COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN CENTRAL BANK An EU Framework for Crisis Management in the Financial Sector
Date: 2010-10-20
Institutions: European Commission
Subjects: anti-crisis plan, economic recession, financial analysis, report

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EUROPEAN COMMISSION 

Brussels, 20.10.2010 
COM(2010) 579 final 

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

An EU Framework for Crisis Management in the Financial Sector 

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   EN 

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

An EU Framework for Crisis Management in the Financial Sector 

(Text with EEA relevance) 

1. 

INTRODUCTION 

During  the  financial  crisis,  governments  discovered  that  banks  and  other  systemic  financial 
institutions could not be allowed to fail. Put bluntly, there was no simple way for a bank to 
continue  to  provide  essential  banking  functions  whilst  in  insolvency,  and  in  the  case  of  a 
failure of a large bank, those functions could not be shut down without significant systemic 
damage. The actions that governments were forced to take to deal with banking institutions in 
distress  –  capital  injections,  asset  relief  measures,  guarantees  on  assets  and  liabilities  and 
liquidity support – succeeded in stabilising the financial system. However, they also propped 
up  failing  institutions  and  supported  creditors  at  huge  costs  to  public  finances:  EU 
governments  committed  aid  amounting  to  around  30%  of  EU  GDP,  while  the  aid  used 
amounts  to  13%.1  These  public  interventions  have  had  a  significant  impact  on  the  level 
playing field within the internal market.2  

There is consensus that this must never happen again. Banks must be allowed to fail, like any 
other  business.  Authorities  must  be  equipped  with  tools  that  enable  them  to  prevent  the 
systemic  damage  caused  by  disorderly  failure  of  such  institutions,  without  unnecessarily 
exposing  taxpayer  to  risk  of  loss  and  causing  wider  economic  damage.  Alongside  tougher 
regulation reducing the chances of a bank becoming distressed, a credible regime is needed to 
re-instil market discipline associated with the threat of failure and to reduce moral hazard – 
the implicit protection from failure that those in the banking sector currently enjoy. 

The  Commission  has  been  developing  an  EU  policy  response,  and  to  date  has  adopted  two 
Communications  related  to  crisis  management  and  resolution.  The  first,  in  October  2009,3 
considered  what  changes  were  needed  to  make  possible  effective  crisis  management  and 
resolution or orderly winding up of a failing cross-border bank, and was the subject of a public 
consultation. The results of that consultation were presented at a conference on crisis management 
organised  by  the  Commission  in  March  2010.4  In  spring  2010  the  Commission  established  a 
group of insolvency law experts to assist with the preparatory work. The second Communication 
published in May 20105 explored the financing of resolution in a way which minimises moral 

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Commission  services  and  information  provided  by  Member  States  via  the  Economic  and  Financial 
Committee, up to December 2009. 
The European Commission has therefore required, where appropriate, burden sharing and measures to 
limit such competitive distortions in accordance with EU treaty provisions.  
COM(2009) 561 
Information  on  that  conference,  including  presentations  and  papers  are  published  on  the  Commission 
website at: http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm#conference 
COM(2010) 254 

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hazard  and  protects  public  funds.6  A  report  by  the  European  Parliament  has  also  made 
important recommendations on Cross-Border Crisis Management in the Banking Sector (the 
Ferreira Report).7 

The  Commission  is  helping  to  shape  the  work  of  the  FSB  and  the  G20,  and  is  also  closely 
monitoring other international developments. The G20 summit held in Toronto in June 2010 
committed to the design and implementation of systems whereby authorities have the powers 
and tools to restructure or resolve all types of financial institutions in crisis, without taxpayers 
ultimately  bearing  the  burden.  The  G20  also  called  on  the  FSB  to  consider  and  develop 
concrete  policy  recommendations  to  address  problems  associated  with,  and  to  resolve, 
systemically important financial institutions by the Seoul Summit in November 2010.8 In the 
US, the Dodd-Frank reform9 has established a resolution framework for systemic institutions 
at group level.  

This Communication sets out the policy orientations the Commission intends to pursue on the 
basis  of  the  work  done  to  date  on  crisis  management  and  resolution.  The  Commission  will 
continue its preparatory work along these lines with a view to presenting legislative proposals 
in  Spring  2011.  That  proposal  will  be  accompanied  by  an  impact  assessment,  and  will 
complete  the  Commission's  implementation  of  the  principal  G20  reforms  in  the  area  of 
financial  regulation.  A  public  consultation  on  technical  details  of  the  legislative  framework 
under  consideration  will  be  launched  in  December  2010.  Section  6  of  this  Communication 
also outlines further work on the reform of insolvency law and the resolution of cross-border 
groups. 

2. 

SCOPE AND OBJECTIVES 

The framework outlined in this Communication will apply to all credit institutions and some 
investment  firms,10  irrespective  of  whether  they  operate  cross-border  or  domestically. 
However,  the  Commission  will  carry  out  further  work  on  resolution  of  other  financial 
institutions,  reporting  by  the  end  of  2011.That  work  will  consider,  in  particular,  what  crisis 
management  and  resolution  arrangements,  if  any,  are  necessary  and  appropriate  for  other 
financial 
investment  funds  and  Central 
insurance  companies, 
Counterparties.  

institutions, 

including 

The overriding objective of a European resolution framework should be that ailing institutions 
of any type and size, and in particular systemically important institutions, can be allowed to 
fail without risk to financial stability whilst avoiding costs to taxpayers. To achieve this in the 
banking sector, the Commission is developing a framework for prevention, crisis management 
and resolution based on the following objectives: 

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10 

of 

the 

two 

text 

previous  Commission  Communications  may 

The 
at:http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm 
European Parliament, A7-0000/2010, Committee on Economic and Monetary Affairs, rapporteur: Elisa 
Ferreira.  
The  ideas  set  out  in  this  document  are  consistent  with  the  recommendations  being  developed  by  the 
FSB. 
The Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173). 
The  Commission's  policy  aim  is  to  cover  those  investment  firms  the  failure  of  which  risks  causing 
systemic instability, and is considering options as to how that category might be defined. 

