulation and supervision, (ii) protecting depositors and investors, (iii) protecting the integrity, 
efficiency  and  orderly  functioning  of  financial  markets,  (iv)  maintaining  the  stability  of  the 
financial system, and (v) strengthening international supervisory coordination. 

European 
Supervisory 
authorities (ESA) 

ESA  is  created  by  transforming  the  European  supervisory  Committees103  in  a  European 
Banking  Authority  (EBA),  a  European  Securities  and  Markets  Authority  (ESMA)  and  a 
European Insurance and Occupational Pension Authority (EIOPA) 

European System 
of Financial 
supervisors 

A  network  of  national  supervisors  working  in  tandem  with  the  new  European  Supervisory 
Authorities  (ESA)  thereby  combining  the  advantages  of  an  overarching  European  framework 
for financial supervision with the expertise of local micro-prudential supervisory bodies that are 

103 

These  are  the  Committee  of  European  Banking  Supervisors  (CEBS),  the  Committee  of  European 
Insurance and Occupational Pensions Supervisors (CEIOPS) and the Committee of European Securities 
Regulators (CESR). 

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(ESFS) 

closest to the institutions operating in their jurisdictions. 

Going concern 

A going concern is a business that functions with the intention or threat of liquidation for the 
foreseeable future, usually regarded as at least within 12 months. 

Leverage ratio 

A ratio that compares capital with assets without risk adjustment. The Commission is working 
on a proposal to supplement the capital adequacy ratio with a simple leverage ratio. 

Memorandum of 
Understanding 
(MoU) 

Pillar II 

A set of principles and procedures for sharing information, views and assessments, in order to 
facilitate the pursuance by participating authorities of their respective policy functions 

The  second  pillar  of  the  Basel  Framework  that  deals  with  the  regulatory  response  to  the  first 
pillar,  giving  regulators  much  improved  'tools'  over  those  available  to  them  under  Basel  I.  It 
also provides a framework for dealing with all the other risks a bank may face, such as systemic 
risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, 
which  the  accord  combines  under  the  title  of  residual  risk.  It  gives  banks  a  power  to  review 
their risk management system. 

Set-off / Netting 

An agreement between two parties to balance one debt against another or a loss against a gain. 

Supervisory 
Review and 
Evaluation 
Process (SREP) 

The  Supervisory  Review  and  Evaluation  Process  (SREP)  is  part  of  the  larger  Supervisory 
Review  Process.  The  competent  authority  conducts  the  SREP.  It  is  a  comprehensive  process 
which supervisors use to review and evaluate the institution's exposure to risks. It is also used to 
review and evaluate the adequacy and reliability of the institution's Internal Capital Adequacy 
Assessment  Process  (ICAAP),  and  the  adequacy  of  the  institution's  own  funds  and  internal 
capital  in  relation  to  the  assessment  of  its  overall  risk  profile.  It  is  done  to  monitor  ongoing 
compliance with standards laid down in the CRD and to identify any weakness or inadequacies 
and necessary prudential measures 

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6. 

ANNEX  II:  EXTRACT  FROM  THE  DE  LAROSIÈRE  REPORT  DEALING  WITH  CRISIS 
MANAGEMENT AND RESOLUTION 

VI. CRISIS MANAGEMENT AND RESOLUTION 

125. 

126. 

As  a  general  observation,  it  has  been  clearly  demonstrated  that  the  stakes  in  a 
banking crisis are high for Governments and society at large because such a situation 
has the potential to jeopardise financial stability and the real economy. The crisis has 
also  shown  that  crisis  prevention,  crisis  management  and  crisis  resolution  tools 
should all be handled in a consistent regulatory framework. 

Of  course,  crisis  prevention  should  be  the  first  preoccupation  of  national  and  EU 
authorities (see chapter on supervision). Supervisors should act as early as possible in 
order to address the vulnerabilities identified in a given institution, and use all means 
available  to  them  to  this  effect  (e.g.  calling  on  contributions  from  shareholders, 
fostering  the  acquisition  of  the  institution  concerned  by  a  stronger  one).  In  this 
respect,  the  role  of  central  banks  which  are  by  essence  well  placed  to  observe  the 
first signs of vulnerability of a bank is of crucial importance. Therefore in countries 
where supervision is not in the hands of the central bank, a close collaboration must 
be ensured between supervisors and central banks. But crises will always occur and 
recent  experiences  in  managing  crises  have  shown  that  many  improvements  to  the 
present system are called for. 

a) Dealing with the moral hazard issue 

127. 

