COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document PROPOSAL FOR A DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directives 77/91/EEC and 82/891/EC, Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 2011/35/EC and Regulation (EU) No 1093/2010
Date: 2012-06-06
Institutions: European Commission
Subjects: banking system, economic recession, economic recovery, economic stabilisation, financial institution, financial intervention, financial planning, structural adjustment

EUROPEAN COMMISSION 

Brussels, 6.6.2012  
SWD(2012) 166 final 

COMMISSION STAFF WORKING DOCUMENT 

IMPACT ASSESSMENT 

Accompanying the document 

PROPOSAL FOR A DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF 
THE COUNCIL 

establishing a framework for the recovery and resolution of credit institutions and 
investment firms and amending Council Directives 77/91/EEC and 82/891/EC, 
Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC and 
2011/35/EC and Regulation (EU) No 1093/2010 

{COM(2012) 280 final} 
{SWD(2012) 167 final} 

EN 

   EN 

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

TABLE OF CONTENTS 

1. 

INTRODUCTION.................................................................................................. - 4 - 

2.  PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES- 5 - 

2.1.  Procedural issues .......................................................................................... - 5 - 

2.2.  Consultation of interested parties ................................................................. - 6 - 

3.  POLICY CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY........... - 7 - 

3.1.  Background and context............................................................................... - 7 - 

3.1.1.  Nature and size of the market concerned ....................................... - 7 - 

3.1.2.  Overview of legislative framework and on-going developments .. - 7 - 

3.2.  Problem definition........................................................................................ - 7 - 

3.2.1.  General description......................................................................... - 7 - 

3.2.2.  The framework of bank recovery and resolution ........................... - 7 - 

3.2.3.  Problem tree ................................................................................... - 7 - 

3.2.4.  Baseline scenario............................................................................ - 7 - 

3.3.  The EU's right to act and justification.......................................................... - 7 - 

3.4.  Objectives..................................................................................................... - 7 - 

4.  POLICY OPTIONS, ANALYSIS OF IMPACTS AND COMPARISON ............ - 7 - 

4.1.  Preparation and prevention........................................................................... - 7 - 

4.1.1.  Possible  policies  to  develop  framework  for  intra  group  financial 

support ............................................................................................ - 7 - 

4.1.2.  Possible policies to require contingency planning ......................... - 7 - 

4.1.3.  Possible policies to ensure resolvability of banks .......................... - 7 - 

4.2.  Early Intervention......................................................................................... - 7 - 

4.2.1.  Possible  policies  to  provide  all  supervisors  with  effective  early 

intervention triggers ....................................................................... - 7 - 

4.2.2.  Possible  policies  to  provide  supervisors  with  effective  early 

intervention tools............................................................................ - 7 - 

4.2.3.  Possible  policies  to  shorten  time  period  for  capital  increase  in 

emergency situation........................................................................ - 7 - 

4.3.  Bank resolution ............................................................................................ - 7 - 

4.3.1.  Possible  policies  to  provide  authorities  with  clear  and  reliable 

resolution triggers........................................................................... - 7 - 

4.3.2.  Possible  policies  to  enable  all  resolution  authorities  with  a  set  of 

resolution tools and powers to resolve banks................................. - 7 - 

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4.3.3.  Possible options to amend EU and national legislation to eliminate 

legal uncertainties around the use of resolution tools .................... - 7 - 

4.4.  Cross border crisis management .................................................................. - 7 - 

4.4.1.  Possible  policies  to  foster  efficient  cooperation  of  authorities  in 

cross border resolution ................................................................... - 7 - 

4.5.  Financing resolution..................................................................................... - 7 - 

4.5.1.  Possible  policies  to  develop  arrangements  to  finance  bank 
resolution that provide optimal and even level of protection for all 
Member States................................................................................ - 7 - 

5.  OVERALL IMPACT OF PREFERRED OPTIONS ............................................. - 7 - 

5.1.  The proposed framework ............................................................................. - 7 - 

5.2.  Proportionality.............................................................................................. - 7 - 

5.3. 

Impacts on fundamental rights ..................................................................... - 7 - 

5.4.  Safeguards .................................................................................................... - 7 - 

5.5. 

Increased responsibility and powers for authorities ..................................... - 7 - 

5.6. 

Interaction of supervisors and resolution authorities ................................... - 7 - 

5.7.  Cross border recovery and resolution........................................................... - 7 - 

5.8.  Benefits of the framework............................................................................ - 7 - 

5.9. 

Impact on stakeholders and cost of preferred options.................................. - 7 - 

5.10.  Administrative burden.................................................................................. - 7 - 

5.11.  Impact on EU budget.................................................................................... - 7 - 

5.12.  Social impact ................................................................................................ - 7 - 

5.13.  Environmental impact .................................................................................. - 7 - 

5.14.  Impact on SMEs ........................................................................................... - 7 - 

5.15.  Coherence with other proposals ................................................................... - 7 - 

5.16.  Choice of legal instrument ........................................................................... - 7 - 

5.17.  Experience of Member States with bank resolution..................................... - 7 - 

6.  MONITORING AND EVALUATION ................................................................. - 7 - 

ANNEX I 

GLOSSARY................................................................................... - 7 - 

ANNEX II 

DIFFERENT  STAGES  OF  BANK  RECOVERY  AND 

RESOLUTION....................................................................................................... - 7 - 

ANNEX III 

CONSULTATIONS WITH STAKEHOLDERS ........................... - 7 - 

ANNEX IV 

REGULATORY FRAMEWORK.................................................. - 7 - 

ANNEX V 

ON-GOING DEVELOPMENTS ................................................... - 7 - 

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ANNEX VI 

DESCRIPTION  AND  ANALYSIS  OF  PROBLEM  DRIVERS 

AND PROBLEMS ................................................................................................. - 7 - 

ANNEX VII 

CASES 

ILLUSTRATING 

PROBLEMS 

OF 

CRISIS 

MANAGEMENT IN THE EU............................................................................... - 7 - 

ANNEX VIII 

CORPORATE STRUCTURE OF LEHMAN BROTHERS.......... - 7 - 

ANNEX IX 

BANK LEVIES AND TAXES IN MEMBER STATES ............... - 7 - 

ANNEX X 

CONDITION  FOR  INTRA  GROUP  FINANCIAL  SUPPORT 

AGREEMENT ....................................................................................................... - 7 - 

ANNEX XI 

RECOVERY AND RESOLUTION PLANS ................................. - 7 - 

ANNEX XII 

RESOLUTION TOOLS ................................................................. - 7 - 

ANNEX XIII 

DEBT WRITE DOWN (BAIL-IN) AND EX-ANTE FUNDING. - 7 - 

ANNEX XIV 

A COMPREHENSIVE STRATEGY TO RESTORE FINANCIAL 

STABILITY TO UNDERPIN SUSTAINABLE GROWTH IN THE EU ............ - 7 - 

ANNEX XV 

DETAILS  ON  THE  NECESSARY  DEROGATIONS  FROM 
STAKEHOLDERS'  RIGHTS  UNDER  EU  COMPANY  LAW  RULES  IN  THE 
RESOLUTION PHASE ......................................................................................... - 7 - 

ANNEX XVI 

IMPACTS ON FUNDAMENTAL RIGHTS ................................. - 7 - 

ANNEX XVII 

OVERVIEW  OF  THE  RESULTS  OF  THE  PUBLIC 
CONSULTATION  ON  TECHNICAL  DETAILS  OF  A  POSSIBLE  EU 
FRAMEWORK FOR BANK RESOLUTION AND RECOVERY (JANUARY - 
MARCH 2011)....................................................................................................... - 7 - 

ANNEX XVIII 

RESULTS OF TARGETED DISCUSSIONS ON BAIL IN ......... - 7 - 

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1. 

INTRODUCTION 

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

The lessons learned during this crisis have prompted the Commission services to examine the 
issue of bank recovery and resolution and to consider how existing arrangements and cross-
border  cooperation  can  be  strengthened  to  better  reflect  the  degree  of  integration  in  the  EU 
financial  services  market.  The  Commission  Services  believe  that  resolving  these  issues  will 
also  be  key  to  deepening  the  Internal  Market  by  providing  further  confidence  in  the  home-
host arrangements underpinning banking supervision, and ensuring its smooth functioning in 
stressed situations. 

A  regime  to  facilitate  an  orderly  resolution  of  failing  banks  and  thus  ensure  smooth  market 
exit is one of the most important pillars to maintain overall financial stability in crises. This 
relies on the ability of authorities to detect, prevent and manage problems which threaten the 
solvency of banks. The involvement of authorities may be crucial to maintaining the stability 
of  the  whole  financial  system,  to  protecting  the  deposits  of  people  and  companies  and  to 
maintaining the continuity of the payment systems and other basic financial services. 

At  international  level,  G20-Leaders  have  called  as  a  medium-term  action  for  a  “review  of 
resolution  regimes  and  bankruptcy  laws  in  light  of  recent  experience  to  ensure  that  they 
permit an orderly wind-down of large complex cross-border institutions.”1 At the Pittsburgh 
summit  on  25  September  2009,  they  committed  to  act  together  to  "...create  more  powerful 
tools to hold large global firms to account for the risks they take" and, more specifically, to 
"develop  resolution  tools  and  frameworks  for  the  effective  resolution  of  financial  groups  to 
help  mitigate  the  disruption  of  financial  institution  failures  and  reduce  moral  hazard  in  the 
future." 

In  October  2011,  the  Financial  Stability  Board  adopted  "Key  Attributes  of  Effective 
Resolution Regimes for Financial Institutions" (Key Attributes)2 that set out the core elements 
that  the  FSB  considers  to  be  necessary  for  an  effective  resolution  regime.  Their 
implementation should allow authorities to resolve financial institutions in an orderly manner 
without  taxpayer  exposure  to  loss  from  solvency  support,  while  maintaining  continuity  of 
their vital economic functions. 

The Basel Committee also dealt with this issue and issued recommendation on cross border 
bank resolution.3 In the US, the existing resolution arrangements have been further improved 
with the introduction of the Dodd-Frank Act.4 In the EU, several Member States (UK, Spain, 
Germany,  Sweden  etc.)  have  reinforced  their  systems  to  enable  the  prompt  and  effective 
resolution of failing banks.  

1 

2  

3 

4 

G20 Leaders' declaration of the Summit on financial markets and the world economy, April 2009. 

http://www.financialstabilityboard.org/publications/r_111104cc.pdf 

A Basel Working Group called Cross-border Bank resolution Group (CBRG) was set up in December 2007 to study the resolution of 
cross-border banks. It issued its report and recommendations in December 2009. http://www.bis.org/publ/bcbs162.pdf  

Dodd–Frank Wall Street Reform and Consumer Protection Act  

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The report of the High-Level Group on Financial Supervision in the EU chaired by Jacques de 
Larosière5  observed:  “The  lack  of  consistent  crisis  management  and  resolution  tools  across 
the Single Market places Europe at a disadvantage vis-à-vis the US and these issues should 
be addressed by the adoption at EU level of adequate measures.” 

2. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

2.1. 

Procedural issues 

An  Inter-service  Steering  Committee  on  early  intervention  and  bank  resolution  was 
established in October 2008 comprising of the Directorate Generals MARKT, ECFIN, SG, SJ, 
ENTR,  EMPL,  COMP,  JLS,  TAXUD  and  the  European  Central  Bank  (ECB).  The  steering 
committee  met  in  November  2008,  June  and  September  2009  and  supported  works  on 
communications,  a  staff  working  document  and  a  related  impact  assessment6.  In  2010  and 
2011, the Committee continued to work on these issues with a view to a legislative proposal. 
The  Steering  Committee  had  meetings  in  November,  December  2010,  and  in  January, 
February 2011. 

The draft impact assessment was discussed with the Impact Assessment Board (IAB) of the 
Commission on 18 May 2011. The IAB requested the following modifications to the text: 

(1) Strengthen the analysis of the problem drivers and the baseline scenario. 

(2) Clarify the legal and institutional context. 

(3) Clarify the content, and better assess the proportionality, of the various options. 

(4) Strengthen the analysis of impacts. 

The  IAB  examined  the  above  revisions  of  the  resubmitted  text  on  9  June  2011  and  issued 
additional  recommendations.  Adjustments  reflecting  these  recommendations  including 
updates  following  latest  developments  in  international  fora  a  as  well  as  incorporation  of 
results of the discussions on the bail-in tool that took part in April 2012 can be found in the 
following sections of the document: 

1.  Introduction:  Reference  is  made  to  the  Key  Attributes  of  Effective  Resolution 
Regimes  for  Financial  Institutions"  adopted  by  the  Financial  Stability  Board  in 
October 2011. 

2.  Consultation of interested parties:  On one of the resolution tools, the so called bail-in 
or  debt  write  down  tool,  targeted  discussions  were  organised  with  experts  from 
Member States, banking industry, academic world and legal firms in April 2012, the 
results of which are summarised in Annex XVIII. The presentation of all consultations 
can be found in detail in Annex III. 

5  

The high level group on financial supervision in the EU – Report, 25 February 2009  
http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf 

6   Documents 

related 

to 

the  work  on  crisis  management  of  banks  can  be 

found  on 

the 

following  website: 

http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm 

- 5 - 

 
 
                                                 
 
 
3.  Improved presentation of the legal and institutional context: 

Chapter 5.6 presents in a more details the responsibilities of national supervisors and 
resolution  authorities  and  chapter  4.3.2  lays  out  in  a  more  detail  the  relationships 
between the proposal for bail-in and the planned CRD requirements. 