found 

be 

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•  Put  prevention  and  preparation  first:  comprehensive  planning  and  preventative 
measures should help authorities and firms prepare for resolution, and should complement 
other reforms to reduce risks in the financial system;  

•  Provide credible resolution tools ensuring authorities have options to resolve institutions 
in  a  way  that  minimises  risks  of  contagion  and  ensures  continuity  of  essential  financial 
services, including continuous access to deposits for insured depositors; 

•  Enable  fast  and  decisive  action,  by  putting  in  place  well  defined  powers  and  processes 
and eliminating legal uncertainty about when authorities can intervene and the actions they 
can take; 

•  Reduce moral hazard by ensuring an appropriate allocation of losses to shareholders and 
creditors and protecting public funds. This implies, at a minimum, the costs of resolution 
should be borne by the shareholders and, as far as possible, the creditors of the institution 
in question reflecting the normal order of ranking and if necessary by the banking industry 
as a whole; 

•  Contribute  to  a  smooth  resolution  of  cross  border  groups  to  ensure  minimum 
disruption  to  the  internal  market,  fair  sharing  of  costs  and  the  preservation  of  essential 
banking services; 

•  Ensure  legal  certainty,  appropriate  safeguards  for  third  parties  and  restrict  any 
interference  with  property  rights  to  what  is  necessary  and  justified  in  the  public  interest. 
The framework should aim to ensure that creditors receive a treatment similar to that which 
they would have received if the bank had been wound up;11 

•  Limiting distortions of competition, which derive from interventions that distort the level 
playing field in the financial sector at European level. This implies that State aid granted 
under the resolution framework must be compatible with the Treaty rules and the internal 
market.  

A  crisis  management  framework  based  on  these  objectives  should  ensure  that  banks  in 
difficulties exit the market without jeopardising financial stability. Without such a framework, 
there may be no realistic alternative in a future crisis to bailing out financial institutions again. 

3. 

PRINCIPAL ELEMENTS OF THE FRAMEWORK 

The crisis management framework that the Commission is developing comprises three classes 
of  measures:  preparatory  and  preventative  measures;  early  supervisory  intervention;  and 
resolution  tools  and  powers.  Some  of  these  tools  already  exist  under  national  regimes  but 
some would be new in some Member States. It will therefore be necessary to ensure a smooth 
transition  between  the  current  national  arrangements  and  the  future  framework.  The  early 
intervention  and  resolution  measures  must  give  authorities  a  wide  range  of  options  and, 
subject  to  the  triggers,  the  framework  should  not  be  prescriptive  as  to  which  measures  are 
used in a particular case. 

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In the sense that the creditors are neither better nor worse off than they would have been if the bank 
would have been wound up. 

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3.1. 

Authorities responsible for crisis management 

Powers of early intervention will continue to be exercised by prudential supervisors under the 
Capital Requirements Directive ('CRD').12 

The  new  crisis  management  framework  will  require  each  Member  State  to  identify  a 
resolution  authority  to  exercise  the  resolution  powers.  Those  authorities  should  be 
administrative rather than judicial, but it does not appear necessary at this stage to prescribe 
further  which  national  body  should  act  as  the  resolution  authority.  This  will  allow  Member 
States  to  retain  existing  national  arrangements  under  which,  variously,  the  Ministry  of 
Finance,  the  Central  Bank  or  the  Deposit  Guarantee  Scheme  may  be  responsible  for 
resolution. The Commission notes, however, that in many jurisdictions resolution authorities 
are appropriately separated from supervisors and considers such separation to be important to 
minimise the risks of forbearance.  

3.2. 

Preparatory and preventative measures 

The Commission is considering a number of measures designed to increase the chances that 
developing  problems  will  be  identified  and  addressed  at  an  early  stage,  and  to  enhance  the 
preparedness of firms and authorities to deal effectively with serious difficulties. 

Reinforced supervision 

Failures  in  effective  supervision  preceded  and  contributed  to  the  recent  crisis.  The 
Commission therefore intends to reinforce the supervisory regime under the CRD to require 
the annual preparation of a supervisory programme for each supervised institution on the basis 
of  a  risk  assessment;  greater  and  more  systematic  use  of  on-site  supervisory  examinations; 
more robust standards and more intrusive and forward-looking supervisory assessment. 

Asset transferability 

The Commission is considering measures that would specify the circumstances and conditions 
under  which  institutions  regulated  under  the  CRD  may  transfer  assets  within  a  group, 
including in situations where group entities are experiencing liquidity stress.13 The objective 
would  be  to  establish  an  enabling  framework  for  intra-group  liquidity  management  which 
must include the safeguards necessary to preserve financial stability in Member States where 
transferring entities are established and to protect the rights of creditors and shareholders.  

Recovery and resolution plans 

Work on recovery and resolution plans as an essential element of planning for the failure of 
major  institutions  is  ongoing  at  international  level,  and  they  are  widely  regarded  as  a 
necessary  component  of  an  effective  crisis  management  regime.  The  Commission  is 
participating  in  this  work  and  will  seek  consistency  with  the  outcome  of  developments  at 
international level.  

All  credit  institutions  and  investment  firms  covered  by  the  regime  would  be  required  to 
prepare and keep updated recovery plans setting out measures the institution or group would 

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13 

Directives 2006/48/EC and 2006/49/EC. 
The  treatment  of  such  a  transfer  under  the  applicable  tax  regime  will  need  attention.  The  accounting 
treatment may also need separate consideration. 

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take in different scenarios to address liquidity problems, raise capital or reduce risk. The plans 
would be expected to be detailed and realistic, and should not assume access to any support 
from  public  funds.  However,  the  requirement  to  prepare  a  recovery  plan  should  be  applied 
proportionately,  reflecting  the  size  of  the  firm,  the  nature  of  its  sources  of  funding  and  the 
degree  to  which  group  or  other  sectoral  support  would  be  credibly  available.  Institutions 
would  be  required  to  submit  plans  to  supervisors  for  assessment  as  to  whether  they  are 
comprehensive and likely to restore the viability of the institution. 