“Constructive  ambiguity”  regarding  decisions  whether  or  not  public  sector  support 
will be made available can be useful to contain moral hazard. However, the cure for 
moral  hazard  is  not  to  be  ambiguous  on  the  issue  of  public  sector  involvement  as 
such  in  crisis  management.  Two  aspects  need  to  be  distinguished  and  require 
different  treatment.  On  the  one  hand,  a  clear  and  consistent  framework  for  crisis 
management is required with full transparency and certainty that the authorities have 
developed  concrete  crisis  management  plans  to  be  used  in  cases  where  absence  of 
such  public  sector  support  is  likely  to  create  uncertainty  and  threaten  financial 
stability. On the other hand, constructive ambiguity and uncertainty is appropriate in 
the  application  of  these  arrangements  in  future  individual  cases  of  distressed 
banks104.  

b) Framework for dealing with distressed banks 

128. 

In  the  management  of  a  crisis,  priority  should  always  be  given  to  private-sector 
solutions  (e.g.  restructuring).  When  these  solutions  appear  insufficient,  then  public 
authorities  have  to  play  a  more  prominent  role  and  the  injection  of  public  money 
becomes often inevitable.  

129. 

As far as domestic national banks are concerned, crisis management should be kept 
at  the  national  level.  National  supervisors  know  the  banks  well,  the  political 

104 

This approach is recommended by Charles Goodhart and Dirk Schoenmaker, “Fiscal Burden Sharing in 
Cross Border Banking Crises”, in International Journal of Central Banking, to be published early 2009.  

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authorities  have  at  their  disposal  a  consistent  legal  framework  and  taxpayers' 
concerns can be dealt with in the democratic framework of  an elected government. 
For  cross-border  institutions  at  EU  level,  because  of  different  supervisory,  crisis 
management and resolution tools as well as different company and insolvency laws, 
the  situation  is  much  more  complex  to  handle.  There  are  inconsistencies  between 
national legislation preventing an  orderly  and efficient handling of  an institution in 
difficulty. 

130. 

For example, company law provisions in some countries prevent in times of crisis the 
transfer of assets from one legal entity to another within the same group. This makes 
it  impossible  to  transfer  assets  where  they  are  needed,  even  though  this  may  be 
crucial  to  safeguard  the  viability  of  the  group  as  a  whole.  Another  problem  is  that 
some  countries  place,  in  their  national  laws,  emphasis  on  the  protection  of  the 
institution while other countries attach a greater priority to the protection of creditors. 
In  the  crisis  resolution  phase,  other  problems  appear:  for  example,  the  ranks  of 
creditors are different from one Member State to the other. 

131. 

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. 

c) Deposit Guarantee Schemes (DGS) 

132. 

133. 

105 

The  crisis  has  demonstrated  that  the  current  organisation  of  DGSs  in  the  Member 
States  was  a  major  weakness  in  the  EU  banking  regulatory  framework105.  The 
Commission recent proposal is an important step to improve the current regime, as it 
will improve the protection of depositors. 

A  critical  element  of  this  proposal  is  the  requirement  that  all  Member  States  apply 
the  same  amount  of  DGS  protection  for  each  depositor.  The  EU  cannot  indeed 
continue to rely on the principle of a minimum coverage level, which can be topped-
up  at  national  level.  This  principle  presents  two  major  flaws:  first,  in  a  situation 

The  Commission's  recent  proposal  is  an  important  step  to  improve  the  current  DGS-regime,  as  it 
strengthens harmonisation and improves the protection of depositors. However, the directive still leaves 
a  large  degree  of  discretion  to  member  states,  particularly  in  relation  to  funding  arrangements, 
administrative responsibility and the role of DGS in the overall crisis management framework. Leaving 
these issues unresolved at EU-level implies that significant weaknesses remain in the DGS framework, 
including inter alia: 
-  Unsustainable  funding  –  the  current  lack  of  sophisticated  and  risk  sensitive  funding  arrangements 
involves  a  significant  risk  that  governments  will  have  to  carry  the  financial  burden  indented  for  the 
banks,  or  worse,  that  the  DGS  fails  on  their  commitments  (both  of which  illustrated  by  the  Icelandic 
case). In particular, in relation to the any of the 43 European LFCIs identified earlier in the chapter, no 
current scheme can be expected to have the capacity to make reimbursements without involving public 
funds. 
-  Limited  use  in  crisis  management  –  Even  if  DGS’  had  that  capacity,  the  pay  box  nature  of  most 
schemes makes it unlikely that they ever will be utilised for LFCIs, because of the large externalities 
associated with letting such institutions fail. 
-  Negative  effects  on  financial  stability  –  reliance  on  ex-post  funding  and  lack  of  risk  sensitive 
premiums weakens market discipline (moral hazard), distort the efficient allocation of deposits, as well 
as it may be a source of pro-cyclicality. 
-  Obstacle  to  efficient  crisis  management  –  due  to  incompatible  schemes  (trigger  points,  early 
intervention powers etc.) and diverging incentives among member states. 

