Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank - Bank Resolution Funds
Date: 2010-05-26
Institutions: European Commission
Subjects: anti-crisis plan, bank, credit institution, economic recession, financial institution, financial market

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EUROPEAN COMMISSION 

Brussels, 26.5.2010 
COM(2010) 254 final 

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

Bank Resolution Funds 

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

Bank Resolution Funds 

1. 

CONTEXT 

Over  the  course  of  the  ongoing  crisis,  governments  throughout  the  European  Union  and 
internationally  have  provided  massive  amounts  of  public  money  to  support  their  financial 
sectors1. This support was necessary to ensure financial stability and to protect depositors, and 
was accompanied by  measures  to  support the real economy. However the overall effect has 
been  to  impose  a  heavy  economic  burden  to  be  borne  by  today's  taxpayers  and  future 
generations2.  

A  clear  political  message  that  emerged  from  the  G-20  meeting  in  Pittsburgh  in  September 
2009, strongly backed by the EU,3 is that taxpayers' money should not be used again to cover 
bank  losses.  The  European  Commission  is  working  to  achieve  this  in  at  least  two 
complementary  ways:  i)  by  reducing  the  probability  of  banking  failure  through  stronger 
macro  and  micro-economic  supervision,  better  corporate  governance  and  tighter  regulatory 
standards and; ii) by ensuring that, if in spite of these measures failure does occur, appropriate 
tools  including  sufficient  resources  are  available  for  orderly  and  timely  resolution.  The 
establishment of resolution funds constituted from private sector sources are an important part 
of this response.  

The Commission supports the establishment of ex ante resolution funds, funded by a levy 
on banks,4 to facilitate the resolution of failing banks in ways which avoid contagion, allow 
the bank to be wound down in an orderly manner and in a timeframe which avoids the "fire 
sale" of assets ("principe de prevoyance"). The Commission believes that resolution funds are 
a necessary part of the toolbox of several different measures that will be included in the new 
EU crisis management framework seeking to mitigate the burden on taxpayers and minimize 
– or better still eliminate - future reliance on taxpayer funds to bail out banks. 

It is a matter of critical importance, in an era of increasingly integrated and global financial 
markets  that  solutions  are  found  to  effectively  handle  banking  crises.  Recent  extreme 
volatility of financial markets is a clear example and reminder of the extent to which financial 
markets are integrated. Robust and credible funding arrangements are more than ever needed.  

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According to the IMF, the net direct fiscal cost of the crisis has averaged 2.7% of GDP for advanced 
G20 countries although amounts pledged, including guarantees and other contingent liabilities averaged 
25% of GDP. 
Government debt in advanced G20 economies is projected to rise by almost 40 percentage points during 
2008-15 (cf IMF).  
ECOFIN Council Conclusions of 18 May 2010. 
In accordance with the scope of application of the EU banking legislation, i.e. the Capital Requirements 
Directive  2006/48/EC,  the  reference  to  "bank"  shall  in  this  Communication  be  understood  to  include 
banks and investment firms. 

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its  Communication  of  October  20095, 

the  Commission  strongly  supported 

In 
the 
establishment  of  a  new  crisis  management  framework  at  the  EU  level  designed  to  facilitate 
orderly  bank  failures  and  to  minimize  costs  to  taxpayers.  In  an  April  2010  Staff  Working 
Document6, the Commission services identified a bank levy as one possible option for making 
the financial sector contribute to the costs of the crisis and preventing the occurrence of future 
crises. On the 9th of May 2010, the ECOFIN concluded that work on crisis management and 
resolution has to be accelerated. 

Political  support  is  growing  for  applying  the  so-called  "polluter  pays"  principle,  known 
from environmental policy, also in the financial sector so that those responsible for causing it 
will  pay  for  the  costs  of  any  possible  future  financial  crisis.  A  number  of  countries  have 
already introduced, or are in the process of introducing levies on banks, although these differ 
across jurisdictions.  

The G20 will hold a first discussion about such levies at its Ministerial meeting in June. .This 
Communication  will  provide  substantial  input  to  these  meetings.  The  EU  should  lead  G20 
efforts  to  find  a  global  approach  and  model  with  a  view  of  maintaining  a  world-wide  level 
playing field.. 