A  requirement  for  up  to  date  resolution  plans  would  apply  to  all  credit  institutions  and 
investment firms covered by the regime, with the aim of ensuring the planning necessary to 
enable the business of the bank or firm to be transferred or wound down in an orderly manner 
in the event of its failure. These plans are prepared by resolution authorities and supervisors, 
in  close  cooperation  with  the  firms  which  would  be  required  to  supply  the  necessary 
information.14  For  example,  resolution  plans  would  require  detail  on  group  structure,  intra-
group guarantees  and  service level  agreements, contracts  and counterparties, debt liabilities, 
custody  arrangements,  as  well  as  operational  information  about  IT  systems  and  human 
resources.  

Recovery and resolution plans would be required both at entity and group level and would be 
agreed jointly in the context of resolution colleges.15 

Preventative powers 

As  a  complement  to  measures  on  resolution  planning,  the  Commission  considers  that 
authorities  should  have  clear  preventative  powers  which  may  be  applied  in  cases  where 
resolution authorities consider that there are impediments to the resolution of an institution or 
group  under  the  applicable  regimes.  The  objective  would  be  to  allow  supervisors,16  after 
consultation  with  resolution  authorities,  to  require  institutions  to  adopt  measures,  including 
changes  to  business  operations  and  corporate  structure,  necessary  to  ensure  that  resolution 
was  viable  under  the  applicable  legal  framework.  The  preventative  powers  under 
consideration  include  requirements  to  limit  or  modify  exposures;  to  increase  reporting;  to 
restrict or prohibit certain activities; or to change to group structures (including the mapping 
of  specific  activities  with  legal  entities).  Given  that  powers  to  require  changes  to  legal 
structures  and  business  arrangements  are  without  doubt  intrusive,  appropriate  checks  and 
balances would therefore be necessary. These would include a right for the firm to challenge 
any requirement for restructuring imposed by the supervisor or resolution authority.  

3.3. 

Triggers  

The  triggers  for  early  intervention  and  for  resolution  need  to  ensure  that  the  relevant 
authorities are able to take timely action, and should be sufficiently clear and transparent to 
minimise uncertainty on the part of supervisors, firms and market counterparties as to whether 
the conditions for intervention are satisfied. 

Triggers for Early Intervention 

14 

15 
16 

The  normal  restrictions  on  disclosure  by  supervisors  and  other  authorities  of  confidential  information 
would apply. 
See Section 4.1. 
The  consolidating  supervisor,  within  the  meaning  of  Directive  2006/48/EC,  would  be  responsible  for 
deciding any changes required at group level. 

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The CRD currently provides early intervention powers for supervisors to impose measures on 
banks  that  fail  to  meet  a  requirement  of  that  Directive.17  In  order  to  ensure  that  supervisors 
can  intervene  at  a  sufficiently  early  stage  to  address  effectively  a  developing  problem,  the 
circumstances in which supervisors can impose such measures could be expanded to include 
cases where a bank or an investment firm is likely to fail to meet a requirement of the CRD. 
Because  the  requirements  of  the  CRD  are  wide  ranging,  a  breach  or  likely  breach  of  a 
requirement will not necessarily mean that the institution in question is encountering serious 
problems  of  a  kind  that,  if  unmanaged,  will  lead  to  decline  and  potential  failure.  The  early 
intervention measures that could be made available under the CRD range in intrusiveness, and 
supervisors would be expected to select them in a way that is appropriate and proportionate to 
the nature and severity of the breach. 

Triggers for Resolution 

For reasons of financial stability, the threshold conditions for the use of resolution tools and 
powers  need  to  ensure  that  resolution  authorities  are  able  to  take  action  before  a  bank  is 
balance sheet insolvent.18 Delaying intervention until the bank has reached that point is likely to 
limit the choice of effective options for resolution or increase the amount of funds that would 
need to be committed in support of such an option. However, because the tools may involve a 
significant interference with the property rights of shareholders and creditors, the triggers for 
resolution  must  also  ensure  that  resolution  action  is  not  taken  before  all  other  realistic 
recovery options are exhausted and that the intervention is in the public interest.  

The Commission is considering a range of options that aim to capture the requirement that an 
institution  should  be  in  serious  distress  without  any  realistic  prospects  of  recovery  in  a 
timeframe  that  is  appropriate  to  the  risks  to  financial  stability  posed  by  the  institution's 
distress and likely failure. Possible threshold conditions aimed at the solvency or liquidity of 
an institution include an assessment by supervisors that the institution has incurred or is likely 
to incur losses that will deplete its regulatory capital; that its assets are likely to be less than 
its  liabilities;  that  it  is  likely  to  be  unable  to  pay  its  obligations  in  the  normal  course  of 
business; or, more broadly, that it does not have adequate resources to carry on its business. 
More qualitative options include a supervisory assessment that the institution no longer meets, 
or is expected to fail to meet, the conditions of its licence to carry on banking or investment 
business. There is obviously a degree of overlap between these options, and the Commission 
will consider further which strike the best balance between flexibility and objectivity.  

In addition to qualitative or quantitative triggers of the kind outlined above, the Commission 
proposes to include a further condition that resolution is necessary in the public interest. The 
public  interest  test  would  be  met,  for  example,  if  winding  up  the  institution  under  ordinary 
insolvency  proceedings  did  not  ensure  the  stability  of  the  financial  system  or  continuity  of 
essential  financial  infrastructure  services.  If  the  public  interest  condition  not  satisfied,  the 
institution should be wound up once the threshold for insolvent liquidation is reached. 

Even  if  triggers  for  early  intervention  and  resolution  are  harmonised,  the  risk  remains  that 
authorities will delay intervention or even fail to realise in time that the triggers are met. This 
risk  can  be  minimised  by  the  development  of  common  indicators  and  agreed  methodology 

17 

18 

Article 136 of Directive 2006/48/EC. These powers apply to investment firms by virtue of Article 37 of 
Directive 2006/49/EC. 
Balance  sheet  insolvency  is  generally  the  threshold  for  the  purposes  of  ordinary  insolvency 
proceedings. 