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134. 

135. 

136. 

137. 

where  a  national  banking  sector  is  perceived  as  becoming  fragile,  there  is  the  risk 
that deposits would be moved to the countries with the most protective regime (thus 
weakening banks in the first country even further); second, it would mean that in the 
same Member State the customers of a local bank and those using the services of a 
third country branch could enjoy different coverage levels. As the crisis has shown, 
this cannot be reconciled with the notion of a well-functioning Single Market. 

Another important element to be taken into account is the way in which the DGSs are 
funded. In this respect, the Group is of the view that preference should be given to 
schemes  which  are  pre-funded  by  the  financial  sector.  Such  schemes  are  better  to 
foster confidence and help avoiding pro-cyclical effects resulting from banks having 
to pay into the schemes at a time where they are already in difficulty. 

Normally,  pre-funded  DGSs  should  take  care  in  the  future  of  losses  incurred  by 
depositors.  Nonetheless,  it  is  probable  that  for  very  large  and  cross  border 
institutions,  pre-funded  mechanisms  might  not  be  sufficient  to  cover  these 
guarantees. In order to preserve trust in the system, it  should be made clear  that in 
those cases pre-funded schemes would have to be topped-up by the State. 

The idea of a pooled EU fund, composed of the national deposit guarantee funds, has 
been  discussed  by  the  Group,  but  has  not  been  supported.  The  setting-up  and 
management of such a fund would raise numerous political and practical problems. 
Furthermore,  one  fails  to  see  the  added-value  that  such  a  fund  would  have  in 
comparison  to  national  funds  operating  under  well-harmonised  rules  (notably  for 
coverage levels and the triggering of the scheme). 

EU  harmonization  should  not  go  as  far  either  as  laying  down  rules  on  the  possible 
use  of  DGSs  in  the  management  of  a  crisis.  It  should  not  prohibit  additional  roles 
beyond the base task for a DGS to act ex post, in the crisis resolution phase, as a pay 
box  by  reimbursing  the  guaranteed  amount  to  depositors  in  a  defaulted  bank.  Most 
member countries limit their national DGS to this pay box function. Some countries, 
however, extend the activities by giving their DGS also a rescue function. The Group 
did not see any need for EU harmonization in this respect. 

There is a specific case (of the Icelandic type) when a supervisory authority allows 
some  of  its  banks  to  mushroom  large  branches  in  other  EU  countries,  whilst  the 
home Member State is not able to honour the deposit guarantee schemes which are 
inadequate for such exposures. The guarantee responsibilities then de facto fall into 
the  jurisdiction  of  the  host  country.  This  is  not  acceptable  and  should  at  least  be 
addressed, for example, in the following way: the host Member State should have the 
right to inquire whether the funds available in the DGS of the home Member State 
are indeed sufficient to protect fully the depositors in the host Member State. Should 
the host Member State not have sufficient guarantees that this is indeed the case, the 
only  way  to  address  this  kind  of  problem  is  to  give  sufficient  powers  to  the  host 
supervisory authorities to take measures that would at the very beginning curtail the 
expansive trends observed. 

138. 

The Group has not entered into the specifics of the protection of policy-holders and 
investors. It nevertheless considers that the above general principles, and in particular 
the  equal  protection  of  all  customers  in  the  Single  Market,  should  also  be 
implemented in the insurance and investment sectors. 

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d) Burden sharing 

139. 

140. 

141. 

The issue of burden sharing in cases of crisis resolution is extremely complicated for 
two reasons. First, cases where financial support from both public sector and private 
sector  is  needed  to  reach  an  acceptable  solution  are  more  complex  than  rescues 
where  either  private  or  public  money  is  involved.  Second,  agreement  on  burden 
sharing on an ex post basis, at the moment of the rescue operation, is more difficult 
to reach than when one can rely on predetermined, ex ante arrangements. 

As noted above, the current lack of pan-EU mechanism to resolve a crisis affecting a 
cross-border group implies that there is no choice but to resolve this crisis at national 
entity-level or to agree on improvised, ad hoc cross-border solutions. The lack of a 
financing  mechanism  to  support  the  resolution  of  a  cross-border  group  further 
complicates the situation. 