This  Communication  sets  out  the  Commission's  thinking  on  how  the  financial  sector  could 
contribute to the cost of financing the resolution of failing banks. It also explains where bank 
resolution funds fit within the overall set of tools which should be made available in the area 
of  crisis  prevention  and  management  of  banks.  This  Communication  also  sets  out  the 
Commission's broad ideas on a number of important issues, such as the purpose of funds, their 
potential size, as well as the conditions under which they might be used.  

However, it does not deal with any levies or taxes whose purpose is to recoup the public funds 
committed during the current crisis to stabilise the banking system or to tackle excessive risk-
taking  or  speculation.  The  examination  of  such  measures  should  continue  in  parallel  as  a 
useful complement to the preventive funds that are considered in this Communication. 

The setting up of resolution funds raises a number of challenges – in particular with respect to 
moral  hazard  concerns,  which  have  been  fuelled  by  actions  taken  during  the  crisis.  The 
Commission recognises that this is a major concern which needs to be addressed by making it 
clear  and  unambiguous  that  shareholders  (up  to  the  value  of  their  investment)  and  creditors 
(excluding depositors which are guaranteed by deposit guarantee schemes) must be the first to 
face the consequences of a bank failure and that resolution funds must not be used as an 
insurance  against  failure  or  to  bail  out  failing  banks,  but  rather  to  facilitate  an  orderly 
failure.  In  short,  bank  resolution  funds  should,  as  the  IMF  suggests,  be  tied  strongly  to  the 
future resolution regime.  

The  establishment  of  bank  resolution  funds  will  form  a  part  of  the  new  crisis  management 
framework. It is acknowledged that this will entail costs for banks at a time when they are in 
the process of implementing additional measures  in  response  to  the  crisis.  The  Commission 
recognises that it is essential to develop a clear understanding and careful assessment of the 
cumulative impacts of the broad set of reforms dealing with levies, deposit guarantee schemes 
and bank capital, and adjust the individual elements of the reform package accordingly. It is 

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COM(2009) 561.  
Innovative Financing at a Global Level - SEC(2010) 409, 1.4.2010. 

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necessary  to  ensure  that  the  costs  are  calibrated  in  such  a  way  as  to  avoid  stifling  the 
economic  recovery  and  increasing  the  cost  of  credit  to  the  real  economy.  It  should  also  be 
avoided that increased costs are passed on to bank customers in the form of higher charges. 
The  Commission  will  ensure  that  all  these  elements  are  properly  taken  into  account  in  the 
accompanying impact assessment work. 

2. 

BANK  RESOLUTION  FUNDS  SHOULD  BE  PART  OF  A  FINANCIAL  STABILITY 
FRAMEWORK 

Establishing  bank  resolution  funds  should  not  be  considered  in  isolation  and  should  be 
understood  as  part  of  the  range  of  broader  initiatives  aimed  at  strengthening  the  financial 
system in the wake of the current crisis. Fundamental reform of the regulation and supervision 
of  financial  markets  is  currently  underway  to  address  the  failings  exposed  by  the  banking 
crisis. The Commission has proposed measures to strengthen capital requirements, reform the 
EU  supervisory  architecture  and  will  in  July  come  forward  with  a  proposal  to  strengthen 
existing Deposit Guarantee Schemes (DGS). Furthermore, the Commission will soon launch a 
wide-ranging  consultation  with  a  view  to  strengthen  corporate  governance  of  financial 
institutions, in particular banks. 

Understanding the broader context is an essential part of deciding what funds should do, how 
they  would  to  work  and  how  large  they  might  need  to  be.  Broader  reforms  to  the  financial 
framework focussed on prevention can be expected to diminish the probability and severity of 
bank  failure,  and  more  efficient  procedures  leading  to  earlier  intervention  and  effective 
resolution  measures  should  reduce  the  cost  of  any  measures  taken  and  mitigate  the  implicit 
guarantees associated with institutions deemed ‘too big to fail’.  

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Diagram 1: When would a resolution fund be used? 

Micro prudential 
problem 
detection 

Institution sound on 
a micro prudential 
basis 

Institution not  
recoverable 

of 

Use 
Bank 
Resolution 
Funds 

Risk 
preparation 
recovery 
resolution plans 

assessment, 
of 
and 

Early 
intervention 
implementation 
& 
of recovery plans,  

Funding 
resolution 
for 
tools:  bridge  bank;  good 
bank/bad  bank;  transfer  of 
assets  and  associated 
administrative  costs. 