4.  Better explained the content of some options:  

Chapter 5.4 presents safeguards envisaged to avoid unnecessarily intrusive actions by 
regulators.  

Chapter 4.3.2, option 4: the debt write-down tool presents extended description of this 
tool including its main aspects: the scope, interaction between ex-ante funds and bail-
in and the amount of bail-in-able liabilities. This chapter also presents the impact on 
the cost of funding, the impact of the tool depending on its phasing- in as well as the 
bail-in tool in light of current international considerations. The preferred option of the 
bail-in  tool  incorporates  view  of  the  key  stakeholders  following  the  discussions 
organised  by  the  Commission  in  the  course  of  April  2012.  Finally,  Annex  XIII 
provides for a more detailed overview of all the features of the debt write-down tool.  

Chapter 5.15 sets out the aspects of coherence with other proposals, namely related to 
the  latest  amendments  to  the  Directive  94/19/EC  on  Deposit  Guarantee  Scheme,  the 
proposal  for  a  Financial  Transaction  Tax  as  well  as  with  the  Capital  Requirements 
Directive.  

5.  Further  strengthening  impacts  analysis:  Chapter  5.6  presents  the  interaction  between 
supervisors  and  resolution  authorities.  Furthermore,  the  impact  of  the  proposed 
measures  on  existing  national  resolution  regimes  and  other  significant  impacts  are 
presented in chapter 4.3.2, in chapter 5.8 and 5.9 related to costs and benefit and the 
impact of the preferred option on stakeholders. Full analysis is available in Annex XIII 
dedicated  to  the  debt  write-down  tool  and  in  chapter  5.1.  In  addition,  chapter  5.17 
outlines current experience of Member States with bank resolution. 

6.  Other changes: 

- Chapter 4.5 Financing Resolution: the related Annex XV has been merged with Annex 
XIII 

-  Chapter 5.11 Impact on EU budget: since EBA will have to develop an expertise in a 
completely new area, it is now estimated that compared to the previous conclusions that 
did not estimate any impact on EU budget, EBA will as a result need 5 permanent and 11 
temporary staff for 2013 and 2014. 

- Chapter 6 Monitoring and Evaluation: indicators for monitoring were added  

2.2. 

Consultation of interested parties 

In  the  period  between  2008  and  2011,  the  Commission  services  organised  a  number  of 
consultations with experts and key stakeholders concerning bank recovery and resolution. As 
the last public consultation before the adoption of the proposal, a Commission Staff Working 
Paper describing in detail the potential policy options under consideration by the Commission 
services was published for consultation in January 2011. The consultation ended on the 3rd of 

- 6 - 

 
 
 
 
March 2011. The summary of this consultation can be found in Annex XVII.7 On one of the 
resolution  tools,  the  so  called  bail-in  or  debt  write  down  tool,  targeted  discussions  were 
organised  with  experts  from  Member  States,  banking  industry,  academic  world  and  legal 
firms in April 2012, the results of which are summarised in Annex XVIII. The presentation of 
all consultations can be found in detail in Annex III. 

3. 

POLICY CONTEXT, PROBLEM DEFINITION AND SUBSIDIARITY 

3.1. 

Background and context 

3.1.1.  Nature and size of the market concerned 

The proposal addresses bank recovery and resolution in relation to all credit institutions and 
certain  investment  firms.  The  scope  of  the  proposal  is  identical  to  that  of  the  Capital 
Requirements  Directive  (CRD)8,  which  harmonised  banking  legislation  and  introduced  the 
Basel  II  framework  in  the  EU9.  Investment  firms  need  to  be  part  of  the  framework,  as  the 
recent  crisis  showed  that  their  failure  (i.e.  Lehman  Brothers)  could  have  serious  systemic 
consequences. The above mentioned public consultations supported this policy as respondents 
agreed  that  the  framework  should  apply  to  all  credit  institutions  and  investment  firms  as 
defined  in  the  CRD  with  the  application  of  the  proportionality  principle  (obligations 
proportionate to the systemic relevance of the institution concerned) and adequate adjustment 
to deal with the specificities of investment firms. They also supported that financial holding 
companies should be part of the framework. 

According  to  the  ECB10,  in  2009,  8,358  credit  institutions11  operated  in  the  EU  with  total 
assets  of  €42,143  billion.12  There  are  39  large  cross  border  banking  groups  in  the  EU  and 
around  100  further  banks  that  have  subsidiaries  or  systemic  branches  in  another  Member 
State. According to the Committee of European Banking Supervisors, 3800 investment firms 
operated in the EU in 2009.  

In  the  European  Union  banks  traditionally  play  a  more  prominent  role  in  financial 
intermediation than in the United States. The Institute of International Finance (IIF) calculated 
that as of end-2009, US banks accounted for only 24 per cent of credit intermediation in the 
country,  versus  53  per  cent  in  Japan  and  as  much  as  74  per  cent  in  the  Euro  area13.  EU 
financial markets are strongly integrated, in particular at the wholesale level. The banking and 
insurance markets are dominated by pan-European groups, whose risk management functions 
are usually centralised. The 39 large cross-border groups' total assets represent around 68 % 
of the total EU banking market. Especially in the EU-12, banking markets are dominated by 
foreign  (mostly  Western  European)  financial  groups.  In  these  countries,  on  average  65%  of 

7  

Results of the public consultation can also be found on the website of DG Internal Market and Services of the European Commission:

 http://ec.europa.eu/internal_market/consultations/2011/crisis_management_en.htm 

8   Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC on the capital 

adequacy of investment firms and credit institutions. 

9   Work is underway to introduce the Basel III agreement in the EU. 

10 

ECB, EU Banking Structures, September 2010 

11  At a Member State level, this figure includes branches and subsidiaries of banks from other EU and third countries. Where a foreign 

bank has several branches in a given MS, they are counted as a single branch. 

12   Consolidated data. 

13   Source: Too Big to Fail: The Transatlantic Debate, Morris Goldstein and Nicolas Véron, January 2011. 

- 7 - 

 
 
                                                 
 
 
banking assets are in foreign-owned banks. In countries like Estonia, the Czech Republic and 
Slovakia over 92% of banking assets are in foreign-owned banks.  

Chart  1.  Market  share  of  foreign-owned  EU  subsidiaries  and  branches  in  Member 
States (% of total assets, 2009) 

3.1.2.  Overview of legislative framework and on-going developments 

To  guard  against  the  risk  of  financial  instability,  banks  are  regulated  and  subject  to 
supervision  by  authorities.  The  summary  of  the  relevant  EU  and  national  legislation  can  be 
found in Annex IV. The description of on-going developments including the creation of the 
new  European  Supervisory  Authorities  and  developments  at  the  international  level  can  be 
found in Annex V. 

3.2. 

Problem definition 

Key concepts used in this impact assessment: 

Preparation  and  Prevention:  improved  supervision  by  banking  supervisors  which  aim  at 
collecting better information on the risks in the financial sector; contingency planning for de-
risking  and  resolutions  measures;  and  powers  to  prevent  too  complex  and  interlinked 
operation hence ensure resolvability.  

Early  intervention:  early  remedial  actions  of  banking  supervisors  aimed  at  correcting 
problems at an early stage and hence helping banks to return to normal business, avoiding the 
need for resolution actions. 

Bank  resolution:  administrative,  non-judicial  procedures  and  tools  for  the  restructuring  or 
managed  dissolution  of  failing  banks  while  preserving  insured  deposits  and  other  services 
essential  for  maintaining  financial  stability  such  as  payment  services.  Bank  resolution  may 
use  specific  tools  (e.g.  bridge  banks,  assisted  acquisition,  partial  sale  of  assets,  asset 
separation,  debt  write  down,  debt  conversion  to  equity)  to  reach  the  above  objectives.  The 
resolution  process  is  managed  by  an  administrative  resolution  authority  (national  bank, 
financial supervisor, deposit guarantee scheme, ministry of finance, special authority), defined 
by Member States. 

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3.2.1.  General description14 

During the recent financial crisis, it became clear that 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 simply shut down or substituted without 
significant systemic damage.  

The banking sector plays a special role in the economy and have critical functions which are 
essential for economic activity to take place. Banks collect funds (deposits and other forms of 
debt)  from  private  persons  and  businesses  (financial  and  non-financial).  They  carry  out 
maturity transformation and provide loans for households and businesses allowing savings to 
be allocated most importantly to investments. They also manage payment transactions that are 
crucial for all sectors of the economy and society. The banking business is based on trust of 
stakeholders. Banks' most important capital is the reputation i.e. the confidence of others in it. 
If  confidence  is  lost  depositors  and  other  debtors  immediately  try  to  withdraw  their  funds. 
This would make the bank unavoidably bankrupt since no bank holds sufficient liquid assets 
to  cover  all  short  term  liabilities15.  Bank  failures  are  capable  of  undermining  financial 
stability, especially if they lead to a loss of depositor confidence in other banks.  During this 
crisis, these issues led Governments to, for the most part, recapitalise and save failing banks. 
The most important factors behind these decisions were the following: 

•  Fear of contagion and domino effects. The financial crisis has illustrated that the failure of 
some financial institutions would cause other financial institutions to fail and ultimately, 
cause  wider  damage  to  the  financial  system.  The  turmoil  created  after  the  failure  of  the 
Lehman  Brothers,  which  the  US  Government  decided  not  to  save,  demonstrated  the 
materialisation of this risk. If a financial institution fails other banks that provide funds to 
it would not get access to those funds. This would cause liquidity problems for them that 
would make these banks vulnerable too. If their debtors and depositors consider that it is 
better  to  withdraw  funds  from  these  vulnerable  banks  then  a  domino  effect  could  take 
place. This could cause liquidity and ultimately solvency problems to a significant part of 
the financial sector. Capital markets may also experience shocks and the payment systems 
be disrupted.  

•  Larger or more interconnected banks also are at increased risk of needing public support. 
Their failure would most likely result in the systemic instability described above. Size is 
not  the  only  reason  for  an  institution  to  be  systemically  important.  The  financial 
connections  with  other  financial  institutions  are  equally  important.  The  more  inter-
connected  a  bank  is,  the  more  likely  it  is  that  problems  affect  other  institutions 
(contagion). Moreover, if a bank is the dominant service provider in one market, then the 
consequences of its failure would be more significant (as there will be fewer institutions 
that  can  step  into  its  place:  substitutability).  In  addition,  some  institutions  may  be  more 
complex  than  others  due  to  their  organisational  set-up,  risk  management  or  funding 
structures.  Finally,  a  bank  active  across  the  world  in  jurisdictions  that  have  completely 
different rules, system of supervision, currencies etc may be more complex to resolve and 
hence more likely to fail were it to experience trouble, which would increase its potential 
systemic impact ex ante. 

•  Lack  of  special  powers  and  tools  to  manage  the  failure  of  banks  in  an  orderly  way. 
Authorities  could  choose  between  placing  banks  into  formal  insolvency  procedures  and 

14   Detailed analysis of the problems and drivers can be found in Annex VI. 

15   One of the basic functions of banks in the economy is to transform short term funding to long(er) term investments. 

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risking systemic problems or rescuing the banks using public funds. No special tools and 
powers  geared  towards  maintaining  crucial  financial  services  of  a  bank  as  an  ongoing 
business  (special  resolution)  were  available  in  most  Member  States.  (for  example,  the 
forced sale of Fortis was not available for Belgian authorities. The UK adopted the new 
banking  act  during  the  crisis  to  enable  bank  resolution  instead  of  insolvency  and  it  was 
subsequently applied in two cases) One of the reasons that in many cases authorities did 
not  oblige  creditors  to  pay  in  the  crisis,  or  eliminate  the  holdings  of  shareholders,  was 
because  they  did  not  have  a  legal  mechanism  to  do  so  in  an  orderly  manner  without 
causing further financial disruption (i.e. outside an insolvency procedure). 

•  The  magnitude  of  problems.  In  the  crisis  so  many  banks  were  affected  that  the  crisis 
became systemic. (e.g. In the UK an number of mid and large banks suffered losses and 
needed help; All major banks in Belgium (KBC, Fortis, Dexia) had problems, In Ireland 
government support for banks amounted to more than 30% of GDP etc.). 

Rescuing banks with public funds (bail-out) helped to avert what could have been economic 
depression  on  a  scale  not  seen  for  80  years,  but  it  has  also  created  a  number  of  medium  to 
long term problems that are becoming increasingly apparent:  

•  The  distortion  of  competition:  Institutions  that  are  perceived  by  the  market  as  being 
systemic are often perceived to benefit from an implicit state guarantee. As a result, those 
institutions  are  able  to  raise  funds  in  the  market  at  a  cost  that  is  lower  than  their  non-
systemic competitors. Research highlights that irrespective of methodological differences, 
the advantage can be significant. 

•  The  realisation  of  moral  hazard:  as  the  state guarantee risks encouraging excessive risk-
taking within systemic institutions. The management, senior executives and shareholders 
of systemic institutions could on the basis of past evidence reasonably expect that while 
they  stand  to  gain  from  the  upside  risk  (profits)  of  their  actions,  society  would  have  to 
cover the downside risk (losses). Research shows that such a skewed incentive structure 
within  financial  institutions  is  not  only  a  theoretical  proposition,  but  over  time  has  a 
material impact. 