On  the  basis  of  the  experiences  learnt  from  the  crisis,  the  Group  believes  that  the 
Member States should become able to manage a crisis in a more adequate way than 
is feasible today. There would be merit, in order to achieve this, in developing more 
detailed  criteria  on  burden  sharing  than  the  principles  established  in  the  current 
Memorandum of Understanding (MoU), which limits the sharing of a fiscal burden 
to  two  main  principles:  the  economic  impact  of  the  crisis  on  the  Member  States 
concerned  (equity  principle)  and  the  allocation  of  home/host  supervisory  powers 
(accountability principle). 

142. 

Burden sharing arrangements could, in addition, include one of the following criteria, 
or a combination thereof: 

–  the deposits of the institution; 

–  the  assets  (either  in  terms  of  accounting  values,  market  values  or  risk-weighted 

values) of the institution; 

–  the revenue flows of the institution; 

–  the share of payment system flows of the institution; 

–  the  division  of  supervisory  responsibility;  the  party  responsible  for  supervisory 
work,  analysis  and  decision  being  also  responsible  for  an  appropriately  larger 
share of the costs. 

143. 

These criteria would preferably be implemented by amending the 2008 MoU. Where 
needed, additional criteria could be agreed. 

Recommendation 13: The Group calls for a coherent and workable regulatory framework 
for crisis management in the EU: 

–  without  pre-judging  the  intervention  in  future  individual  cases  of  distressed  financial 
institutions,  a  transparent  and  clear  framework  for  managing  crises  should  be 
developed; 

–  all  relevant  authorities  in  the  EU  should  be  equipped  with  appropriate  and  equivalent 

crisis prevention and crisis intervention tools; 

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–  legal  obstacles  which  stand  in  the  way  of  using  these  tools  in  a  cross-border  context 

should be removed, with adequate measures to be adopted at EU level. 

–  Recommendation  14:  Deposit  Guarantee  Schemes  (DGS)  in  the  EU  should  be 
harmonised  and  preferably  be  pre-funded  by  the  private  sector  (in  exceptional  cases 
topped  up  by  the  State)  and  provide  high,  equal  protection  to  all  bank  customers 
throughout the EU. 

The principle of high, equal protection of all customers should also be implemented in the 
insurance and investment sectors. 

The  Group  recognises  that  the  present  arrangements  for  safeguarding  the  interests  of 
depositors in host countries have not proved robust in all cases, and recommends that the 
existing  powers  of  host  countries  in  respect  of  branches  be  reviewed  to  deal  with  the 
problems which have occurred in this context. 

Recommendation  15:  In  view  of  the  absence  of  an  EU-level  mechanisms  for  financing 
cross-border crisis resolution efforts, Member States should agree on more detailed criteria 
for  burden  sharing  than  those  contained  in  the  existing  Memorandum  of  Understanding 
(MoU) and amend the MoU accordingly. 

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7. 

ANNEX III:  MAIN  ELEMENTS  OF  A  POSSIBLE  FUTURE  FRAMEWORK  (EXTRACT 
FROM THE COMMISSION COMMUNICATION) 

The  issues  that  need  to  be  addressed  in  order  to  construct  an  EU  crisis  management 
framework  to  deal  with  cross-border  banks  are  described  in  greater  detail  in  the 
Communication  and  accompanying  staff  working  document.  The  table  below  provides  an 
overview of what those issues are and when they are likely to be relevant.  Measures aimed at 
strengthening  crisis  prevention  fall  outside  the  scope  of  the  Communication,  and  are  the 
subject of separate Commission initiatives.  

The Communication covers three areas that, for the purposes of discussion, are presented as 
conceptually distinct.  These are: 

1.    Early  intervention  (section  3),  covering  actions  by  supervisors  with  the  aim  of 
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 it is or likely to become insolvent (within 
the meaning of the applicable law). 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 of 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. 

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

the applicable insolvency regime.  

Although  these  measures  are  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.   

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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 

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8. 

ANNEX IV. SUMMARY  OF  THE  PUBLIC  CONSULATION  CONCERNING DIRECTIVE  ON 
THE REORGANISATION AND WINDING UP OF CREDIT INSTITUTIONS (2001/24/EC). 

Main results of the consultation106 

In  May  2007,  the  Commission  launched  a  public  consultation  on:  (i)  whether  Directive 
2001/24/EC  on  the  reorganisation  and  winding  up  of  credit  institutions  leaves  gaps  or 
ambiguities  that  need  to  be  removed;  and  (ii)  issues  arising  in  the  context  of  crisis 
management and resolution for banking groups (i.e. parent credit institutions with subsidiaries 
in other Member States). The purpose of the public consultation was to take stock of Member 
States’  legal  frameworks  relating  to  the  reorganisation  of  banking  groups,  and  to  identify 
possible  problems  preventing  smooth  crisis  management,  which  may  involve  asset  transfers 
within banking groups. 