Liquidation/winding 
up  of  all  or  parts  of 
the failed institution 

Prevention 

Early 
Intervention 

Resolution 

Liquidation 

The  Commission  will  adopt  in  October  2010  a  roadmap  setting  out  the  timetable,  concrete 
measures, tools and plans for a complete EU framework for crisis management. The intention 
is to present the relevant legislative proposals regarding both crisis management measures and 
tools and resolution funds by early 2011.  

The objective of the new framework will be to ensure Member State authorities have common 
tools that can be used in a coordinated manner to allow prompt and legally robust action in the 
event  of  major  banking  failures,  protecting  the  broader  financial  system,  avoiding  costs  for 
taxpayers  and  ensuring  a  level  playing  field.  In  particular,  the  aim  will  be  to  ensure  that 
orderly failure is a credible option for any bank, irrespective of size or complexity.  

Applying  resolution  tools  with  accompanying  private  sector  financing,  to  very  large  and 
complex  financial  institutions  may  pose  particular  challenges.  For  these  reasons  other 
alternative tools, that would not include public funding, need to be available. They could be 
used in specific circumstances to stabilize situations and avoid a forced and rushed liquidation 
that may be detrimental to financial stability in the short term.  

Significant work is underway at international level to reduce the probability and impact of the 
failure of such institutions (Box 1).  

BOX 1: Addressing large and very complex financial institutions in distress 

There  needs  to  be  sufficient  certainty  that  distressed  entities  could  be  handled  without 
jeopardising financial stability or triggering a systemic event. The tools outlined below could 
complement ex ante resolution funds and provide authorities with a set of sufficiently robust 
measures to deal with distressed large and very complex financial institutions. 

Recovery and Resolution Plans 

Work is ongoing both at EU (CEBS) and at international level (Financial Stability Board) on 
the design and testing of recovery and resolution plans (the G20 has called for these plans to 
be  drawn  up  by  the  end  of  2010),  which  will  be  an  essential  element  of  a  future  EU  crisis 
prevention framework. Relevant authorities should be equipped to actively use existing or, if 

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necessary, new preventative powers to ensure, in advance of a crisis, that banks can be wound 
down in an orderly manner. An efficient legal framework for resolution will be essential. 

Creditor haircuts and debt to equity conversion 

Institution-specific  options  include  debt  to  equity  conversion  (either  administrative  or 
contractual7) or imposing 'haircuts' on holders of subordinated debt and unsecured creditors 
(excluding deposits) in order to provide significant funding to a distressed firm and maintain 
it as a going concern. 

There is an active international debate about the possible introduction of such measures. This 
could include modifying prudential rules to require or encourage the use of convertible debt 
instruments  (so  institutions  can  ‘self  insure’),  or  conferring  an  administrative  power  for 
authorities  to  apply  haircuts  to  non  convertible  debt  or  to  convert  debt  into  equity.  Pre-
insolvent  recapitalisation  through  such  mechanisms  could  serve  to  stabilize  an  institution. 
Measures  of  this  kind  would  clearly  have  an  impact  on  the  cost  of  funding  for  banks,  on 
capital  structure  and  on  market  practices,  but  they  would  also  help  to  reinforce  market 
discipline by ensuring that unsecured creditors fully bear the costs of the risks to which they 
are  exposed.  To  be  workable  in  practice,  considerable  legal  and  practical  obstacles  would 
need to be overcome and further work is underway. 

3. 

AN EU APPROACH TO BANK RESOLUTION FUNDS IS REQUIRED 

The  extent  of  integration  of  global  financial  markets  requires  common  approaches  to  be 
adopted  both  at  EU  level  and  globally  with  respect  to  the  introduction  of  bank  resolution 
funds. The experience of handling cross-border failures during the current crisis has provided 
clear  illustrations  of  why  new  crisis  management  arrangements  are  necessary.  The  EU’s 
immediate  response  to  the  financial  crisis  has  been  to  propose  legislation  strengthening 
macro-economic  supervision  and  cross-border  supervisory  arrangements  by  setting  up  new 
authorities in recognition of the need for closer cooperation. Under the new arrangements, day 
to  day  supervision  will  remain  national,  consistent  with  Member  States'  fiscal  competence. 
However this choice to remain with a supervisory system which is essentially decentralised, 
relies  on  a  high  level  of  trust  among  authorities  and  cooperation  in  the  new  European 
Supervisory Authorities and will only deliver its full potential if underpinned by a solid cross-
border crisis management framework backed by robust financing arrangements.  