•  Growth  regardless  of  synergy  gains:  as  non-systemic  institutions  have  an  incentive  to 
reach  systemic  importance,  thus  leading  banks  to  expand  beyond  their  ideal  economic 
size. This will over time contribute to an overly concentrated market place with potential 
negative effects on competition and welfare.   

• 

Increased  burden  on  public  finances:  Between  October  2008  and  October  2010,  the 
European  Commission  has  approved  €3.6  trillion  (equivalent  to  31%  of  EU's  GDP)  of 
State aid measures to financial institutions, of which €1.2 trillion has been effectively used 
(of  which  €409  billion  was  used  for  capital  injections  and  asset  relief  programs). 
Budgetary commitments and expenditures in this range are not sustainable from a fiscal 
point of view, and impose heavy burden on the present and future generations. Moreover, 
the  crisis  which  started  in  the  financial  sector  plunged  the  EU  economy  in  a  severe 
recession, with the EU GDP contracting by 4.2% or €0.7 trillion in 2009.16 

16   History suggests that it is the consequences of an economic downturn rather than the direct fiscal cost of supporting the financial sector 
that will have the largest effects (fall in tax revenues, increase in counter-cyclical spending), especially if the downturn is prolonged 
See e.g. Reinhart, Carmen M. and Kenneth S. Rogoff (2008), The Aftermath of Financial Crises 
http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf. 

- 10 - 

 
 
                                                 
 
 
Major problems addressed by the proposal 

Before  the  crisis,  neither  banks  nor  supervisors  and  other  authorities  were  sufficiently 
prepared for the financial crisis. Contingency planning for de risking banking operations and 
resolving  failing  banks  were  not  in  place.  Supervisors  discovered  problems  within  banks  at 
too  late  a  stage.  Highly  complex  operations  and  business  structures,  interlinkages  and  large 
institutions impeded resolution or liquidation of banks. There was no legislation at EU level 
governing the entire process of bank resolution. Beyond introducing a minimum set of early 
intervention powers for supervisory authorities aimed at restoring a situation in a bank17, and 
establishing  arrangements  for  the  winding-up  and  reorganisation  of  credit  institutions  with 
branches in other Member States18,  no EU framework existed which set out how and under 
which conditions authorities should act in the event of a crisis arising in a bank.  

During  the  financial  crisis,  authorities  in  many  Member  States  did  not  have  adequate  tools 
and  powers  to  handle  the  failure  of  banks.  The  lack  of  bank-specific  resolution  tools  left 
authorities  with  no  choice  other  than  to  intervene  with  public  funds.  This  cost  significant 
amount  of  taxpayers'  money  and  in  some  cases  even  put  the  whole  country  at  the  risk  of 
default.  Although  a  few  European  authorities  have  tools  available  to  intervene  in  banking 
crisis19, the tools are different, or in many cases do not exist at all. The diverging approaches, 
tools, and powers are likely to lead to inefficient resolution and deliver sub optimal results at 
EU  level.  Differences  and  gaps,  including  legislative  differences  between  Member  States 
and/or  a  lack  of  a  legislative/institutional  basis  in  some  countries,  have  the  potential  to 
complicate and even hinder the efficient cross-border handling of a banking crisis. This could 
weaken the functioning of the Internal Market.  

In the absence of bank specific resolution tools, the reorganisation of banks under insolvency 
procedures would most likely be unsuccessful, as debtors would immediately withdraw funds 
from  the  banks.  Depriving  depositors'  access  to  their  accounts  may  not  be  compatible  with 
objective  of  maintaining  financial  stability,  and will  usually  lead  to  the  loss  of  any  residual 
franchise  value  in  the  bank,  thereby  reducing  the  likelihood  of  a  recovery.  Insolvency 
procedures may take years, and the objective of authorities is to maximise the value of assets 
of the failed firm in the interest of creditors. In contrast, the primary objective of a resolution 
is to maintain financial stability and minimise losses for the society, in particular taxpayers. 
For  this  reason,  certain  critical  stakeholders  and  functions  (such  as  depositors,  payment 
systems) need to be protected and maintained as operational, while other parts, which are not 
considered  key  to  financial  stability,  may  be  allowed  to  fail  in  the  normal  way.  In  order  to 
avoid moral hazard and the use of taxpayers' money to support failing banks, shareholders and 
debt holders need to face the actual risks of banks and bear an appropriate share of the failure. 
Bank resolution also ensures that decisions are taken rapidly in order to avoid contagion.  

Moreover, the existing EU supervisory framework has proved inadequate to deal with cross-
border  banking  failure.  While  the  operation  of  cross  border  banks  has  become  highly 
integrated,  (with  the  result  that  business  lines  and  internal  services  have  become 
interconnected and cannot be easily separated along geographical borders of Member States), 
crisis management as well as related legislative framework of banks has remained national20. 

17 

In Article 136 of the Capital Requirements Directives (CRD). See more details in Annex IV. 

18   Directive  2001/24  on  the  reorganisation  and  winding  up  of  credit  institutions  deals  with  cross  border  branches  and  not  with 

subsidiaries. More information can be found in Annex IV. 

19   More details can be found in Annex VII. 

20  As Bank of England governor Mervyn King, pointed out, at the moment "global banks are global in life, but national in death" 

- 11 - 

 
 
                                                 
As a consequence, in the event of a cross border bank failure, financial supervisors and other 
(resolution) authorities concentrate only on the operations within their respective territories. A 
key  shortcoming  to  effective  cooperation  is  the  misalignment  between  the  national 
accountability  and  mandate  of  supervisors  (protecting  interest  of  depositors  and  creditors  at 
national  level)  and  the  cross-border  nature  of  the  banking  industry,  which  complicates 
voluntary co-operation between supervisors of different Member States and lead to inefficient 
and  possibly  competing  resolution  approaches  and  suboptimal  results  at  EU  level.  The 
introduction  of  the  EU  Memorandum  of  Understanding  on  Cross-border  Stability  came  too 
late to be applied during the recent bank failures, and moreover it is questionable whether this 
arrangement would have been sufficient to ensure optimal results at EU level.  

The  lack  of  private  financing  arrangements  for  bank  resolution  purposes21  also  led  to  the 
significant use of taxpayers' money to support banks. There were no or limited private funds 
available in Member States for financing resolution measures. Even though in some countries 
the  funds  of  deposit  guarantee  schemes  (DGS)  could  have  been  used  for  the  purposes  of 
resolution, they were not adequate in size and availability. 

These problems led to more expensive outcomes for EU citizens and tax-payers, as the bail-
out of systemically important cross border banks can be very expensive compared to the cost 
of  a  timely  and  effective  resolution22.  The  extent  of  the  cost  savings  that  might  result  from 
effective  bank  recovery  and  resolution  arrangements  at  EU  level  can  be  expected  to  be 
significant, given the overall costs associated with banking crises. 

The  financial  crisis  has  provided  clear  examples  (Fortis,  Lehman  Brothers,  Anglo  Irish, 
Icelandic banks among others) of how damaging the absence of adequate arrangements (both 
at national and EU level) in the field of bank resolution can be. The description of these cases 
and their relevance to the problems described in this chapter can be found in Annex VII. 

3.2.2.  The framework of bank recovery and resolution 

There are three key stages which need to be considered in the context of a bank recovery and  
resolution  framework:  (i)  preparation  and  prevention,  (ii)  early  intervention  and  (iii) 
resolution.  The  chart  below  presents  the  different  stages  and  the  proposed  policies  under 
them.  

The  actual  application  of  crisis  management  tools  might  follow  the  order  presented  in  the 
chart,  but  it  is  also  possible  that  authorities  use  the  resolution  tool  directly  without  any 
intermediate solution. Since problems and failures can differ to a large extent it is important 
that the framework remains flexible and adaptable to all situations. More detailed explanation 
of the different stages can be found in Annex II. 

21   Financing  is  crucial  when  special  resolution  techniques  (bridge  bank,  partial  transfers,  asset  separation)  are  applied  to  enable  the 
continuous  operation  of  resolved  entities  to  maintain  the  stability  of  the  financial  system  as  a  whole.  More  detailed  information  on 
financing can be found in Annex XIII. 

22   Effective cross border arrangements should ensure a result that is optimal at EU level, taking into account the interests of stakeholders 

in all Member States, and thus minimising the overall cost. 

- 12 - 

 
 
                                                 
Chart 2. Stages of the bank recovery and resolution process 

Early 
intervention 

Early 
intervention 
measures by 
supervisors 

(cid:131)  Raise own funds 
by shareholders 

(cid:131)  Replace 

managers 
(cid:131)  Implement 

recovery plan 
(cid:131)  Divestment of 

activities 

(cid:131)  More frequent 

reporting 

(cid:131)  Special 

management 

(cid:131)  Etc. 

Normal course of business 

Ongoing supervision + 
Preparatory measures 
to avoid problems 

(cid:131)  Capital requirements 
(cid:131)  Liquidity 
(cid:131)  Large exposure limits 
(cid:131)  Reporting 
(cid:131)  On/off site supervision, etc. 

(cid:131)  Supervisory programs 
(cid:131)  Enhanced supervision 
(cid:131)  Stress testing 
(cid:131)  Recovery plans 

Preventative measures 
to ensure resolvability 

(cid:131)  Resolution plans 
(cid:131)  Change of legal and business 

structure,  

(cid:131)  Limit exposures 
(cid:131)  Divestment 
(cid:131)  Reduction of complexity 

Bank Resolution 

Sale of 
busines

Bridge bank 

Asset 
separation 

Administrative 
resolution 
procedure 

Decision 
about 
non-
viability

Debt write 
down (bail-in) 

Judicial 
insolvency 
procedure 

Winding up / liquidation 

Bank Insolvency 

The diagram below presents the problems and their relations. The most important drivers for 
this proposal are the followings: i) Divergence and lack of effective resolution tools & powers 
and  ii)  Misalignment  between  national  accountability  and  mandate  of  authorities  and  cross-
border  nature  of  the  industry.  While  the  proposal introduces policies that can solve the first 
problem, changing the political, institutional and legal setup that result in the second problem 
is beyond  the  objectives of this proposal.  Annex  VI extensively  describes  and discusses the 
drivers and problems contained in the problem tree.  

- 13 - 

 
 
 
 
3.2.3.  Problem tree 

PROBLEM DRIVERS 

PROBLEMS

N
O

I
T
N
E
V
E
R
P

,

N
O
I
T
A
R
A
P
E
R
P

N
O
I
T
N
E
V
R
E
T
N

I
-
Y
L
R
A
E

N
O
I
T
U
L
O
S
E
R
K
N
A
B

Lack of EU rules for intra group financial 
support 

Lack of contingency planning by banks and 
authorities for potential crisis situations 

Too complex operation and structure of 
banks to fail

Too large and interconnected banks to fail 

Divergence and lack of effective early 
intervention triggers for supervisors 

Divergence and lack of effective early 
intervention tools for supervisors 

Too long time required to increase capital 

N
O
I
T
A
R
E
P
O
O
C
L
A
N
O
I
T
A
N
R
E
T
N
I

Misalignment between national 
accountability and mandate of 
supervisors and cross-border 

t

f th i d t

Lack of authorities responsible 
for bank resolution  

Misalignment between national 
responsibility of resolution 
authorities and cross-border 

t

f th i d t

Divergence and lack of resolution triggers 

Divergence and lack of effective resolution 
tools & powers  

Legal obstacles to effective and efficient 
bank resolution 

G
N
I
C
N
A
N
I
F

Lack of arrangements for 
financing resolution from 
private sources in most MS

Diverging national policies 
concerning financing of crisis 
situations (where available)

Conflicting interests of Member 
States concerning financing of 
crisis situations

Suboptimal level of 
preparedness of supervisors 
and banks

Irresolvable banking 
operations and structures 

Sub-optimal early 
intervention arrangements 

Sub-optimal level of 
supervisory cooperation 
impairing the effectiveness of 
supervisory intervention in 
crisis situation of cross border 
b k

Suboptimal level of 
cooperation between 
authorities responsible for 

b k

l ti

Inefficient cross-border bank 
crisis resolution process and 
suboptimal outcomes 

Lack of legal certainty

Use of public funds in crisis 
situation 

National systems not 
calibrated to ensure an 
optimal and even level of 

t

ti

f fi

i

l

- 14 - 

Increased risks to 
financial stability 

Reduced social welfare 
(shareholders, creditors, 
customers, taxpayers) 

Fragmentation of the 
internal market 

 
 
 
 
 
 
 
 
 
 
 
 
3.2.4.  Baseline scenario 

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

In  the  case  of  preparation  and  prevention,  supervisors  would  continue  to  rely  on  current 
practices  for  detecting  risks  at  credit  institutions.  In  the  absence  of  contingency  plans, 
supervisors  would  lack  key  information  about  the  possible  de-risking  strategies  of  credit 
institutions  or  about  their  recovery,  financing  or  resolution  possibilities.  When  it  comes  to 
failure,  resolution  authorities  would  not  have  an  adequate  overview  about  the  structure  and 
operation of complex banks thus it would be difficult to determine whether such banks could 
undergo  special  bank  resolution.  Supervisors  would  not  have  any  power  to  ask  overly 
complex,  large  or  interrelated  institutions  to  reorganise  or  simplify  their  operations  which 
could be a major hurdle in an eventual resolution. This would entrench moral hazard among 
banks  that  are  too  big,  complex  or  interconnected  to  fail.  Lack  of  legal  clarity  around  intra 
group financial support would discourage group entities to make arrangement help each other 
even if it were in the interest of the whole group. 