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that would provide further guidance about when intervention should take place. The scrutiny 
of peers within colleges should also help reduce the risks that developing problems will not be 
identified or addressed. 

3.4. 

Early intervention  

This section describes measures under consideration in order to address developing problems 
at  entity  and  group  level  at  an  early  stage,  prevent  them  from  aggravating  and  secure 
recovery. 

Supervisory powers 

Supervisors'  powers  of  early  intervention  will  be  expanded  and  clarified.  New  measures 
available  to  supervisors  might  include  clear  powers  to  prohibit  payment  of  dividends  and, 
where  feasible,  coupons  of  hybrid  instruments  eligible  as  regulatory  capital;  to  require  the 
replacement  of  managers  or  directors;  or  to  require  a  bank  to  divest  itself  of  activities  or 
business lines that pose an excessive risk to its financial soundness. As indicated above, these 
powers would be available in the event of a breach or likely breach of the requirements of the 
CRD,  and  are  therefore  distinct  from  the  preventative  powers  discussed  in  the  preceding 
section.  

Implementing recovery plans 

With  the  aim  of  ensuring  that  institutions  take  timely  steps  to  address  problems  at  an  early 
stage,  banks  and  investment  firms  covered  by  the  framework  should  be  subject  to  a  new 
obligation, on demand from supervisors, to submit a plan containing the measures they intend 
to  take  to  restore  the  institution  in  a  specific  situation  of  financial  stress.  This  obligation 
would apply where an institution is failing to meet the solvency requirements of the CRD or 
any  future  requirements  relating  to  liquidity.  It  is  expected  that  in  most  cases,  the  plan  will 
draw on and apply contingency measures already set out in the firm's recovery plan.  

Special management 

In addition to expanded supervisory powers under the CRD, supervisors  could be  given  the 
power  to  appoint  a  special  manager  for  a  limited  period  of  up  to  one  year  to  take  over  the 
management,  or  assist  the  existing  management,  of  an  institution  that  is  failing  to  meet  the 
requirements  of  the  CRD  and  either  has  not  submitted  a  credible  plan  as  mentioned  in  the 
previous  paragraph  or  fails  to  implement  that  plan  effectively.  The  special  manager  would 
exercise  all  the  powers  of  the  management  but  his  primary  duty  would  be  to  restore  the 
soundness  of  the  institution.  Shareholders'  rights  would  not  be  otherwise  affected,  and 
shareholder  approval  would  be  required  for  any  action  by  the  special  manager  that  would 
require consent if taken by the directors. The decision to appoint a special manager should not 
imply  a  state  guarantee  or  expose  supervisors  to  liability  for  the  actions  of  the  special 
manager. The extent of liability of the special manager merits further analysis. 

3.5. 

Resolution  

The general rule should be that failing credit institutions should be liquidated under ordinary 
insolvency  proceedings.  However,  unlike  in  other  sectors  of  the  economy,  in  the  financial 
sector it has generally been the case that failing financial institutions, and particularly those of 
systemic  importance,  have  not  been  dealt  with  under  ordinary  insolvency  proceedings.  The 
Commission  will  consider  what  reform  of  bank  insolvency  law  is  necessary  to  ensure  that 

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failed banks can be liquidated as a second phase, as outlined in Section 5, with the ultimate 
aim of ensuring that liquidation is a realistic option.  

However, it will not always be feasible to liquidate a bank or investment firm under ordinary 
insolvency proceedings. In some cases, an orderly winding down through resolution will be 
necessary in the public interest for reasons of financial stability: that is to minimise contagion, 
ensure  continuity  of  vital  economic  functions,  maximise  the  value  of  remaining  assets  and 
facilitate their return to productive use in the private sector.19  

Measures  aimed  at  maintaining  the  entity  as  a  going  concern  -  such  as  the  power  to  write 
down  debt  or  convert  it  to  equity20  -  should  be  a  last  resort,  and  only  used  in  duly  justified 
cases. This would help to underpin market discipline. 

The  Commission  considers  that  this  resolution  framework,  coupled  with  the  preventative 
powers  aimed  at  simplifying  legal  and  business  structures  in  cases  where  a  firm  would 
otherwise  be  un-resolvable,  will  ensure  that  resolution  authorities  can  manage  the  failure  of 
all  institutions  covered  by  the  framework,  irrespective  of  their  size  and  interconnectedness, 
without jeopardising financial stability. 

Resolution and insolvency 

Point of failure/likely to 
fail 

First option: Ordinary liquidation 

Bankruptcy code 

unless 

Financial stability concerns 

Second option: Orderly wind down 

unless 

Essentially viable business + 
extreme financial conditions 

Third option: Restructuring as a 
going concern 

Original bank 
liquidated as a 
gone concern 

Original bank 
maintained as a 
going concern 

- Bridge bank 

- Sale of business 
- Asset 
separation 

- Debt write 
down 
- Conversion  of 
debt to equity 

The resolution framework will need to consist of resolution tools that comprise a combination 
of resolution powers. The framework will specify both the tools and the powers, together with 
threshold conditions that must be satisfied before they can be applied and exercised.  

The resolution tools include a sale of business tool which will enable authorities to effect a 
sale  of  the  credit  institution  or  parts  of  its  business  to  one  or  more  purchasers  without  the 

19 

20 

In  both  ordinary  liquidation  and  orderly  wind  down  the  firm  essentially  disappears  in  full  or  in  part. 
Therefore it is treated as a gone concern. 
See Section 3.6. 

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consent of shareholders;21 a bridge bank tool which would enable authorities to transfer some 
or all the business of a failing credit institution (including its deposits or mortgage book) to a 
temporary  bridge  bank;22  an  asset  separation  tool  to  enable  authorities  to  transfer  under-
performing or 'toxic' assets to a separate vehicle (a 'bad bank') in order to 'cleanse' the balance 
sheet of a troubled bank; and a debt write down tool which is discussed further in Section 3.6. 
The  resolution  powers  are  the  various  legal  powers  that,  in  different  combinations, 
authorities  exercise  when  applying  the  resolution  tools.  These  include  the  core  powers  to 
transfer  shares  in,  or  assets,  rights  or  liabilities  of,  a  failing  bank  to  another  entity  such  as 
another  financial  institution  or  a  bridge  bank;  powers  to  write  off  or  cancel  shares,  or  write 
down  or  convert  debt  of  a  failing  bank;  power  to  replace  senior  management  and  power  to 
impose a temporary moratorium on the payment of claims. Supplementary powers may also 
be needed, including a power to require continuity of essential services from other parts of the 
group.  