In  principle,  pooling  resources  into  a  single  pan  EU  resolution  fund  would  deliver  clear 
benefits  by:  increasing  risk  diversification;  delivering  economies  of  scale;  reducing  the 
amount  that  would  be  subject  to  burden  sharing;  providing  the  right  incentives  for 
cooperation;  speeding  up  decision-making;  and  guaranteeing  a  level  playing  field.  It  would 
also  better  reflect  the  pan  EU  nature  of  banking  markets,  in  particular  for  cross  border 
banking groups.  

However, the Commission recognises that it would be very difficult to begin with the creation 
of  an  EU  Resolution  Fund  in  the  absence  of  an  integrated  EU  supervisory  and  crisis 
management  framework.  The  European  approach  to  the  establishment  of  bank  resolution 
funds should mirror the broader approach to supervisory arrangements.  

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For example through the issuance of contingent capital with either debt to equity conversion or write-
down features. A number of banks such as Lloyd's and Rabobank have already issued such instruments. 

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For that reason, an appropriate first step could be a system based around the establishment of 
a  harmonized  network  of  national  funds  linked  to  a  set  of  coordinated  national  crisis 
management  arrangements.8  These  arrangements  are  a  first  step  and  would  be  reviewed  by 
20149  with  the  aim  of  creating  EU  integrated  crisis  management  and  supervisory 
arrangements, as well as an EU Resolution Fund in the longer term.  

Establishing  greater  clarity  and  mutual  understanding  between  authorities  through  more 
robust financing arrangements will also be key to aligning incentives between authorities to 
cooperate fully in the event of a cross-border banking failure. This would in turn represent an 
important underpinning for effective cross-border crisis management arrangements.  

Failure  to  adopt  an  EU  approach  with  respect  to  bank  resolution  funds  could  result  in  the 
unilateral  imposition  of  resolution  levies  domestically  and  thus  risk  competitive  distortions 
between national banking markets. It could also lead to the overlapping of levies in the case of 
cross-border  banks.  Moreover,  different  approaches  to  private  sector  financing  mechanisms 
may create obstacles to efficient handling of crises or use of resolution tools, if private sector 
funds are available in some Member States but not in others and may render agreement on the 
sharing of costs more complex, if not impossible.  

For  these  reasons,  an  EU  approach  is  the  appropriate  way  forward  with  respect  to  the 
principles  of  subsidiarity  and  proportionality  as  set  out  in  Article  5  of  the  Treaty  on  the 
European  Union.  Only EU action  would ensure that banking groups operating in more than 
one Member State were subject to similar requirements concerning resolution funds, and thus 
a broadly level playing field, avoid unwarranted compliance costs for cross-border activities 
and  promote  further  integration  within  the  Internal  Market.  Furthermore,  such  an  approach 
should  ensure  consistency,  where  appropriate,  with  existing  EU  legislation.  Such  EU  level 
action would also reinforce financial stability within the EU. 

4. 

FINANCING,  SCOPE  OF  EXPENDITURE  AND  GOVERNANCE  OF  A  BANK  RESOLUTION 
FUND  

This chapter explores three main pillars of such a resolution fund: financing (4.1); scope and 
size (4.2) and governance (4.3). 

4.1. 

Financing Bank Resolution Funds 

Designing financing arrangements for a fund should aim to achieve two objectives: i) to raise 
the necessary amounts of money reflecting the nature of its usage (i.e. the likelihood and cost 
of resolution); ii) to do so in a way which incentivises appropriate behaviour, mitigating the 
risk of resolution. Essentially there are three main parameters: the contribution could be based 
on the institution's liabilities, its assets, or its profits.  

•  Banks'  assets  are  good  indicators  of  their  risk.  They  could  also  accurately  reflect  the 
potential  likelihood  of  a  bank  failure  and  therefore  the  need  to  resolve  the  bank10. 

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This approach takes into account that resolution funds already exist in some Member States. 
2014 is the date foreseen in the proposed EBA Regulation for reviewing the new supervisory . 
In  banking  regulation  terms,  this  would  mean  building  on  the  existing  monitoring  capacity  of  assets' 
riskiness to assess both the Probability of Default (PD) and the Loss Given Default (LGD) in order to 
estimate the relative size of the levies. 