In the case of early intervention by supervisors, this would mean that supervisors in different 
Member  States  would  continue  to  have  different  powers  and  intervention  tools  for  different 
members  of  the  same  cross  border  banking  groups.  They  would  be  required  to  intervene  at 
different  times,  under  different  conditions  and  implement  different  measures.  This  would 
probably not ensure that problems of cross border banks could be effectively dealt with before 
they became more serious and affected other financial institutions and members of the group 
located in different Member States. This would risk suboptimal outcomes for stakeholders in 
the EU and would maintain the uneven playing fields.  

If  no  special  bank  resolution  tools  and  powers  are  granted  to  authorities,  resolution  of 
systemic banks will remain impossible to execute, and bail-out remains the only alternative. 
Currently only a few Member States (UK, Germany, Sweden, Denmark) operate special bank 
resolution  systems.  If  authorities  can  intervene  in  certain  countries  only  when  banks  are 
formally insolvent, those countries will bear much higher social cost if banks fail. The lack of 
an EU framework will represent a source of distortions in the internal market. 

When cross border banks approach insolvency, different national authorities would continue 
to focus their resolution activities only on the respective legal entity located in their territory. 
Conflicting interests would be likely to impede a more optimal reorganisation solution for the 
group as a whole, taking into consideration the interest of all Member States. Resolution of a 
cross border banking group would remain fragmented  by  national  borders where authorities 
would  follow  diverging  goals  and  apply  diverging  measures.  National  solutions  would 
probably  be  more  costly  for  the  citizens  and  taxpayers  of  the  EU  than  if  the  group  was 
reorganised at EU level.  

If no changes to current financing arrangements were implemented, there would be no private 
resources raised today to finance the resolution of tomorrow's failures in addition to existing 
safeguards.  This  accordingly  means  continuing  to  rely  on  capital  buffers  at  the  level  of 
individual institutions and Deposit Guarantee Schemes (DGS) to the extent that these are able 

- 15 - 

 
 
to  finance  resolution  measures.23  If  losses  are  not  be  covered  by  private  means,  recourse  to 
public funds may continue to be the only option for governments.  

At the same time, as a result of recent measures, the new European Authorities will improve 
the  macro  warning  systems  and  will  create  an  improved  supervisory  environment.  The 
European  System  of  Financial  Supervisors  (ESFS),  and  the  new  European  Supervisory 
Authorities24 (ESAs), will help cooperation between supervisors and the better functioning of 
Supervisory  Colleges.  The  ESAs  should  fulfil  an  active  coordination  role  between  national 
supervisory  authorities,  in  particular  in  case  of  adverse  developments  which  potentially 
jeopardise the orderly functioning and integrity of the financial system in the EU. However, in 
some emergency situations, coordination may not be sufficient. The ESAs will therefore, in 
such exceptional circumstances, have the power25 to require national supervisors to take the 
necessary  action.  They  will  however  have  no  formal  role  in  the  resolution  phase  of  crisis 
management. The safeguard clause of the regulations on ESAs makes it clear that decisions 
by the ESAs should in no way impinge on the fiscal responsibilities of the Member States.  

The current EU financial stability framework is focused on ensuring that banks are adequately 
capitalised.  The  Capital  Requirements  Directive  (CRD)26  contains  provisions  aimed  at 
stabilising  capital  within  banks,  but  it  is  not  prescriptive  in  case  the  banks  fail  to  meet  the 
8%27 minimum capital threshold. The handling of situations when a bank does not meet the 
requirements of banking laws (8% CAR) but is still not insolvent is left to national legislation. 
At EU level, currently the article 136 of the CRD deals with the early intervention powers and 
tools of banking supervisors in a crisis situation. This article enables the supervisors to oblige 
banks to implement measures that correct irregularities and restore capital requirements, e.g. 
by  requiring  them  to  hold  additional  capital,  improve  governance,  systems  and  internal 
control  arrangements,  increase  reserves,  limit  business  operations  and  risk  exposures,  etc. 
However, these early intervention powers proved to be insufficient in the financial crisis. The 
CRD also established rules about alerting other authorities28 (i.e. Central Banks and Ministries 
of  Finance)  in  emergency  situations,  requiring  coordination  of  supervisory  activities  and 
exchange  of  information  in  emergency  situations29  among  Member  States.  However,  if  no 
change in banking legislation is proposed, the CRD will not be enough (as it was not enough 
during the crisis) to address situations when banks actually fail.  

In  the  future,  banks  will  also  need  to  abide  stricter  prudential  requirements.  The  Basel  III 
accord  which  is  expected  to  be  introduced  in  the  EU  acquis  by  modifying  the  Capital 
Requirements  Directive  (CRD4)  will  require  banks  to  hold  more  and  better  quality  capital. 
Banks will also need to fulfil new liquidity requirements, stricter rules in counterparty credit 
risk and at later stage limit leverage. The new rules are expected to largely increase the safety 

23   However,  as  documented  by  the  impact  assessment  underpinning  the  Commission's  2010  proposal  for  amending  the  Directive  on 
Deposit  Guarantee  Schemes  (COM(2010)  368),  currently  many  DGS  are  either  not  financed  or  under-financed,  thus  raising  doubts 
about their ability to perform their central function, protect payouts, let alone facilitate resolution. Furthermore, as also documented by 
the same impact assessment, DGS mandates differ significantly as regards their ability to go beyond their core mandate of payout (e.g. 
liquidity support, restructuring).  

24   European  Banking  Authority  (EBA),  European  Securities  and  Markets  Authority  (ESMA),  European  Insurance  and  Occupational 

Pensions Authority (EIOPA) 

25  Article 18 of Regulation 1093/2010. 

26  Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC on the capital 

adequacy of investment firms and credit institutions. 

27 

Capital Adequacy Ratio (CAR): bank's capital expressed as a percentage of its risk weighted assets. 

28  Article 130 CRD 

29  Article 129(1) CRD 

- 16 - 

 
 
                                                 
of the banking sector, but will not completely eliminate the risk of bank failure. Thus there 
remains a strong need to have a new bank recovery and resolution framework in the EU.  

In  addition,  higher  capital  requirements  for  systemically  important  financial  institutions 
(SIFIs) are being considered in the Financial Stability Board (FSB). There are three pillars of 
the  too-big-to-fail  (TBTF)  or  SIFI  discussions:  (i)  higher  loss  absorbency,  (ii)  ensuring 
resolvability  and  (iii)  more  effective  and  intense  supervision.  This  IA  deals  with  the  latter 
two.  The  requirements  related  to  higher  loss  absorbency  relate  predominantly  to  so-called 
'going  concern'  loss  absorbency,  i.e.  a  requirement  for  SIFIs  to  hold  higher  loss  absorbing 
capital (capital surcharge) in good times to ensure that they can absorb losses without failing. 
The Commission is considering amending the CRD once the international negotiations on the 
attributes  of  such  a  loss  absorbency  regime  (magnitude,  imposition  approach,  instruments) 
have  been  finalised.  This  impact  assessment  deals  with  so-called  'gone  concern'  loss 
absorbency provisions, i.e. additional resources that could be mobilised once a SIFI is failing 
and  hence  placed  in  resolution  context.  These  are  the  bail-in  debt  provisions,  which  will 
contribute to higher ability to absorb losses in a resolution context (by writing down the value 
of debt and, possibly, convert to equity (which could absorb further losses).  

Nevertheless,  the  objectives  of  a  resolution  framework  and  capital  surcharge  are  different: 
The former aims to reduce the impact of failure through improving resolvability while higher 
capital requirements are primarily a tool for reducing the probability of failure; they affect the 
impact  of  failure  to  a  much  lesser  and  more  indirect  extent.  Estimates  of  the  magnitude  of 
potential  further  SIFI  capital  charges  in  the  international  debate  are  rather  low  compared  to 
the levels required by many academic models. Moreover, capital buffers – while useful – have 
proven  during  this  crisis  to  be  of  limited  value.  Many  of  the  failed  institutions  had  ample 
capital  at  the  time  of  failure.30  Accordingly,  it  is  important  to  find  more  effective  ways  of 
increasing  loss  absorbency  for  banks  than  capital  requirements.  Debt  write-down  (bail-in) 
attempts to fill that gap, by (depending on scope/limitations etc) providing a potentially much 
larger  (multiples  of  going  concern  higher  loss  absorbency)  additional  buffer  in  a  resolution 
context. 

The proposal of the Commission (in 2010) on changing the Directive on Deposit Guarantee 
Schemes  also  aims  at  improving  the  financial  safety  net.  The  risk  of  bank  failures  due  to 
depositor runs should be reduced as a result of shorter payout delays and more robust funding 
arrangements. The coverage level has also been raised to € 100 000 by Directive 2009/14/EC. 
DGS  are  permitted  to  finance  resolution.  This  role  has  clear  relevance  for  financing  bank 
resolution, as it is explained later in the Policy Options section of this document. 

In the UK, the Independent Banking Commission assessed a variety of proposals to improve 
competition and increase resolvability of institutions.31 These options range (in broad terms) 
from structural separation to higher capital requirements. Capital and competition issues are 
being  considered  through  other  legislative  and  non-legislative  fora.  The  objective  of  this 
proposal  is  to  ensure  resolvability  and  in  this  context  we  have  concluded  that  it  is  highly 
likely that there is no 'one size fits all' approach to resolution, for example non-deposit taking 
banks (e.g. investment banks) can contribute to systemic risk in the event they fail and may 
require public assistance in the absence of an effective resolution regime.32  

30   For example, a few days prior to its default, Lehman had Tier 1 capital of 11%. Lehmann Brothers press release, Sept 10, 2008 

31   The ICB's report can be found here: http://bankingcommission.independent.gov.uk/. 

32   For example, Lehman Brothers was allowed to fail which caused significant disruption to the wider financial system, this led to money 
market mutual funds 'breaking the buck' and receiving a $50bn US Treasury guarantee package, AIG was bailed out, reportedly costing 
$85bn, the arranged $4bn bailout of hedge fund LTCM in the late 1990s was designed to avoid a downward price spiral in securities. In 

- 17 - 

 
 
                                                 
Despite  the  above-mentioned  improvements  in  banking  regulation  at  EU  level,  failure  of 
financial  institutions  cannot  be  excluded  in  the  future.  Increased  and  better  quality  capital, 
new  liquidity  rules  provide  stronger  safety-net  for  bank  losses.  Strengthened  DGS 
arrangements  reinforce  depositors'  confidence  in  banks.  However,  if  no  legal  framework  is 
developed  to  manage  the  failure  of  financial  institutions,  governments  could  again  find 
themselves in a situation when their only choices are to either rescue banks from public funds 
or risk financial systemic instability.  

3.3. 

The EU's right to act and justification  

Due  to  the  advanced  cross  border  integration  of  the  financial  sector,  only  EU  action  can 
ensure that credit institutions are subject to adequate interventions in crisis situation. EU level 
action  is  necessary  since  current  tools  to  deal  with  bank  crises  are  nationally  based  and 
insufficient to deal with cross-border institutions in difficulty. Moreover, objectives pursued 
by each national authority may differ. As a consequence, Member State authorities cannot be 
sure  that  critical  problems  arising  in  a  cross-border  banking  group  can  be  solved  fairly, 
effectively  and  expediently.  Unless  these  flaws  in  the  framework  are  adequately  addressed, 
national authorities will be left in practice with only two alternatives: they can either take the 
politically unpopular option of using public money to bail out banks or they can decide to ring 
fence assets in a cross-border bank and apply national resolution tools (where they exist) at 
each entity level – which may drive up the overall cost of the resolution. The first option can 
have substantial impacts on the budget of Member States, while the other would substantially 
fragment  the  internal  market  and  could  lead  to  overall  more  costly  solutions  (e.g.  Fortis). 
Limited options available to authorities would increase the risk of moral hazard and generate 
an expectation that large; interconnected and complex banks would need public assistance in 
the event of problems. 

As  a  response  to  the  financial  crisis,  some  Member  States  have  already  enacted  legislative 
changes  in  order  to  introduce  mechanisms  to  resolve  failed  credit  institutions;  others  have 
indicated  their  intention  to  introduce  such  mechanisms.  Differences  in  rules  concerning  the 
pre-conditions,  tools  and  powers  for  resolving  credit  institutions  would  likely  constitute 
barriers to the smooth operation of the internal market, as national authorities would not have 
the  same  level  of  control  and  the  same  ability  to  resolve  credit  institutions  as  each  other. 
European  financial  markets  are  highly  integrated  and  interconnected  with  many  credit 
institutions operating extensively beyond national borders. The failure of a cross-border credit 
institution is likely to affect the stability of financial markets in the different Member States in 
which it operates. The inability of Member States to take control of a failed credit institution 
and resolve it effectively can undermine Member States' mutual trust and the credibility of the 
internal  market  in  the  field  of  financial  services.  These  differences  would  hinder  the 
cooperation between national authorities when dealing with failing banking groups operating 
across borders. 