The application of these tools and powers may interfere with the rights of shareholders and, in 
most cases, creditors. Accordingly, the framework would include safeguards and mechanisms 
for  compensation  where  necessary.  The  guiding  principle  for  compensation  that  the 
Commission is considering is that affected stakeholders should suffer no greater loss than they 
would  have  suffered  if  the  institution  had  been  wound  up  under  the  applicable  insolvency 
regime.23 

In  addition,  the  framework  will  also  include  safeguards  for  counterparties  and  market 
arrangements that may be affected by a transfer of property, assets or liabilities, together with 
provisions  on  judicial  review  to  ensure  that  affected  parties  have  appropriate  rights  to 
challenge  the  actions  of  authorities  and  seek  financial  redress.  Finally,  the  Commission 
considers that the framework should include provision for a temporary stay on rights to close 
out netting where authorities transfer relevant contracts as part of a resolution measure, and 
will  consult  with  experts  on  the  details  of  such  a  provision.  Further  consideration  may  also 
need  to  be  given  to  the  exercise  of  close  out  rights  in  connection  with  early  intervention 
measures. 

It is proposed that the framework should not be rigidly prescriptive about the legal means by 
which  the  powers  are  exercised.  A  number  of  models  currently  exist  in  Member  States, 
including administration, receivership and the simple exercise of executive power. It does not 
appear necessary for efficient cooperation to impose a single model at this stage.  

These  tools  and  powers  must  be  applied  and  exercised  in  a  way  that  complies  with  the  EU 
treaty provisions, and in particular with the State aid framework where applicable. 

21 

22 

23 

Sales  of  institutions  or  parts  of  their  business  should,  as  far  as  is  feasible  in  the  circumstances,  be 
carried  out  in  a  manner  that  is  open,  transparent  and  non-discriminatory.  This  is  the  best  way  of 
ensuring that a fair market price is paid and thus that no State aid is granted to the acquirer. However, 
the Commission recognises that there will be circumstances in which a sale must be completed in a very 
short period to preserve financial stability. In such cases, a normal process of public tender will not be 
possible,  but  the  requirements  of  transparency,  openness  and  non-discrimination  will  need  to  be 
respected as far as possible.  
The  purpose  of  a  bridge  bank  structure  is  to  facilitate  continuous  access  to  insured  deposits  or  the 
preservation  of  essential  banking  functions  for  a  limited  period,  with  a  view  to  onward  sale  to  the 
private sector when market conditions stabilise. 
This principle is currently applied in a number of jurisdictions. 

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3.6. 

Debt write down 

The  challenge  of  resolving  large,  complex  financial  institutions  ('LCFIs')  is  the  focus  of 
current international discussions. Policy makers recognise that there may be circumstances in 
which the other resolution tools described above may not be sufficient to resolve a LCFI in a 
way  that  protects  financial  stability.  For  example,  in  a  systemic  crisis  traditional  resolution 
procedures may not enable authorities to maintain the systemically crucial activities of a large 
commercial bank, such as its payment systems and lending functions. This business may be 
too  large  to  sell  to  other  banks  in  the  prevailing  conditions  without  government  support  or 
without a significant anti-competitive impact, while if it is wound down its market functions 
may  not  be  readily  replaced  by  existing  or  new  entrants.  The  Commission  is  therefore 
considering  supplementary  mechanisms  designed  to  enable  the  institution  to  continue  as  a 
going concern, so that it can be re-organised or, where appropriate, certain activities wound 
down in an orderly manner that minimises contagion.  

One such mechanism under consideration is to write down all equity and the conversion of the 
debt  of  a  troubled  institution  into  equity,  to  restore  its  capital  position  so  as  to  allow  it  to 
continue (either  temporarily  or permanently) as  a  going concern.  However,  significant legal 
and policy questions exist. These include: 

–  whether the mechanism should be based on a statutory power for authorities to write down 
or  convert  debt  under  specified  conditions,  or  on  mandatory  contractual  terms  for  write 
down  or  conversion  which  would  be  required  to  be  included  in  a  proportion  of  the  debt 
issued by financial institutions covered by the crisis management framework;  

–  if the power is statutory, the classes of debt that should be covered (for example, difficult 
legal  and  policy  questions  arise  in  respect  of  trade  creditors,  derivatives,  wholesale 
deposits, secured debt, intra-group liabilities24) and the impact that the scope of application 
would have on the ranking of debt;25 

–  the  impact  on  the  cost  of  financing,  the  risk  of  driving  funding  to  short  term  or  secured 
debt, the need to regulate the liabilities side of the balance sheet, and the possible need to 
change ranking of certain creditors; 

–  the  complexities  of  applying  this  tool  to  a  cross-border  group,  and  the  need  to  ensure 
recognition of any write down or conversion by foreign courts where the debt is booked in 
or governed by the law of a non-EU jurisdiction.  

The  Commission  notes  that  a  range  of  initiatives  with  similar  objectives  of  enhancing  loss 
absorption  through  conversion  of  debt  to  equity  or  write  down  of  debt  before  the  bank  is  a 
gone  concern  are  under  consideration.  These  include  the  proposed  requirement  discussed  in 
the Basel Committee consultation paper of 19 August that all subordinated debt capital should 
be convertible to equity at the point of non-viability or public intervention. The Commission 
will consult further on its implementation of any new rules on contingent convertible capital 
that may be adopted, and will ensure that the development of any proposal on debt write down 
as a resolution tool is coordinated with this.  

24 

25 

Attention should be paid in designing the tool so as not to disadvantage certain categories of investors 
such as retail investors and SMEs 
The Commission believes that as a matter of principle any debt write down should be applied in a way 
that respects the ranking in insolvency. 