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Indirectly assets could represent an indicator of the amount which might need to be spent 
in  handling  the  bank's  resolution.  However,  banks'  assets  are  already  subject  to  risk 
weighted  prudential  capital  requirements  in  the  form  of  capital  charges.  Imposing  a  levy 
based  on  assets  could  therefore  amount  to  an  additional  capital  requirement  and  would 
have  to  be  considered  carefully  in  the  context  of  the  wider  reforms  to  capital  standards 
currently underway.  

•  Banks' liabilities11 would appear to be the most appropriate indicators of the amounts that 
might be needed when facing the need to resolve a bank. Costs of bank resolution are most 
likely  to  arise  from  the  need  to  support  certain  liabilities  (excluding  equity  and  insured 
liabilities - e.g. deposits). However, banks' liabilities could be a less effective proxy for the 
degree of risk. 

•  In addition to balance sheet related levies, levies could be related to profits and bonuses 
as  an  indicator  of  a  bank’s  size  and  more  reflective  of  the  ‘polluter  pays’  principle.12 
However  profits  and  bonuses  may  not  be  closely  correlated  to  the  amount  of  resolution 
financing a bank might require or the probability of its failure. 

The Commission is carefully assessing which of the different basis mentioned would be the 
most  appropriate  for  the  financing  of  a  bank  resolution  fund.  In  any  case,  regardless  of  the 
basis  finally  chosen,  the  Commission  considers  that  it  should  at  least  comply  with  the 
following principles: a) avoid any possible arbitrage, b) reflect the appropriate risks; c) take 
into  account  the  systemic  nature  of  certain  financial  entities,  d)  be  based  on  the  possible 
amounts  that  could  be  spent  if  resolution  becomes  necessary  and  e)  avoid  competition 
distortions.  

There is also an important consideration as to whether funds need to be raised on an ex post or 
an ex ante basis. The Commission takes the view that resolution funds should be built up 
on the basis of contributions from banks ex ante. Fully ex post funded schemes may imply 
upfront  taxpayer  funding  and  therefore  increase  the  risk  that  banking  failures  would  be 
accompanied  by  broader  negative  economic  impacts.  Such  an  approach  may  prove  pro-
cyclical, placing strains on the public budget during a financial crisis when the State is least 
well equipped to provide additional financing13. 

4.2. 

Scope and Size of Fund Expenditure 

The task of bank resolution funds will be to contribute to financing the orderly resolution of 
distressed financial entities. They should be available for resolution of banks irrespective of 
their  size  and  interconnectedness,  but  their  use  to  bail  out  institutions  should  be  clearly 
excluded.  At  this  stage,  it  does  not  seem  appropriate  to  extend  resolution  funds  to  other 
financial  institutions  such  as  investment  funds  or  insurance  institutions.  Although  they  are 
also  active  participants  in  financial  markets,  they  have  a  number  of  specificities  that  would 
complicate  the  application  to  them  of  a  similar  resolution  regime  as  the  one  envisaged  for 
banks. Although resolution funds will not be used to recapitalise banks, they will need to be 

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Using  liabilities  as  the  basis  for  the  calculation  of  the  amount  of  the  levy  is  the  IMF's  preferred 
approach. 
Some  Member  States  have  recently  decided  to  introduce  taxes  on  bonuses.  This  is  different  from  the 
bank levy discussed in this Communication. 
In the event that ex ante funds proved insufficient to cover the costs of a resolution, resolution funds 
would however need to be backed by sufficiently credible alternative financing 

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sufficiently resourced to cope with different resolution costs, and the approach taken will need 
to be tailored to entities of different sizes and nature.  

The size of the fund will depend on which type of financial institutions fall under the scope of 
a crisis resolution framework and will also need to be designed in the context of the planned 
broader reforms to the financial sector. 

BOX 2: Which measures would a Bank Resolution Fund be expected to cover? 