The  framework  should  apply  to  all  credit  institutions  (domestic  and  cross-border)  since 
banking  groups  may  be  composed  of  several  entities,  only  some  of  which  operate  cross-
border, but it is necessary that authorities be able to intervene in all the entities and to resolve 
the group as a whole. Using different tools and powers for entities affiliated to the same group 
would be inefficient and would raise issues of inequality of treatment. 

The proposal does not intend to introduce EU solution at the following two fields: 

Japan  in  the  1990s,  finance  companies  were  used  by  banks  to  circumvent  restrictions  placed  on  real  estate  lending  which  led  to  an 
unregulated boom. 

- 18 - 

 
 
                                                                                                                                                         
1.  In  order  to  achieve  the  objectives,  it  is  necessary  to  confer  resolution  powers  to  a  public 
administrative  authority33  to  ensure  the  required  speed  of  action.  It  is  however  not 
indispensable  to  determine  which  authority  should  be  appointed  in  each  Member  States.  A 
harmonisation  would  facilitate  coordination  but  the  effectiveness  of  resolution  would  not 
depend  on  the  chosen  institution.  It  would  also  interfere  with  the  constitutional  and 
administrative orders of Member States. A sufficient degree of coordination can be achieved 
also  with  the  less  intrusive  requirement  that  all  the  national  authorities  involved  in  the 
resolution of a cross-border  group be represented in resolution colleges, where coordination 
will take place. A detailed harmonisation  of resolution processes would imply a deeper  and 
more  complex  harmonisation  of  substantial  and  procedural  insolvency  rules  applicable  to 
banks. 

This  degree  of  flexibility  for  Member  States  was  fully  supported  in  the  latest  public 
consultation.  Resolution  authorities  could  be  for  example  national  banks,  financial 
supervisors,  deposit  guarantee  schemes,  ministries  of  finance,  or  specially  appointed 
authorities.  They  need  to  have  adequate  expertise  and  resources  to  manage  possible  bank 
resolutions  at  national  and  cross  border  level.  If  a  member  state  decides  to  set  up  the 
resolution authority within the same institution that is responsible for supervision, functional 
separation  of  the  two  activities  is  recommended  to  avoid  supervisory  forbearance.34  Most 
respondents to the public consultation acknowledged the risk of forbearance and favoured to 
combine  resolution  and  supervision  in  the  same  institution  with  the  establishment  of 
functional  separation.  Even  if  resolution  authorities  would  not  be  determined  by  EU 
legislation, their  powers  and tools would be harmonised to a certain extent by this proposal 
(minimum harmonisation, see in section 4.3.2). 

2. Similarly there is no need for action at EU level as regards the way an administrative, non-
judicial35 resolution process is managed. There can be different models in different Member 
States,  like  receivership,  administration  or  direct  executive  powers,36  which  can  be  equally 
effective during a bank resolution. This view was fully supported in the public consultation. 
Respondents  believed  that  Member  States  should  be  free  to  choose  what  resolution 
mechanism they use, whether receivership, administration or executive decree mechanism or 
a  combination.  As  long  as  it  is  clear  what  resolution  mechanism(s)  Member  States  use, 
different resolution solution should not stand in the way of an efficiently coordinated cross-
border resolution. 

3.4. 

Objectives 

The general objectives are to  

• 

• 

Maintain  financial  stability  and  confidence  in  banks,  ensure  the  continuity  of 
essential financial services, avoid contagion of problems; 

Minimise  losses  for  society  as  a  whole  and  in  particular  for  taxpayers,  protect 
depositors, and reduce moral hazard; 

33   Since there is no special bank resolution framework in place in most Member States, there are no authorities designated to manage bank 

resolution in these countries. 

34   The risk of non-action by authorities when failure of banks and failure of supervision is linked. 

35   Bank  resolution  is  carried  out  in  an  administrative,  non-judicial  process  to  ensure  speed  of  actions  and  special  skills  needed  for  the 

financial sector. 

36   See definitions in the Glossary in Annex I. 

- 19 - 

 
 
                                                 
• 

Strengthen the internal market for banking services while maintaining a level playing 
field (i.e. same conditions for all players to compete in the financial markets of the 
EU). 

In the public consultation, all respondents supported the objectives of the bank recovery and 
resolution proposal. Public authorities had mixed views on the order of importance as half of 
them  considered  financial  stability  as  the  most  important,  while  the  other  half  regarded  all 
objectives as equally essential. 

The specific and operational objectives are the following: 

Preparation and prevention 

Problems 

Suboptimal level 
of preparedness 
of supervisors 
and banks for 
potential crisis 
situations  
Irresolvable 
banking 
operations and 
structures 

Problem drivers 

Operational objectives 

Specific objectives 

Lack of EU rules for intra group 
financial support 

Develop framework for intra group 
financial support for effective crisis 
prevention while providing legal certainty 

Lack of contingency planning for 
potential crisis situations 
Too complex operation and 
structure of banks to fail 
Too large and interconnected 
banks to fail 

Require contingency planning from credit 
institutions and authorities 
Make it possible to reduce the complexity 
of certain banks 
Make it possible to reduce the size and 
interdependence of certain banks 

Increase 
preparedness of 
supervisors and 
banks for crisis 
situations 

Enable resolvability 
of all banks 

Early intervention 

Problems 

Problem drivers 

Operational objectives 

Specific objectives 

Sub-optimal early 
intervention 
arrangements for 
supervisors 

Divergence and lack of effective 
early intervention triggers for 
supervisors 
Divergence and lack of effective 
early intervention tools for 
supervisors 
Too long time required to increase 
capital in emergency situation 

Provide all supervisors with effective 
early intervention triggers  

Enabling all supervisors with  effective 
tools to intervene at an early stage 

Shorten time period to increase capital 
at banks in emergency situation 

Bank resolution 

Problems 

Inefficient bank 
resolution process 
and suboptimal 
outcomes 

Problem drivers 
Divergence and lack of resolution 
triggers 
Divergence and lack of effective 
resolution tools & powers 

Lack of legal 
certainty in bank 
resolution 

Legal obstacles to effective and 
efficient bank resolution 

Operational objectives 

Provide authorities with clear and 
reliable resolution triggers 
Enabling all resolution authorities with 
a set of resolution tools and powers to 
resolve banks 
Amending EU and national legislation 
to eliminate legal uncertainties around 
the use of resolution tools by drawing 
the right balance between effective 
resolution and the protection of 
shareholders' rights 

Improve early 
intervention 
arrangements for 
supervisors 

Specific objectives 
Ensure resolution 
of banks in a 
timely and robust 
manner 

Ensure legal 
certainty for bank 
resolution 

Cross border crisis management  

Problems 

Suboptimal level of 
cooperation between 
authorities responsible 
for bank resolution 

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

Operational objectives 
Ensure that national interest of 
resolution authorities does not 
jeopardise resolution of cross border 
banks  

Specific objectives 
Foster efficient 
cooperation of 
authorities in cross 
border resolution  

- 20 - 

 
 
Financing 

Problems 

Problem drivers 

Operational objectives 

Use of public funds in 
crisis situation  
National systems not 
calibrated to ensure an 
optimal and even level 
of protection of 
financial stability 
across MS (with other 
prudential measures) 

Lack of arrangements for 
financing resolution from 
private sources in most MS 
Diverging national policies 
concerning financing of 
crisis situations (where 
available) 
Conflicting interests of 
Member States concerning 
financing of crisis situations 

Develop private financing 
arrangements for bank 
resolution 

Develop and calibrate optimal 
arrangements for financing 
bank resolution across EU 

Align national interest with 
group wide (EU) interest in 
financial arrangements 

Specific objectives 
Develop arrangements for 
financing bank resolution 
from private sources 

Develop arrangements to 
finance bank resolution that 
provide optimal and even 
level protection for all 
Member States (in line with 
other prudential measures) 

4. 

POLICY OPTIONS, ANALYSIS OF IMPACTS AND COMPARISON 

This section sets out the policy options under consideration, their impacts on stakeholders and 
their comparison along the lines of effectiveness and efficiency. Description of certain policy 
options  and  their  impact  analysis  can  be  found  more  extensively  in  the  Annexes.  The 
presented policy options are not necessarily mutually exclusive, hence the combination of two 
or  more  options  are  also  analysed.  We  use  the  following  score  system  when  presenting 
impacts on stakeholders, efficiency and effectiveness: Magnitude of impact as compared with 
the  baseline  scenario  (the  baseline  is  indicated  as  0):  ++  strongly  positive;  +  positive;  –  – 
strongly negative; – negative; +/– both positive and negative ≈ marginal/neutral; ? uncertain; 
n.a. not applicable  

- 21 - 

 
 
4.1. 

Preparation and prevention 

4.1.1.  Possible policies to develop framework for intra group financial support 

Policy option 

1. No policy change 
2. Introduction of group 
interest 

3. Voluntary group financial 
support agreement 

4. Review of proposed 
agreement by supervisors 

5. Transfer by supervisors 

Description 

The baseline scenario applies 
The  notion  of  'group  interest'  could  be  introduced  for  credit  institutions  in  the 
company  law  legislation  of  the  EU.  This  approach  would  depart  from  the 
traditional  focus  on  separate  legal  entities  and  would  accept  that  a  group  of 
enterprises constitute a single economic entity. 
An  EU  parent  credit  institution  or  an  EU  parent  financial  holding  company  and 
subsidiaries that are credit institutions or investment firms could voluntarily enter 
into an agreement to provide financial support (in the form of a loan, the provision 
of guarantees, or the provision of assets for use as collateral in transaction) to any 
other party within the group that experiences financial difficulties.  
Any  group  financial  support  agreement  could  be  approved  ex-ante  by  the 
shareholders'  meeting  of  every  group  entity  that  proposes  to  enter  into  the 
agreement. The shareholders' meeting could authorise the respective management 
body  to  take  a  decision  that  the  entity  will  provide  financial  support  if  needed. 
State aid rules should be met. Further information can be found in Annex X. 
Supervisors could grant the authorisation for a group financial support agreement 
if the conditions for financial support are satisfied. As a safeguard for the financial 
stability,  the  supervisor  of  the  transferor  could  have  the  power  to  prohibit  or 
restrict a transfer of assets pursuant to the agreement when this transfer threatens 
the  liquidity  or  solvency  of  the  transferor  or  financial  stability.  If  the  supervisor 
were not to prohibit the transfer within a set period of time, the transferor should 
be able to proceed with the transfer. 
In the case a voluntary intra group financial support agreement is already in place, 
supervisors may also apply the agreement for compulsory financial assistance. If a 
credit institution that is party to a group financial support agreement is in breach 
or is likely to be in breach of the requirements of the CRD, the supervisor could 
require the management body of the credit institution to request financial support 
pursuant  to  the  agreement,  after  consulting  the  other  supervisors  responsible  for 
supervising the entities subject to the agreement. 

As a first option, the notion of 'group interest' would be very effective in reaching the goal 
of legal certainty around intra group asset transfer. With the group interest the legal concerns 
around the management's liability, retroactive void transfers in consecutive insolvency would 
be  eliminated37.  This  would  however  undermine  the  traditional  approach  of  company  laws 
and insolvency laws that focus on the legal entity as a separate economic entity. In addition, 
not only these laws but also contract laws would need to be changed. The fundamental change 
of  these  laws  would  be  disproportionate  with  the  benefits  of  a  clear  asset  transferability 
framework for crisis situations38. 

Signing a voluntary agreement on intra group financial support and eventually providing 
intra group financial assistance would greatly increase the effectiveness of crisis prevention. 
Financial help from an entity in one Member State to an entity in the other would also balance 
and  minimise  the  effects  of  adverse  financial  developments  across  the  EU.  As  an  early 
financial  support  mechanism,  it  could  stop  the  aggravation  of  financial  problems  at  bank 
entities working as part of a group. Legal certainty would increase as it would be clear when 
and how such financial support can be provided. In this way, shareholders could jointly agree 

37   More explanation about these problems can be found in Annex VI.  

38   A draft 9th Company Law Directive was prepared and circulated by Commission in 1984; which tried to introduce group interest in the 

company law of the EU, but finally it did not even become a proposal. 

- 22 - 

 
 
 
                                                 
on  the  importance  of  mutual  financial  help  in  cases  where  the  group  interest  could  prevail 
over  the  interest  of  group  entities  (with  adequate  safeguards).  Shareholders'  approval  to  the 
agreement  would  reinforce  the  mandate  of  bank  managers  to  take  into  consideration  the 
interest  of  the  group  as  one  economic  entity  and  not  only  the  interest  of  the  entity  they  are 
directing.  This  would  alleviate  concerns  regarding  directors'  liability  laid  down  in  company 
laws  and  the  risk  of  rendering  a  transfer  retroactively  void  in  a  consequent  insolvency 
proceeding. In this way, managers of group entities would be more willing to help other group 
entities in the interest of all. Shareholders and creditors of group entities would be aware of 
the  possibility  of  such  pre-emptive  transactions,  which  would  further  increase  clarity. 
Transferring  assets  from  a  healthy  entity  would  decrease  its  liquidity  and  capital  and  hence 
the  position  of  debt  holders  and  depositors  could  weaken.  Safeguards  are  needed  to  ensure 
that they cannot suffer losses as a result. Therefore the transfers should be executable only in 
case it does not jeopardise the liquidity or solvency of the support provider. 