EN 

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In spite of the technical challenges presented by the design of a debt write-down mechanism, 
the Commission considers that it offers an additional resolution tool that would significantly 
enhance the ability of authorities to resolve LCFIs. If there are no effective mechanisms for 
managing the failure of such institutions without systemic disruption, then at a minimum the 
argument  for  additional  prudential  requirements,  alongside  structural  measures  designed  to 
ensure resolvability as an alternative to improved loss absorbency becomes stronger.  

4. 

COORDINATION OF CROSS-BORDER CRISIS MANAGEMENT 

4.1. 

Coordinated resolution of EU banking groups 

The measures outlined in Section 2 will ensure that resolution authorities have the same tools 
and powers at their disposal. This will facilitate coordinated action in the event of a failure of 
a cross-border group, but further action appears necessary to promote cooperation and prevent 
fragmented national responses. 

In  principle,  an  integrated  framework  for  resolution  of  cross  border  entities  by  a  single 
European body would deliver a rapid, decisive and equitable resolution process for European 
financial  groups,  and  better  reflect  the  pan  EU  nature  of  banking  markets.  However,  the 
Commission  recognises  that  it  would  be  difficult  to  establish  an  EU  integrated  resolution 
model for cross-border banking groups in the absence of a harmonised insolvency regime and 
of a Single European Supervisory authority for those entities. The Commission considers that 
the  European  approach  to  resolution  should  mirror  the  broader  approach  to  supervisory 
arrangements. 

For that reason, the Commission favours, as a first step, a coordination framework based on 
harmonised resolution tools and a requirement for authorities to consult and cooperate when 
resolving affiliated entities. To this end, the Commission is considering two principal reforms. 

First,  resolution  colleges  would  be  established  around  the  core  of  the  existing  supervisory 
colleges through the inclusion of resolution authorities for group entities. Resolution colleges 
would be chaired by the resolution authority responsible for the EU parent credit institution 
('the group level resolution authority'),  and  would be  responsible  for crisis planning and the 
preparation of resolution plans including, if appropriate, principles for burden sharing. In the 
event  of  a  crisis,  the  resolution  college  would  provide  a  forum  for  the  exchange  of 
information and the coordination of resolution measures. 

Second, group level resolution authorities should have the power to decide in cases of group 
failure whether a group resolution scheme is appropriate. Pending that decision, which would 
need  to  be  taken  quickly,  national  authorities  would  be  required  to  refrain  from  adopting 
national measures that could prejudice the effectiveness of the group resolution scheme. The 
group  level  resolution  authority,  in  cooperation  with  the  other  authorities  in  the  resolution 
college, may conclude that separate entity resolution best suits the structure and organisation 
of  the  group,  and  in  that  case  each  national  authority  would  take  independent  decisions.  A 
group resolution scheme would be based on the group resolution plan already prepared by the 
relevant  authorities  and  would  be  implemented  by  national  authorities  using  the  resolution 
tools and powers under the new framework.  

The  production  of  a  group  resolution  scheme  in  appropriate  cases  should  facilitate 
coordinated  resolution  that  is  more  likely  to  deliver  the  best  result  for  the  group.  However, 
because  resolution  powers  are  applied  to  individual  legal  entities  and  the  competence  for 

EN 

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resolution would remain national, the group resolution scheme would not be binding. National 
authorities  that  disagreed  with  the  scheme  would  not  be  prevented  from  taking  independent 
action where they considered that necessary for reasons of national financial stability, but in 
doing so would be required to consider the impact of that action on financial stability in other 
Member  States,  give  reasons  for  their  decision  to  the  resolution  college  and,  where  feasible 
within  the  time  constraints,  discuss  those  reasons  with  the  other  members  of  the  college 
before taking individual action.  

This  framework  would  strike  an  appropriate  balance  between  the  coordination  of  national 
measures  that  is  necessary  to  deal  coherently  with  a  failing  group,  and  the  proven  need  for 
authorities to act quickly and decisively where the situation requires it.  

4.2. 

Coordination framework with third countries 

Effective  resolution  of  internationally  active  groups  requires,  as  a  minimum,  mutual 
recognition  and  enforcement  of  measures  taken  by  resolution  authorities  in  the  relevant 
jurisdictions.  The  international  agreements  necessary  to  achieve  this  will  be  easier  if 
resolution  regimes  are  based  on  common  principles  and  approaches,  and  the  Commission 
strongly  supports  the  FSB  and  G20  work  in  this  regard.  The  Commission  also  supports  the 
development  of  firm  specific  cooperation  agreements  between  the  national  authorities 
responsible  for  managing  the  failure  of  global  firms,  with  a  view  to  ensuring  effective 
planning, decision-making and coordination in respect of international groups.  

4.3. 

The role of the European Supervisory Authorities in crisis management 

The  framework  outlined  in  this  Communication  is  fully  consistent  with  the  recently  agreed 
Regulations establishing the European Supervisory Authorities. As a result of negotiations in 
the European Parliament and the Council, the ESA Regulations extend the role of the ESAs to 
several areas including in the area of crisis management, preparation and preventative actions. 
In particular, the EBA (in cooperation with the ESMA where appropriate) could, within the 
limits  set  by  EU  law,  be  given  oversight  of  and  specific  tasks  in  relation  to  aspects  of  the 
preparatory,  preventative,  early  intervention  and  coordination  parts  of  the  framework, 
including powers to investigate breaches of EU law, of mediation, and of decision making in 
emergency  situations.26  Furthermore,  the  EBA  would  play  a  key  role  in  cross  border 
coordination  under  the  framework,  being  an  observer  in  resolution  colleges  and  playing  an 
important  role  in  contributing  to  and  participating  in  the  development  and  coordination  of 
recovery and resolution plans.27 In areas where the ESA's powers of mediation and emergency 
decision  making  apply,  the  fiscal  safeguard28  would  also  apply,  ensuring  that  any  ESA 
decisions do not impinge in any way on the fiscal responsibilities of Member States. 