Actions  taken  by  resolution  authorities  to  carry  out  an  orderly  resolution  of  a  bank  may 
involve a variety of different costs. In principle, a well designed resolution framework should 
oblige a resolution authority to resolve ailing entities at the lowest economic and social cost, 
in compliance with the relevant Treaty provisions including state aid rules. The following are 
examples of different measures that resolution funds might be expected to cover: 

- Financing a bridge bank (with the resolution authority taking over the bank) to allow for 
the  continuation  of  operations  of  an  insolvent  institution.  This  could  imply,  for  example, 
providing bridge financing and/or guarantees. 

- Financing a total or partial transfer of assets and/or liabilities from the ailing entity to a 
third  party.  Costs  could  involve  a  guarantee  on  the  assets  (for  example  loss  sharing  with  a 
potential acquirer of bad assets) and/or financing or guaranteeing the transfer of liabilities for 
a  period  of  time  in  order  to  maintain  market  confidence  and  avert  the  risk  of  a  run  by 
creditors. 

-  Financing  a  good  bank/bad  bank  split.  Costs  to  the  fund  might  entail  the  temporary 
purchase  and  management  of  bad  assets  and  the  provision  of  bridge  financing  for  the  good 
bank. 

-  Covering  administrative  costs,  legal  and  advisory  fees,  as  well  as  the  need  to  preserve 
certain vital functions of the banks – such as payments systems. 

During  the  ongoing  crisis,  government  pledges  in  support  of  the  banking  sector  reached  a 
significant percentage of EU GDP. Resolution funds as described in this Communication do 
not  have  the  prospect  of  achieving  a  size  of  that  dimension  because  the  very  purpose  of  a 
resolution  fund  is  to  make  sure  that  interventions  by  governments  to  bail  out  banks  will  be 
pre-empted.  Importantly,  the  Commission  considers  that  a  crisis  management  framework 
must  ensure  that  any  losses  in  the  context  of  a  bank  failure  are  first  and  foremost  borne  by 
shareholders,  holders  of  subordinated  debt  and  unsecured  creditors,  before  resolution  funds 
can be available. The Commission will take a position on the appropriate target limit for funds 
following  further  detailed  quantitative  analysis  and  comprehensive  impact  assessment.  The 
examples provided in Box 3 are included for illustrative purposes and represent a spectrum of 
possible target sizes based on recent initiatives. 

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BOX 3: Cost implications of recent initiatives to create funds 

Some  countries  have  already  taken  the  decision  to  impose  levies  on  banks  for  the  express 
purpose of establishing dedicated funds. However the precise purpose of these funds, as well 
as the financial implications, differs: 

- In Germany, proposals are under preparation for a systemic levy on banks to be paid into a 
stability  fund  to  finance  measures  under  a  special  resolution  regime.  The  details  about  the 
design of the levy, the size of the fund and the way funds should be invested and used are still 
to be developed, however indications are that the levy could be expected to raise around €1 
billion per year. 

- Sweden has recently established a bank “stability fund”, the purpose of which is to finance 
measures to counteract the risk of serious disturbance to the financial system in Sweden14. In 
15 years the fund is targeted to reach 2.5 per cent of GDP. It will be built up on the basis of a 
stability fee paid by banks and other credit institutions, amounting to 0.036 percent per year 
levied on certain parts of the institution's liabilities (excluding equity capital and some junior 
debt securities). 

- The IMF has indicated15 that on the basis of past experiences of crises, approximately 2-4 
percent of GDP should suffice for the provisioning of resolution funds (this corresponds to the 
direct costs of ongoing banking crisis), depending on the relative importance of the financial 
sector. 

In  a  number  of  Member  States,  Deposit  Guarantee  Schemes  (DGS)  are  already  tasked  with 
funding  the  transfer  of  deposits  from  the  failing  entity16.  The  Commission  believes  that  the 
use  of  deposit  guarantee  funds  for  resolution  purposes  should  be  limited  to  the  amount  that 
would  have  been  necessary  to  pay  out  covered  deposits.  Costs  beyond  this  limit  should  be 
borne by resolution funds. Care will also need to be taken when designing systems to avoid 
any duplication. 

4.3. 

The Governance of Bank Resolution Funds 

Given that the size of a bank resolution fund is likely to be significant in most economies, the 
governance rules for such a fund are of paramount importance. Contributions from banks to 
cover the costs of future resolution could be either allocated to the general budget or to a fund. 
Some Member States could find it attractive to use these contributions to reduce their public 
deficit. However in the longer term, failure to establish dedicated resolution funds may result 
in increasing the dependence of the financial sector on public funds should new crises occur, 
and further reinforce the moral hazard problem associated with ‘too big to fail’ institutions. 
Furthermore,  the  risk  will  always  remain  that  levies  paid  into  the  general  budget  over  time 
might be diverted for other uses.  