The agreements should be on a voluntary basis, because it is best to leave to banking groups 
assess whether such arrangements would be in the group interest within the wider objective of 
the financial stability of the entire group  (a group  might  more  or  less  integrated and pursue 
more or less strongly a common strategy) and to identify the companies that should be part to 
the  agreement  or  not  (it  may  be  appropriate  to  exclude  certain  companies  that  pursue  the 
riskier activities). In addition, the interest in entering into such agreements will depend on the 
existence and the nature of the obstacles to asset transferability posed by national laws under 
which banks operate. Supervisors' approval is appropriate for prudential purposes in order to 
verify  that  the  agreement  complies  with  the  specific  conditions  and  the  prudential 
requirements in general. The agreement should not work against resolvability because it is not 
an unconditional intra-group guarantee, rather a commitment to help only when this does not 
jeopardize the solvency of the supporting entity. In insolvency therefore the agreement would 
not  apply.  The  supervisor's  control  of  each  transaction  would  be  a  further  guarantee  for 
financial  stability;  it  is  however  limited  in  scope  to  verifying  that  the  conditions  for  the 
support  are  met  and  it  should  be  facilitated  by  the  existence  of  the  already  approved 
underlying agreement.  

Supervisory approval to the intra group agreement and actual asset transfers would largely 
increase the stability of the framework, as one of the main barriers/uncertainties (blocking of 
transfers  by  supervisors)  could  be  eliminated.  In  addition,  different  national  supervisors 
would  need  to  come  to  an  agreement  about  the  interest  of  a  cross  border  banking  group, 
taking into account not only their own but the interest of other member states, too. This would 
also  further  strengthen  the  internal  market,  as  host  and  home  supervisors’  opposing  interest 
around  an  intra-group  transfer  could  be  tackled39.  In  case  of  disagreement,  the  European 
Banking Authority could play a mediating role. 

Financial support from one group entity to the other may be ordered by the supervisors as 
part  of  an  early  intervention  measure  if  a  voluntary  ex-ante  agreement  is  in  place.  This 
measure  would  be  very  effective  in  providing  quick  fix  to  a  temporary  (liquidity)  problem. 
Transfers required by supervisors could ensure optimal pre-emption solutions at EU level. At 
the same time, such a measure would limit the freedom of management over the banks' assets. 
This  would  probably  discourage  banks  from  voluntarily  signing  such  agreements.  Creditors 
(of  both  transferring  and  receiving  entity)  would  be  in  a  similar  situation  as  under  the  third 
option.  

39   Home and host financial supervisors have two concerns around intra group asset transfers. Firstly they want to avoid contagion (i.e. one 
group entity exports its failure to the other) even though in certain cases financial assets in excess in one part of the group might help 
avoiding failure in another part of a group. Secondly, host supervisors may fear that financial support transferred to the mother bank 
would weaken the subsidiaries and increase their vulnerability.. 

- 23 - 

 
 
                                                 
Results of the public consultation are mixed on intra group financial support. Some Member 
States are in favour as they believe that a framework for asset transferability would be useful 
to  improve  the  ability  of  groups  to  prevent  financial  difficulties  and  to  increase  the  legal 
certainty  and  transparency  of  cross-border  intra-group  asset  transfers.  Other  Member  States 
are  against  such  a  framework  because  they  fear  that  it  would  blur  the  boundaries  of  the 
limited  liability  of  individual  companies  (and  the  distinction  between  branches  and 
subsidiaries)  and  might  become  a  source  of  contagion  within  a  group.  The  main  concerns 
from host Member States is the provision of up-stream financial support (i.e. from subsidiary 
to parent company).  

The  banking  industry  is  mainly  in  favour  of  the  framework  with  the  exception  of  few 
respondents, who think that banks are already able to transfer assets within groups under the 
current rules  and are concerned  that the framework might reduce flexibility.  The  support of 
the industry shows that banks would be interested in having the possibility to benefit from a 
framework  facilitating  intra-group  asset  transfers,  although  a  number  of  respondents 
expressed reservations on the need to obtain a preliminary shareholders' agreement.  

The majority of respondents consider that a mediation role of EBA is necessary. However, the 
views  are  split  regarding  whether  this  role  should  imply  a  binding  decision  or  not.  The 
majority  of  supervisory  authorities  agree  to  give  the  supervisor  the  power  to  require  an 
institution  to  request  financial  support;  banks  and  federations,  on  the  contrary,  take  the 
opposite view.  

The preferred option is to implement the voluntary agreement together with the approval of 
supervisors without the possibility for supervisors to order a transfer.  

Table 1. Intra group financial support - comparison of options 

Operational objective 

Policy options 

Develop framework 
for intra group asset 
transferability 

1. No policy change 
2. Introduction of group interest 
3. Voluntary group financial support agreement 
4. Review of proposed agreement by supervisors 
5. Transfer by supervisors 
6. Voluntary agreement with approval of 
supervisors  

Effectiveness 
0 
++ 
++ 
+ 
+ 

Comparison criteria 
Efficiency 
0 
- 
+ 
+ 
- 

Coherence 
0 
- 
+ 
+ 
- 

++ 

++ 

++ 

Table 2. Intra group financial support - impact on main stakeholders 

Transferring 
banks' 
creditors and 
depositors 
0 
+/- 

Transferring 
banks' 
shareholders/ 
management 
0 
+/- 

Receiving 
banks' 
creditors and 
depositors 
0 
+/- 

Receiving 
banks' 
shareholders/ 
management 
0 
+/- 

+/- 

+ 

- 

+/- 

+ 

+ 

- 

+/- 

+ 

+ 

+ 

+ 

+ 

+ 

+ 

+ 

Supervisors 

0 
+/- 

++ 

++ 

++ 

++ 

1. No policy change 
2. Introduction of group interest 
3. Voluntary group financial 
support agreement 
4. Review of proposed 
agreement by supervisors 
5. Transfer by supervisors 
6. Voluntary agreement with 
approval of supervisors  

- 24 - 

 
 
 
4.1.2.  Possible policies to require contingency planning40  

Policy option 

1. No policy change 
2. Introduction of 
recovery plans 

3. Introduction of 
resolution plans 

Description 

The baseline scenario applies 
Recovery plans prepared by the banks may set out the arrangements that banks have 
in place or the measures that it would adopt to enable it to take early action to restore 
its long term viability in the event of a material deterioration of its financial situation 
in foreseeable and conceivable situations of financial stress. Supervisors would 
assess and would need to approve recovery plans. For groups, recovery plans at both 
group and individual level would be necessary. For more description, including the 
content of such plans see Annex XI. 
A resolution plan, prepared by the resolution authorities in cooperation with 
supervisors in normal times of business may set out options for resolving the credit 
institution in a range of conceivable scenarios, including circumstances of systemic 
instability. Such plans could include details on the application of resolution tools, 
ways to ensure the continuity of critical functions, among others. Group resolution 
plans would also have to be drawn up. For more description, including the content of 
such plans see Annex XI. 

Recovery plans could largely help supervisors in identifying the appropriate actions that can 
restore  the  viability  of  banks  at  an  early  stage.  Early  reaction  could  stop  aggravation  of 
problems  and  thus  avoid  the  implementation  of  more  serious  (resolution)  measures.  As 
recovery plans would be prepared by banks, this process would also help them reviewing their 
operations, risks, and necessary actions in a problematic situation. Recovery plans thus would 
increase  the  preparedness  and  awareness  of  both  banks  and  their  supervisors  for  and  about 
problematic  financial  situations.  Planning  in  itself  may  not  however  be  sufficient.  It  is  also 
very  critical  that  credit  institutions  take  any  necessary  measures  to  ensure  that  there  are  no 
impediments to the implementation of the plan in situations of financial stress. 

Resolution plans enable rapid, more efficient and effective execution of potential measures 
that  can  substantially  decrease  the  (social)  cost  of  bank  failure.  If  resolution  authorities  are 
fully  aware  of  the  options  they  have  to  resolve  or  liquidate  a  failing  bank  or  group,  the 
likelihood of a successful resolution is substantially higher.  

The case of Bradford & Bingley 

UK  authorities  took  Bradford  &  Bingley  into  temporary  public  ownership  on  29  September  2008  following  a 
determination  by  the  FSA  that  the  bank  no  longer  met  threshold  conditions.  Thanks  to  extensive  prior 
contingency planning by the authorities, the UK was able over the weekend to conduct an auction of Bradford & 
Bingley’s retail deposits, branches and associated systems and to sell these to Santander/Abbey. The Bradford & 
Bingley branches opened for business as usual on Monday morning with no interruption in service. 

Resolution plans reduce moral hazard, as they indicate to the market that authorities will take 
steps  to  avoid  to  be  “forced”  to  rescue  large  firms,  and  that  no  firm  is  necessarily  to  be 
considered  as  too  big  or  too  complex  or  too  interconnected  to  fail.  This  can  already  have  a 
salutary effect on market discipline. Moody’s alerted investors to the fact that resolution plans 
“would remove the necessity to support banks as banks would no longer be too interconnected 
or complex to fail. This could potentially result in ratings downgrades where ratings currently 
incorporate a high degree of government support” (cited in Croft and Jenkins 2009).41 

40   A contingency plan in general is a plan devised to mitigate potential impacts of exceptional risk which is impractical or impossible to 

avoid. They are also referred to as living wills in the context of bank resolution. 

41 

Thomas F. Huertas: Living Wills: How Can the Concept be Implemented?, Wharton School of Management 

- 25 - 

 
 
 
                                                 
In  public  consultation,  the  majority  of  supervisory  authorities  and  banks  supported  the 
introduction  of  recovery  and  resolution  plans.  They  considered  the  required  content  of 
recovery plans42 to be sufficient with some suggestions to expand it. All respondents agreed 
that  resolution  plans  would  adequately  prepare  possible  resolution  of  institutions.  The 
majority of authorities believed that resolution plans should be required for all the institutions 
that would be covered by the framework. Most of them also considered that the content of the 
obligation should be proportionate to the size and systemic nature of the entity. The industry 
had  mixed  views  whether  all  institutions  should  be  required  to  prepare  resolution  plans.  In 
some of their opinion small and not interconnected firms should be excluded as this would be 
too  burdensome  for  them.  Respondents  would  welcome  the  involvement  of  EBA  in 
contingency planning, although views are mixed about the binding or non-binding nature of 
the involvement. 

Devising, analysing and maintaining contingency plans would entail cost for both authorities 
and banks. Staff tasked with this activity need to be trained and prepared for carrying out this 
relatively  new  activity.  Respondents  to  the  public  consultation  however  were  unable  to 
estimate these costs at this point in time. 

The  preferred  option  is  the  introduction  of  both  plans,  which,  in  a  complementary  way, 
would  help  supervisors,  resolution  authorities  and  banks  in  different  phases  of  an  evolving 
crisis  situation.  In  case of  disagreement  between  authorities  in  different  Member  States,  the 
EBA could play a mediating role. In an early stage, recovery plans would make supervisory 
action more prompt and effective, hopefully avoiding the escalation of problems. Resolution 
plans, on the other hand, would enable a timely resolution of a failing bank. The development 
and continuous maintenance of such plans would increase cost at both supervisors and banks. 
However the benefits of quicker and  more  effective supervisory actions and the decrease in 
moral  hazard  would  substantially  surpass  the  expenses.  In  the  US,  the  Dodd-Frank  Act  has 
also implemented  similar requirements for contingency planning. Implementation  in  the EU 
would also contribute to a global level playing field. 

Table 3. Contingency planning - comparison of options 

Operational objective 

Policy options 

Require contingency 
planning from credit 
institutions and 
authorities 

1. No policy change 
2. Introduction of recovery plans 
3. Introduction of resolution plans 
4. Introduction of both plans 

Effectiveness 
0 
+ 
+ 
++ 

Comparison criteria 
Efficiency 
0 
+ 
+ 
++ 

Coherence 
0 
+ 
+ 
+ 

Table 4. Contingency planning - impact on main stakeholders 

Bank 
shareholders 

Bank 
creditors 

1. No policy change 
2. Introduction of recovery plans 
3. Introduction of resolution plans 
4. Introduction of both plans 

0 
+/- 
+/- 
+/- 

0 
+ 
- 
+/- 

Banks' clients 
(depositors, 
borrowers) 
0 
+ 
+ 
+ 

Supervisors 
and Resolution 
authorities 
0 
++ 
++ 
++ 

Taxpayers / 
governments 

0 
++ 
++ 
++ 

42   See Annex XI. 

- 26 - 

 
 
 
                                                 
4.1.3.  Possible policies to ensure resolvability of banks 

Policy option 

1. No policy change 
2. Ensure resolvability 
by general requirement 
of laws 

3. Empower authorities 
to require the change of 
business structure and 
operation of credit 
institutions 

4. Empower authorities 
to limit or modify 
exposures and activities 
of credit institutions 

Description 

The baseline scenario applies 
Laws  could  require  the  changing  of  banking  structures,  limiting  build  up  of  certain 
business  lines,  unwind  certain  business  models,  imposing  quotas  (e.g.  size  caps), 
prohibiting  certain  activities  altogether  (e.g.  Volcker  rule)  or  downsize,  break  up 
banks.  
If,  as  a  result  of  preparing  the  resolution  plan,  an  authority  identifies  significant 
impediments to the application of the resolution tools or the exercise of the resolution 
powers,  a  resolution  authority  could  draw  up  a  list  of  measures  that  the  authorities 
reasonably believe to be necessary to address or remove those impediments. Measures 
to  address  or  remove  impediments  might  include  requiring  changes  to  legal  or 
operational structures of the entity for which the resolution authority is responsible so 
as to reduce complexity in order to ensure that critical functions could be legally and 
economically separated from other functions through the application of the resolution 
tools. 
If an authority identifies in a resolution plan significant impediments to the application 
of the resolution tools or the exercise of the resolution powers, a resolution authority 
could  also  implement  the  following  measures  or  ask  the  banks  to  address  or  remove 
impediments: 
(a) to draw up service level agreements (whether intra-group or with third parties) to 
cover the provision of critical economic functions or services; 
(b) to limit its maximum individual and aggregate exposures;  
(c) to impose specific or regular information requirements for resolution purposes;  
(d) to limit or cease certain existing or proposed activities; 
(e) to restrict or prevent the development or sale of new business lines or products; 
(f) to issue additional convertible capital instruments in excess of the minimum. 