As  regards  resolution,  where  authorities  other  than  supervisors  may  be  involved,  the 
Commission  will  consider  carefully  where  the  EBA  could  best  support  the  process.  For 
example, the EBA could usefully act as a coordinating body at the EU level in much the same 
way as supervisors support the actions of resolution authorities nationally. However, the risk 

26 

27 

28 

Articles 9, 10 and 11 of the compromise texts of the ESA Regulations as agreed by the Council and the 
European Parliament. 
Article  12c  ff.  of  the  compromise  texts  of  the  EBA  Regulation  as  agreed  by  the  Council  and  the 
European Parliament. 
Article 23 of the compromise texts of the ESA Regulations as agreed by the Council and the European 
Parliament. 

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of  conflicts  of  interest  must  also  be  borne  in  mind:  one  reason  supervisors  and  resolution 
authorities  in  many  jurisdictions  are  separated  is  to  reduce  the  incentives  for  regulatory 
forbearance.  

5. 

FINANCING RESOLUTION  

The cost of resolution should primarily be paid by shareholders and creditors but in most of 
the  cases  this  would  not  be  enough.  If  resolution  is  to  be  a  credible  option,  appropriate 
financing  arrangements  should  be  put  in  place.  As  announced  in  the  Commission's 
Communication of 26 May, the Commission intends to propose the establishment of national 
funds to support bank resolution.  

The Commission believes that a coordinated approach at EU level is needed to ensure a clear 
link  between  funding  mechanisms  and  the  new  resolution  framework.  Credible  resolution 
financing  arrangements  should  contribute  to  strengthening  financial  stability  and  result  in  a 
more  resilient  system.  By  eliminating  any  potential  differences  and  distortions,  a  common 
approach  would  also  improve  the  prospects  for  effective  cross-border  cooperation.  The 
Commission believes that a system of ex ante funded resolution funds would in the long run 
reduce costs for society as a whole. 

Furthermore,  the  Commission  believes  that  a  common  approach  to  private  sector  financing 
could  facilitate  agreement  on  appropriate  burden  sharing  arrangements  for  the  costs  of 
resolution, which will be important for the efficient resolution of cross border entities. 

5.1. 

Use of resolution funds 

The  existence  of  resolution  funds  will  ensure  that  resolution  is  a  credible  option.  Concerns 
about the potential increase in moral hazard associated with the existence of resolution funds 
will be mitigated if use of the funds is restricted to providing financial support for resolution 
tools,  for  example  by  financing  a  temporary  bridge  bank  or  guaranteeing  its  liabilities  to 
prevent the withdrawal of credit.  

In cases where the objective of resolution measures (such as debt write-down) is to restore a 
troubled  entity  to  a  going  concern,  any  ancillary  provision  of  temporary  financing  must  be 
accompanied by appropriate measures to restructure the entity, remove culpable management, 
write down unsecured creditors and dilute or write off the claims of existing shareholders.  

Any provision of financing in support of resolution (including capital, liquidity, guarantees or 
other  measures)  must  comply  with  the  EU  Treaty,  and  in  particular  with  the  State  aid 
framework where it involves the use of state resources29 and where an advantage that could 
distort competition and affect intra EU trade is provided to an economic entity that continues 
to operate in the market, even in a limited way.  

29 

State  resources  are  generally  considered  to  be  involved  where  funds  come  from  contributions  made 
compulsory by State legislation and are managed and apportioned in accordance with that legislation, 
even if they are administered by institutions separate from the State (see for example Case 173/73 Italy 
v Commission [1974] ECR 709, paragraph 16). 

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5.2. 

Resolution funds and Deposit Guarantee Schemes 

Resolution  funds  and  Deposit  Guarantee  Schemes  do  not  have  the  same  purpose. 
Nevertheless,  in  some  Member  States,  DGS  are  already  able  to  provide  certain  forms  of 
resolution financing. The Commission proposed in July30 that the ex-ante funds of DGS could 
be used for bank resolution measures involving the transfer of deposits to another entity (for 
example, sale to or mergers with another private sector entity, or a bridge bank) provided that 
the amount of DGS funds used does not exceed the amount that would have been necessary to 
repay depositors.  

The introduction of a new crisis management framework may extend the need for financing 
beyond  measures  aimed  at  preserving  guaranteed  deposits.  Costs  of  such  further  measures 
might  then  fall  to  the  resolution  fund.  Furthermore,  a  resolution  financing  system  that  is 
funded  solely  on  the  basis  of  insured  deposits  would  unfairly  penalise  smaller  and  more 
specialised deposit taking institutions to the advantage of larger, universal banks that have a 
more  diversified  balance  sheet  structure  and  are  potentially  more  systemically  important. 
Nevertheless, potential synergies between DGS and resolution funds will be further explored. 

5.3. 

Design of resolution funds 

Although the Commission does not consider it necessary to prescribe every aspect governing 
the operation of funds, the following features should, in its view, be coordinated: 

•  Banks  subject  to  the  crisis  management  framework  would  contribute  to  ex  ante  funds, 
backed by ex post financing arrangements to ensure that financing is available irrespective 
of the size of the failed bank, and costs exceeding the capacity of the fund are subsequently 
recovered from the banking sector.  

•  Requirements to contribute to the funds should reflect the allocation of responsibility for 
supervision  and  crisis  management.  Like  DGS,  each  resolution  fund  would  receive 
contributions  from  institutions  licensed  in  the  same  Member  State,  and  the  contribution 
would cover their branches established in other Member States.  

•  The basis for contributions will need to be considered carefully. While the Commission in 
principle  considers  full  harmonisation  based  primarily  on  liabilities  to  be  the  preferable 
proxy  for  the  costs  of  resolution,  other  options  could  be  considered  at  this  stage,  with  a 
view  to  harmonising  the  basis  for  the  contributions  later.  If  justified  by  the  structure  of 
their  financial  system,  the  broader  fiscal  context  or  the  potential  costs  of  resolution, 
Member  States  could  be  given  the  flexibility  to  decide  on  a  different  basis  for 
contributions, provided that this would not result in distortions of the Internal Market. The 
Commission will consider the costs and benefits of each approach and carefully listen to 
the views of different stakeholders.  