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The  mandate  is  to  be  understood  more  broadly  than  the  "bank  resolution  funds"  described  by  the 
Commission. 
A Fair and Substantial Contribution by the Financial Sector, Interim report for the G-20, April 2010. 
There have been a number of examples of orderly bank failures using the Deposit Guarantee Scheme 
during  the  recent  financial  crisis.  These  which  serve  to  illustrate  the  potential  costs  associated  with 
small and medium bank failures (e.g. Dunfermline Building Society £ 1.5 billion, Bradford & Bingley 
£ 14 billion,. 

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The  Commission  therefore  takes  the  view  that  bank  resolution  funds  should  remain 
separate from the national budget and dedicated only to resolution costs. 

For  practical  purposes,  management  of  bank  resolution  funds  should  be  entrusted  to 
authorities  that  would  be  in  charge  of  resolving  financial  entities  and  which  would  act  as 
independent executive bodies. Clear lines of accountability will be needed where new powers 
for  the  allocation  of  funds  are  granted.  Functional  independence  from  government  would 
ensure that the funds were strictly reserved to pay for resolution measures. The details of the 
governance  arrangements  will  have  to  be  further  developed.  In  this  context,  three  questions 
are particularly relevant for the management of a fund:  

i) How should the money collected be held, ii) Under which conditions should the funds be 
used to resolve banks and iii) How to decide the allocation of costs payable by funds in case 
of a cross-border resolution:  

(i) 

(ii) 

Investment of funds would need to be in a geographically well diversified portfolio 
in  highly  liquid  non-bank  assets  with  low  credit  and  market  risk  and  in  a  way  that 
supports the real economy.  

With regard to the use of funds, the Commission intends to put in place a harmonised 
resolution framework which should aim to avoid any differences resulting from the 
way national authorities apply resolution powers and tools, thus limiting competitive 
distortions. This will determine when and how resolution funds can be used.  

(iii)  With  regard  to  arrangements  in  case  of  a  cross-border  resolution,  the  Commission 
intends to come forward with proposals to establish clear rules on how coordination 
will be expected to take place. At the core of these arrangements could be colleges 
involving authorities in charge of resolution with a view to taking joint decision on 
the preparation for the resolution of a cross-border banking group under the oversight 
of  an  entity  such  as  the  future  European  Banking  Authority  as  proposed  by  the 
Commission.  Such  resolution  plans,  based  on  clear  principles  to  be  established  by 
law,  would  include  discussion  about  how  burdens  might  be  fairly  shared  and  the 
sharing of costs between privately financed resolution funds.  

Finally,  the  use  of  bank  resolution  funds  will  need  to  respect  the  EU  state  aid  rules.  The 
definition  of  the  operational  aspects  of  resolution  funds  will  need  to  take  proper  account  of 
potential state aid implications. Interventions using resolution funds will thus need to embed 
features that make easier their compatibility assessment, particularly in relation to the type of 
support given, appropriate burden sharing and avoidance of undue distortions of competition. 

5. 

NEXT STEPS 

This  Communication  contributes  to  the  discussions  on  levies  and  resolution  funds  that  will 
take  place  in  the  context  of  the  upcoming  G20  meetings.  It  is  important  to  find  broad 
agreement  –  within  the  EU  and  globally  -  on  general  principles  and  orientations  on  these 
matters as rapidly as possible to avoid the development of divergent national approaches.  

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The Commission invites the European Council of 17 June 2010 to endorse the principles and 
suggested  way  forward  in  this  Communication  and  to  invite  the  EU's  representatives  in  the 
G20 to advocate it in forthcoming meetings.  

As  a  next  step  in  the  creation  of  a  comprehensive  crisis  prevention  and  management 
framework,  the  Commission  will  present  in  October  2010  a  Communication  setting  out  a 
roadmap and its broader and detailed plans for the development of a new crisis management 
framework, including further assessment of the viability of tools to ensure creditors contribute 
at an early stage to a resolution (e.g. through the use of creditor haircuts). The Commission 
plans to adopt legislative proposals for crisis management and resolution funds in early 
2011. 

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