Option  two  would  have  the  possible  advantage  that  banks  may  be  regulated  in  such  a  way 
that they would no longer pose any significant threat to an effective resolution and in theory 
avoid  the  need  for  banks  to  be  bailed  out  using  public  money  in  future.  Such  a  regulation 
would however have uncertain impacts since practically it would be very difficult to design 
general  rules,  methods,  benchmarks  that  would  suit  to  all  situations  and  institutions  and 
ensure resolvability of all banks. It would also be not efficient as a blanket rule would force 
many well functioning and ultimately resolvable banks to reorganise themselves. This could 
unjustifiably  burden  business  without  any  certain,  significant  gains.  General  rules  that 
prohibit  certain  businesses  would  also  risk  urging  market  players  to  shift  activities  to  less 
regulated  parts  of  the  financial  system.  Finally,  it  may  contribute  to  make  banks  more 
resolvable  to  some  extent  but  it  probably  would  not  effectively  reduce  systemic  risk  and 
interconnectedness.  
Separation  of  retail,  wholesale  and  investment  banking  activities  do  not  seem  to  deliver  the 
desired financial stability either. Firstly, many interconnected financial institutions which may 
pose systemic risks are not deposit taking institutions (the problems at Bear Stearns, Lehman 
Brothers, and AIG would have been identical to what we experienced). Second, even the most 
basic deposit taking institutions can become systemic as seen in the savings and loans crisis of 
the late 1980s.43 

Providing  power  for  resolution  authorities  to  change  the  operation  and  business 
structure of banks (option three) would place the right of judgement with authorities. Based 
on  resolution  plans,  in  normal  times  of  business,  they  could  effectively  and  efficiently 
examine  those  banks  where  such  intervention  might  become  necessary.  Authorities  could 

43  

In which over 700 US deposit taking institutions failed. 

- 27 - 

 
 
 
 
                                                 
satisfy themselves that critical functions of banks could be legally and economically separated 
from other functions so as to ensure continuity in a resolution.  

Decisions  on  actual  measures  would  be  placed  with  the  resolution  authority  but  the  proper 
involvement  of  supervisory  authorities  would  need  to  be  ensured.  They  would  be  consulted 
before  any  decision  is  taken  in  order  to  avoid  any  conflict  between  the  resolution  and  the 
supervisory  authorities.  A  forum  where  the  decisions  are  discussed  could  ensure  that 
prudential  and  supervisory  concerns  are  taken  into  account  while  ensuring  resolvability  of 
banks.44 In addition, the mediation of EBA could help to resolve conflicting interests at cross 
border level. 

These actions would effectively remove the implicit state support (likely bail out) from those 
banks  that  are  too  complex  or  too  important  to  fail.  This  would  decrease  moral  hazard  and 
ensure  banks  operate  more  prudently.  Ensuring  the  resolvability  of  banks  would  mean  that 
reliance on support using taxpayers funds would be reduced. At the same time, the removal of 
implicit state guarantee would likely increase funding cost for banks, some of which may be 
passed on to consumers.. 

The  possible  changes  in  operations  and  business  structure  would  entail  cost  for  banks.  It  is 
very difficult to estimate such costs in advance of the assessments of resolvability undertaken 
by national authorities. However based on experiences of certain restructurings (see the case 
of ING in Annex VII), global groups may spend tens of millions of euros on preparing, taking 
inventory  and  designing  the  restructuring  of  their  business  operation.  The  actual  cost  of 
execution of restructuring might go up to hundreds of millions of euros for the largest players, 
which might be the most concerned by such decision. These costs however have to be seen 
against  the  benefits,  namely  that  as  a  result  of  the  measures,  banks  could  be  resolved  in  a 
managed way, which would maintain financial stability and avoid the need to resort to public 
funds.  

The powers to change business operation of banks may also  have an impact on the  internal 
market  especially  on  the  freedom  of  establishment  if  branches  are  requested  to  locally 
incorporate. Safeguards need to ensure that such measures should not be implemented or only 
in cases of public interest. 

Limiting  exposures,  activities  services  by  resolution  authorities  could  also  make  certain 
banks  more  resolvable.  This  way  the  proposed  resolution  tools  could  be  applied  with  more 
likelihood of success, and the objectives of resolution could be more easily reached. On the 
other  hand,  size  limitations  or  downsizing  would  decrease  economies  of  scale  and  certain 
business  advantages,  or  synergies.  Limiting  exposures  would  also  affect  clients  of  banks 
which  might  not  receive  loans  necessary  for  the  development  of  their  business.  However 
clients  could  request  financing  from  other  banks,  where  restrictions  are  not  needed  for 
systemic considerations. 

Some  of  the  powers  listed  under  option  two  and  three  are  already  available  for  supervisory 
authorities but not for resolution authorities. Their objectives are different: supervisors need to 
ensure that banks comply with banking legislation (CRD), limiting the probability of failure, 
while resolution authorities’ aim is to make sure that banks are resolvable when a failure takes 
place.  

44   For  example  one  could  imagine  that  a  resolution  authority  could  block  an  expansion  of  an  institution  into  certain  business  lines  for 
reasons of resolvability. However, this could not be sound from a prudential point of view. After discussions, the resolution authority 
could integrate the prudential aspects into its decision by, for example, allowing the expansion but conditioned to the establishment of 
an adequate legal and operational separation between the business lines. 

- 28 - 

 
 
                                                 
The  above  measures  would  limit  the  rights  of  shareholders  and  management45  to  operate  in 
the  form  and  way  that  is  the  most  optimal  for  their  objectives  and  business  strategies.  This 
may  decrease  competitiveness.  Hence,  any  measures  proposed  to  address  or  remove 
impediments  to  resolution  should  be  proportionate  to  the  systemic  importance  of  the  credit 
institution  and  the  likely  impact  of  its  failure  on  financial  stability  in  Member  States. 
Measures  should  also  serve  public  interest.  In  addition  the  framework  would  propose  a 
number  of  safeguards.  These  fall  into  two  categories.  The  first  restrict  the  way  in  which 
authorities may exercise such powers. In particular: 

- the power may only be used to remove identified obstacles to resolvability; 

- it cannot be used to address impediments that arise from operational or financial weaknesses 
in the home Member States or its resolution authority; 

- it is expressly specified that the power should not be used in a way that restricts firms from 
exercising  the  freedom  of  establishment  (for  example,  the  right  to  establish  branches  rather 
than subsidiaries); 

-  national  authorities  may  not  propose  measures  that  would  have  an  adverse  impact  on 
financial stability in another  Member States; 

- any use of the power is subject to the usual principles, derived from ECH jurisprudence, that 
restrictive  measures  must  be  non-discriminatory,  justified  by  an  overriding  public  interest, 
and suitable and proportionate to achieving their objective. 

The  second  category  of  safeguards  is  procedural.  Decisions  on  the  exercise  of  preventative 
powers in relation to groups would be subject to joint decision within the resolution college, 
with reference to the EBA where there is disagreement. The EBA would also have a role in 
ensuring  that  any  decisions  by  individual  authorities  are  consistent  with  Community  law.  
Finally, the proposal will specify an iterative procedure between the authorities and the firm 
in question that allows the firm to challenge any measures proposed and suggest alternatives 
that would achieve the same objective, and, ultimately, to challenge the exercise of the power 
through judicial review.  

The  preventative  powers  would  affect  not  only  banks  that  are  in  the  phase  of  development 
through  organic  growth  or  acquisitions,  but  also  banks  that  are  already  too  big,  too 
interconnected or complex to undergo a resolution in a short space of time such as a weekend. 
Once  the  above  powers  are  granted  to  authorities,  these  banks  might  expect  that  resolution 
authorities would require them to restructure in order to ensure resolvability. 

With  some  exceptions,  many  respondents  to  the  public  consultation  considered  that  the 
suggested powers are too intrusive. Authorities that opposed these powers consider that they 
would conflict with the powers they already have under Pillar II46 of the CRD. For some of 
the respondents these powers could be accepted but only if they were to be used at the early 
intervention stage. These powers would, however, be granted to resolution authorities, and be 
used  for  different  purposes  than  supervisors  do.  The  main  objective  here  is  to  ensure 
resolvability  of  banks  before  any  problem  materialises.  Major  overhaul  of  banks  is  time 
consuming so in an early intervention process, such measure would be too late to implement 
and expect results. 

45   Detailed analysis on the impacts on fundamental rights can be found in Annex XVI. 

46   See in Glossary in Annex I. 

- 29 - 

 
 
                                                 
Respondents who supported the preventative powers argued that improving the resolvability 
of groups will help to ensure the correct functioning of the single market by removing implicit 
state  aid.  Respondents  had  mixed  views  whether  the  proposed  safeguards  are  adequate  to 
protect  the  rights  of  stakeholders:  some  were  content  while  some  suggested  adding  extra 
safeguards beyond the right of appeal and judicial review. 

In cross border cases, most respondents considered that the EBA could play a mediation role. 
Respondents  generally  agreed  that  changes  to  legal  or  operational  structures  should  not  be 
decided by a single authority, even if it is the group level resolution  authority. Respondents 
from the industry suggested that it would be fairer and more effective to confer such a power 
to the resolution college as a whole with a decisive mediation role played by EBA. 

The  preferred  option  is  that  authorities  should  be  empowered  to  change  the  operation, 
business  structure  as  well  as  the  exposures  and  activities  of  banks  to  ensure  resolvability. 
Despite  the  views  of  stakeholders,  such  a  power  is  necessary  to  make  the  resolution 
framework effective and credible. If banks are not resolvable, authorities, even equipped with 
all  resolution  tools  and  powers,  would  not  be  able  to  complete  a  resolution  within  a  short 
period of time.  

No two banks are the same or operate (legally and in terms of business) in the same way. The 
objective pursued by the framework is that the authorities should fully understand the banks 
that they may have to deal with. This will be done through resolution planning. On the basis 
of these plans they will be able to assess the resolvability of each institution (either alone or in 
the context of a more systemic crisis) in accordance with the toolkit they have at their disposal 
and act if they consider that resolvability is not ensured. 

The  cooperation  of  different  national  resolution  authorities47  through  colleges  would  ensure 
that cross border banks are made resolvable without losing the benefits of the single market. 
The involvement of the EBA could ensure that the single market is respected and a balance is 
maintained among Member States.  

To avoid that banks shift activities to non-regulated parts of the system, resolvability should 
be  assessed  comprehensively  and  not  only  with  respect  to  the  regulated  part  of  the  bank. 
Measures  should  encompass  both  the  supervised  entities  and  the  non-supervised  ones  and 
their internal relationships. To provide safeguards for stakeholders and ensure that measures 
are  proportionate  and  triggered  only  if  absolutely  necessary,  authorities  need  to  apply  the 
principles listed above. 

47   The policy options regarding cooperation of national resolution authorities can be found in Chapter 4.4. 

- 30 - 

 
 
                                                 
Table 5. Resolvability of banks - comparison of options 

Operational objective 

Policy options 

Enable resolvability 
of all banks 

1. No policy change 
2. Ensure resolvability by general 
requirement of laws 
3. Empower authorities to require the 
change of business structure and 
operation of credit institutions 
4. Empower authorities to limit or 
modify exposures and activities of 
credit institutions 
5. Provide authorities with both 
powers 

Effectiveness 
0 

Comparison criteria 
Efficiency 
0 

Coherence 
0 

- 

++ 

++ 

++ 

- 

++ 

++ 

++ 

- 

++ 

++ 

++ 

Table 6. Resolvability of banks - impact on main stakeholders 

Bank 
shareholders 

Bank 
management 

Bank 
creditors 

1. No policy change 
2. Ensure resolvability by 
general requirement of 
laws 
3. Empower authorities to 
require the change of 
business structure and 
operation of credit 
institutions 
4. Empower authorities to 
limit or modify exposures 
and activities of credit 
institutions 
5. Provide authorities 
with both powers 

0 

- 

- 

- 

- 

4.2. 