In response to its consultation, the Commission  received 51 answers to the consultation; 39 
were  from  Member  States’  national  authorities  and  12  from  industry.  The  Commission's 
report on the pubic consultation summarised the responses and presented an overview of the 
policy  issues  raised  by  respondents  (Ministries  of  Finance,  Justice,  Economic  Affairs, 
financial  supervisors,  national  and  international  industry  associations,  deposit  guarantee 
schemes, central banks).  

Problems, ambiguities in the current text 

Even though the Directive’s rules have never been applied in practice, respondents expressed 
their  views  on  a  number  of  provisions  that  might  need  clarification  or  amendment. 
Respondents  asked  for  more  clarity  on  issues  related  to  the  role  of  host  authorities, 
equivalence  of  claims,  form  of  publication,  deadlines,  and  provisions  on  information 
exchange. 

Respondents  also  called  for  new  legislation  catering  for  the  insolvency  of  cross-border 
branches  of  investment  firms  and  payment  institutions,  which  are  at  present  not  covered  by 
any directives. A more precise reference to e-money institutions in this context would also be 
welcomed by some respondents. 

Extension of the Directive — winding-up of cross-border banking groups 

Member States and the industry broadly supported a legal framework tailored to the winding-
up  and  reorganisation  of  cross-border  banking  groups.  This  would  contribute  to  further 
enhancing  the  financial  stability  arrangements  given  the  increased  activity  of  cross-border 
financial groups. 

Respondents  proposed  a  set  of  possible  solutions  regarding  both  the  winding-up  and 
reorganisation  of  cross-border  banking  groups  and  the  reduction  of  obstacles  to  asset 

106 

All consultation documents are available on the following website: 
http://ec.europa.eu/internal_market/bank/windingup/index_en.htm 

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transferability.  Some  of  these  solutions  might  be  mutually  exclusive,  while  others  might  be 
applied cumulatively. 

Possible options/solutions suggested by respondents could include: 
(i) Full harmonisation across Member States; 
(ii)  Harmonisation  limited  to  specific  circumstances  (e.g.  in  case  of  intermingled  assets, 
confusion of proceedings, cases of mismanagement); 
(iii)  Coordination  of  multiple  insolvency  proceedings  by  a  “lead”  insolvency  administrator 
governed by the law of each Member State; 
(iv) Possibility for all creditors to file claims against any insolvent entities of the group; 
(v)  Mere  cooperation 
the 
judicial/administrative authorities to consult the authorities of the home country of the parent 
company). 

to  cooperate  and 

for  administrators 

(requirement 

for 

Asset transferability within a cross-border banking group 

The following solutions might be considered to address legal obstacles to asset transferability: 
(i)  Full  harmonisation  to  overcome  obstacles  in  terms  of  company  law,  banking  law  and 
insolvency law; 
(ii) Harmonisation with respect to some key issues (e.g. group’s interest in company law); 
(iii)  Supervisory  arrangements  for  asset  transferability  (e.g.  agreement  of  home  and  host 
banking supervisory authorities) and conditions to allow asset transferability; 
(iv) Mutual intra-group agreement (i.e. intra-group guarantees). 

However, in the interest of financial stability, such asset transfer should not be detrimental to 
entities  from  which  assets  have  been  transferred.  The  overall  benefit  of  stakeholders 
(shareholders,  creditors,  governments,  and  employees)  needs  to  be  assured.  Adequate 
safeguards could include: 

•  guarantees provided by the parent or another entity of the group; 

•  access to all proceedings for creditors with a priority right; 

•  cooperation and agreement of national authorities to transfer of assets; 

•  protection of minority shareholders, creditors and the entity transferring assets as part of a 

group’s winding-up or reorganisation process. 

Powers of supervisors 

Any  EU-wide  approach  to  winding-up  and  asset  transferability  may  require  similar  specific 
powers for authorities to fully and effectively cooperate. In this respect, the consultation has 
demonstrated that the EU legal framework is fragmented. The extent of banking supervisory 
authorities’  involvement  in  crisis  resolution  and  management  varies  from  one  country  to 
another.  Future  work  needs  to  address  this  situation  in  order  to  enable  banking  supervisory 
authorities  (hereinafter  “competent  authorities”)  and  other  authorities  to  work  together 
effectively. 

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