Whilst  it  appears  appropriate  to  aim  for  a  network  of  national  resolution  funds  at  the  first 
stage, the Commission believes that a Single EU fund would better serve  the purpose of an 
efficient  EU  resolution  regime.  Such  fund  would  require  a  harmonised  basis  for  the 
contributions.  

30 

COM(2010) 368.  

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5.4. 

Size of funds 

The  Commission  recognises  the  need  to  calibrate  the  size  of  harmonised  national  funds  in 
view  of  the  burdens  imposed  by  other  financial  sector  reforms.  Funds  should  be  phased  in 
gradually  and  contributions  initially  charged  at  a  lower  level,  increasing  as  the  economy 
recovers.  

In order to determine the target size of funds, the Commission will pay specific attention in its 
impact assessment to the cost of recent resolution measures and taking into account that the 
size  of  the  fund  should  depend  also  on  the  impact  of  reforms  such  as  increased  capital 
requirements  and  improvements  in  the  loss-absorbing  quality  of  capital,  as  well  as  the 
effectiveness  of  other  shock  absorbers  (for  example  DGS),  which  may  mitigate  both  the 
likelihood  and  impact  of  bank  failure.  Furthermore,  since  part  of  a  resolution  fund's 
expenditure may be recovered (for example, on sale of a bridge bank), this may further reduce 
the target size. Finally, it will be possible to adjust the amounts held in funds in the light of 
ongoing experience so that they reflect anticipated financing needs more precisely. 

6. 

NEXT STEPS AND FUTURE WORK 

6.1. 

Next Steps: A coordination framework (2011) 

The  Commission  is  now  working  on  a  framework  for  crisis  management  and  the  impact 
assessment  that  will  inform  its  development  and  accompany  the  formal  proposal  in  Spring 
2011. Before adopting its proposal, the Commission will consult on the technical details of its 
possible  provisions  in  December  2010.  This  framework  will  cover  policy  areas  outlined  in 
this  Communication:  the  harmonisation  of  tools,  the  coordination  of  national  measures  and 
financing arrangements. 

For  this  purposes  of  this  framework,  national  insolvency  laws  will  only  be  modified  to  the 
extent  that  is  necessary  to  support  the  measures  outlined  above.  This  might  include 
modifications needed to confer the necessary protections for creditors and shareholders of the 
transferee  where  assets  are  transferred  between  group  entities  (Section  3.3),  and  depositor 
preference if that is desirable in the light of a statutory debt write down power. 

6.2. 

Future work 

An insolvency framework (medium term) 

The Commission will examine the need for further harmonisation of bank insolvency regimes, 
with  the  possible  aim  of  resolving  and  liquidating  banks  under  of  the  same  procedural  and 
substantive insolvency rules. This includes: 

The desirability of administrative liquidation proceedings for banks to facilitate a faster and 
more  orderly  liquidation  than  the  standard  court-based  procedure.  Harmonisation  of  core 
principles of bank insolvency law, including priority rankings and rules on claw back actions.  

The Commission will publish a report on the further harmonisation of insolvency law by the 
end of 2012.  

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An integrated framework (longer term) 

Alongside the review of the EBA Regulation in 2014, the Commission will assess how a more 
integrated framework for the resolution of cross-border groups might be best achieved. This 
could involve an EU authority; however the operational capacity of such an authority would 
depend on the establishment of an EU resolution and insolvency regime and an EU resolution 
fund financed on a harmonised basis.  

7. 

CONCLUSION 

The  future  policy  actions  outlined  in  this  Communication  would  significantly  reinforce  the 
resilience of the financial system by ensuring that firms and authorities are better prepared for 
problems and better able to address them at an early stage. The Commission will proceed with 
these actions in accordance with the attached work programme, so that authorities in Europe 
have  the  necessary  tools  and  financial  resources  to  intervene  effectively  and  to  manage  the 
failure of a bank or investment firm in an orderly manner that minimises the systemic impact 
and the ultimate costs to public finances and taxpayers. 

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Objectives 

Proposed action 

Time line 

Future policy actions  

Coordination framework 

To ensure that all  member States have 
an  effective  crisis  management  regime 
for banks and certain investment firms, 
with sufficient and harmonised powers 
of early intervention and resolution 

Proposal  for  a  Directive  on  crisis 
management to include: 

- expanded supervisory powers 

Spring 2011 

requirements 

- 
adequate 
planning,  including  recovery  and 
resolution plans 

for 

- harmonised resolution tools  

Proposal  for  a  Directive  on  crisis 
management  to  include  a  cross-
border coordination framework 

Proposal  for  a  Directive  on  crisis 
management  to  include  provision 
for  the  establishment  of  national 
resolution funds 

Report to the Council and European 
Parliament 

Spring 2011 

Spring 2011 

End 2011 

Report to the Council and European 
Parliament,  coupled,  if  appropriate, 
by legislative proposal 

End 2012 

To  be  considered  alongside  the 
review of the EBA Regulation 

2014 

To  be  considered  alongside  the 
review of the EBA Regulation 

2014 

effective 

and 
Ensure 
coordination between authorities in the 
case of failure of a cross-border firm 

cooperation 

Ensure  that  private  sector  funding  is 
available to support crisis management 
actions 

Assess  what 
measures  are 
financial institutions 

crisis  management 
for  other 
required 

Insolvency  

is  required 

Assess  what  EU  reform  of  bank 
to 
insolvency  regimes 
ensure  that  liquidation  is  a  realistic 
option for failing banks and to address 
the  current  deficiencies  in  insolvency 
procedures  for  cross-border  banking 
groups.  

Integrated resolution for cross-border 
banking groups 

Assess  how  a  framework  for 
the 
integrated  resolution  of  cross-border 
best 
groups  might 
banking 
delivered, 
the 
including 
involvement  of  an  EU  Authority  in 
resolution 

be 
by 

to  complement  an 

Assess  the  need  for  an  EU  resolution 
fund 
integrated 
approach  to  the  resolution  of  cross-
border banking groups 

EN 

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EN 

19 

   EN