Early Intervention 

0 

- 

- 

- 

-- 

0 

- 

- 

- 

- 

Bank 
clients 
(depositors, 
borrowers) 
0 

- 

+ 

+/- 

+ 

Resolution 
authorities 

Taxpayers / 
governments 

0 

+/- 

++ 

++ 

++ 

0 

+/- 

++ 

++ 

++ 

4.2.1.  Possible policies to provide all supervisors with effective early intervention triggers 

Policy option 

1. No policy change 
2. Assessment of 
authorities (soft 
triggers) 

3. Automatic, hard 
triggers 

4. Combination of soft 
and hard triggers 

Description 

The baseline scenario applies 
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 
measures under Article 136 of the CRD could be expanded. Powers of early 
intervention could be granted to the supervisors in not only those cases where any 
credit institution does not meet the requirements of the CRD but also in those where it 
is likely to fail to meet the requirements of the CRD.  
It is also possible to activate authorities to intervene if certain thresholds of indicators 
are hit (hard triggers). Mostly quantitative indicators can be applied for implementing 
such hard triggers based on solvency (such as a capital adequacy or leverage) or 
liquidity indicators. As a sub-option, it is also possible to tie concrete supervisory 
actions to thresholds i.e. obliging supervisors to implement predefined measures 
without any discretion regarding the concrete situation and specificity of the banking 
group. 
It is possible to combine the supervisory assessment with some pre-defined trigger 
mechanism tied to quantifiable benchmarks. If selected indicators are hit, supervisors 
will have the right to intervene. Action is however not compulsory, only a possibility. 

- 31 - 

 
 
 
 
 
 
If  supervisors  can  intervene  in  the  operation  of  banks  when  they  are  likely  to  breach    the 
requirements of CRD (e.g. capital and future liquidity ratios), it would give further room for 
supervisors  to  assess  the  financial  situation  of  the  bank.  The  timely  intervention  of 
supervisors  can  be  a  very  effective  tool  to  stop  the  escalation  of  financial  problems,  which 
would substantially increase the chances of a successful intervention. Banks on the other hand 
would be exposed to a more intrusive environment, where supervisors might intervene at the 
early stages of deterioration. The general early intervention powers would be an extension of 
the  existing  supervisory  powers  in  the  Capital  Requirements  Directive.  A  soft  trigger  is 
necessary to allow supervisors to respond flexibly to the diverse situations of breach (that may 
or  may  not  involve  financial  distress)  that  an  institution  may  encounter.  For  cross-border 
institutions, supervisory intervention is coordinated within supervisory colleges (Article 129 
CRD).   

Harmonised  hard  triggers  applied  in  all  Member  States  would  greatly  decrease  the 
uncertainties  around  intervention  of  supervisors  as  conditions  and  possible  actions  of 
supervisors  would  be  clear  ex-ante.  On  the  other  hand,  advance  knowledge  of  the  basis  for 
supervisory  intervention  could  provide  opportunities  for  regulatory  arbitrage  on  the  part  of 
banks.  Knowledge  that  the  supervisor  focuses  on  certain  indicators,  might  lead  to  perverse 
incentives  within  the  bank  to  focus  on  particular  metrics.  Moreover,  hard  indicators  / 
benchmark  ratios  could  reduce  supervisors’  incentives  to  maintain  comprehensive  oversight 
of  financial  institutions,  thereby  allowing  potential  problems  elsewhere  to  escape  detection. 
Moreover,  it  is  very  difficult  to  identify  single  indicators  that  would  be  adequate  to  detect 
every  possible  technical  problem  and/or  incorporate  all  the  possible  relevant  data  and 
information  for  a  proper  supervisory  assessment.  As  each  case  is  different,  indicators  that 
efficiently  detect  problems  in  a  specific  case  can  be  also  different48.  A  single  set  of  hard 
triggers  could  thus  prove  to  be  a  blunt  instrument  for  use  in  complex  and  developing 
situations.  If  not  only  the  need  for  actions  is  tied  to  quantitative  levels,  but  also  the 
measures/tools  to  be  applied  by  supervisors  are  pre-defined,  the  certainty  of  intervention  is 
even higher. This would protect supervisors from possible litigation by stakeholders who are 
negatively affected by the interventions (where that is possible under national law) and also 
bring certainty for ailing banks that can be fully aware of the consequences of their incorrect 
operation.  On  the  other  hand,  supervisors  would  lose  flexibility,  increasing  the  risk  that 
problems are inappropriately handled and potentially resulting in suboptimal outcomes.  

It  is  possible  to  combine  the  supervisory  assessment  with  a  pre-determined  trigger 
mechanism tied to quantifiable benchmarks. Authorities would be protected from litigation, 
if  they  act  after  the  pre-defined  triggers  are  hit.  In  addition,  supervisory  assessment  would 
ensure the flexibility and adaptability of the system. Situations could be evaluated on a case 
by  case  basis  and  specificities  could  be  taken  into  account.  Ratios,  indexes  or  other 
quantitative  triggers  could  bring  more  transparency  but  at  the  same  time  they  may  not  be 
adequate  for  all  situations.  Other  arguments  against  such  hard  triggers  (mentioned  above) 
would also remain valid even in a mixed system. 

In the public consultation, all Member States that replied to the consultation agreed with the 
inclusion of likely breach of the CRD as a trigger for early intervention. Few Member States 
were  concerned  that  the  wording  gives  too  much  discretion  to  supervisors.  The  industry 
respondents were generally against the preferred trigger as they considered it to be too vague 
and subjective, which could be interpreted in different ways across jurisdictions. The proposal 

48 

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

- 32 - 

 
 
                                                 
will  ask  EBA  to  develop  guidelines  about  early  intervention  triggers,  which  would  ensure 
harmonised application across the EU and higher certainty for stakeholders. 

The preferred option is to allow supervisors to assess the situation freely (as it is currently in 
the CRD) but with a larger room for manoeuvre than presently granted. They should be able 
to implement early intervention measures in cases of likely breach of the requirements of the 
CRD  (not  only  at  actual  breach  as  presently  established).  Potential  problems  regarding  the 
transparency  and  predictability  of  'soft'  triggers  can  be  addressed  to  a  significant  extent 
through  the  publication  of  guidance.  It  is  proposed  that  the  EBA  should  define  common 
criteria  to  guide  supervisors'  assessment  regarding  the  triggers.  This  will  promote 
convergence and limit the extent to which supervisors take divergent approaches.  

Table 7. Early intervention triggers - comparison of options 

Operational objective 

Policy options 

Provide all supervisors 
with effective early 
intervention triggers 

1. No policy change 
2. Assessment of authorities (soft triggers) 
3. Automatic, hard triggers 
4. Combination of soft and hard triggers 

Comparison criteria 

Effectiveness 
0 
++ 
+/- 
+/- 

Efficiency 
0 
++ 
+/- 
+/- 

Coherence 
0 
+ 
+/- 
+/- 

Table 8. Early intervention triggers - impact on main stakeholders 

Bank 
shareholders 

Bank 
management 

Bank 
creditors 

1. No policy change 
2. Assessment of authorities 
(soft triggers) 
3. Automatic, hard triggers 
4. Combination of soft and 
hard triggers 

0 

+/- 

+/- 

+/- 

0 

+/- 

+/- 

+/- 

0 

+ 

+ 

+ 

Bank clients 
(depositors, 
borrowers) 
0 

+ 

+/- 

+/- 

Supervi-
sors 

Taxpayers / 
governments 

0 

++ 

+/- 

+/- 

0 

++ 

+/- 

+/- 

- 33 - 

 
 
 
 
4.2.2.  Possible policies to provide supervisors with effective early intervention tools 

Policy option 

1. No policy change 
2. Expanded minimum 
set of early intervention 
tools (minimum 
harmonisation) 

3. Single set of 
harmonised early 
intervention tools 
(maximum 
harmonisation) 
4. Introduction of 
special management 

Description 

The baseline scenario applies 
Supervisory  powers  of  early  intervention  under  Article  136(1)  of  the  CRD  may  be 
expanded  to  include  the  following  powers:  requiring  the  credit  institution  to  take 
steps to raise own funds; to use net profits to strengthen the capital base, to request 
intra-group  financial  support,  to  replace  one  or  more  board  members  or  managing 
directors  or  require  their  dismissal,  to  draw  up  and  implement  a  specific  recovery 
plan, to draw up a plan for negotiation on restructuring of debt with some or all of its 
creditors,  to  carry  out  a  full  fledged  review  of  its  activities.  And  also  requiring  the 
divestment  of  activities  and  imposing  additional  or  more  frequent  reporting 
requirements. 
Fully harmonised, closed list of supervisory tools and powers that need to be made 
available for all European banking supervisors. 

In  addition  to  expanded  supervisory  powers  under  Article  136(1)  of  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 or likely to fail to meet the requirements 
of  the  CRD  and  either  has  not  submitted  a  credible  plan  or  fails  to  implement  that 
plan effectively. 
The primary duty of a special manager would be to restore the financial situation of 
the  credit  institution  by  implementing  the  recovery  plan  or  prepare  for  winding-
down. A special manager would have all the powers of the management of the credit 
institution  under  the  statutes  of  the  credit  institution  and  under  applicable  national 
law, including the power to exercise the administrative functions and powers of the 
management of the credit institution. 

An  expanded  harmonised  set  of  early  intervention  tools  could  pre-empt  or  deal  with 
problems at supervisory level and therefore greatly increase financial stability. Measures like 
divestment  of  activities  could  substantially  decrease  accumulated  excessive  risks  of 
institutions thus their failure could be avoided. A more aligned set of tools available to each 
supervisor  could  improve  cooperation  of  different  supervisors  and  enable  important 
actions/measures  that  are  presently  not  available  in  all  Member  States  where  a  cross  border 
banking group may operate. 

The new early intervention measures that would be available under the current Article 136 of 
the CRD vary in their intrusiveness. First of all they would limit the freedom of management 
(e.g.  limiting  business,  replacing  managers)  and  shareholders  (e.g.  suspending  dividend 
payment).  Such  measures  could  therefore  be  introduced  only  together  with  safeguards  that 
ensure that these powers will not be misused and will serve public interest, and banks will not 
be  forced  to  bear  unnecessary  limitations  and  costs.  Hence,  supervisors  should  only  take 
actions or steps that are proportionate to the nature of the breach in question and appropriate 
to address that breach and restore compliance with the requirements of the CRD.  

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

- 34 - 

 
 
 
certain Member States. Due to differences in legal systems (e.g. constitutional limitations) and 
arrangements  for  banking  supervision  (single  supervisor  or  shared  competences  among 
supervisor, national bank and DGS), setting exactly the same tools and powers (and not tools 
that  achieve  the  same  results)  in  all  Member  States  could  be  difficult  to  reach.  Certain 
Member  States  could  be  deprived  of  powers  and  tools  that  are  available  for  them  now  and 
might be effective to settling problems at national level. 

Although it could be part of the tool-set under option two, special management is considered 
separately given the intrusiveness of this measure. The nomination of a special manager to a 
bank  is  a  very  powerful  and  effective  way  to  correct  a  problematic  situation.  Shareholders' 
right  to  nominate  management  would  be  limited  and  the  nomination  of  a  special  manager 
would  in  most  cases  mean  that  existing  managers  would  be  removed.  However,  the  special 
manager  would  need  to  respect  company  law  legislation,  and  act  in  accordance  with  the 
decisions of the general meeting of shareholders. The main benefit would be that authorities 
could immediately stop mismanagement of banks and implement corrective measures to avoid 
the deterioration of the situation. 

To avoid any uncertainty and legal challenge to the measures, supervisors should not be held 
liable against shareholders or creditors of a credit institution to which they have appointed a 
special  manager  for  any  actions,  decisions  taken  by,  or  any  failure  to  take  an  action  or 
decision by the special manager. The actions of the special  manager could be challenged at 
courts, and compensation could be obtained. It must also be made clear that the appointment 
of a special manager would not imply any state guarantee of the bank to which it is appointed. 

The  appointment  of  a  special  manager  if  made  public  could  have  implications  to  market 
participants  and  counterparties  of  a  bank.  This  could  be  regarded  as  a  sign  that  there  are 
serious  problems  with  the  bank  so  counterparties  and  depositors  in  certain  Member  States 
might react by closing their positions or withdrawing their deposits. In other countries where 
special management has historical roots (e.g. Italy, France49), stakeholders of the bank could 
feel reassured that the problems are managed by the authorities which could increase the trust 
for the credit institution in question. Another possibility is not to make public the appointment 
of a special manager. In this case the special manager does not replace the management but 
only approves or refuses their decisions.50 

In the public consultation, Member States regarded the proposed early intervention powers 
as sufficient but they asked for flexibility (minimum toolkit with the possibility to apply other 
national  tools).  On  the  other  hand,  most  of  the  industry  respondents  considered  that  the 
powers are too far reaching especially if they are linked to 'likely breach' of the CRD. Most 
Member  States  supported  the  possibility  to  appoint  a  special  manager;  some  expressed 
reservations and few were against. They opposed special management because the disclosure 
of this measure risks resulting in a loss of confidence in the distressed bank and could have 
negative  financial  consequences  (bank  runs,  withdrawal  of  funding,  loss  of  value,  etc.).  On 
the  other  hand,  in  countries  where  special  management  is  already  a  common  practice, 
examples showed that the nomination reinforced public  trust in the  problematic  institutions. 
The  industry  expressed  mixed  views  on  the  proposal  to  appoint  a  special  manager.  Many 
banks  and  bank  federations  were  opposed  to  the  use  of  this  power  in  the  early  intervention 
phase  and  suggested  that  it  should  only  be  a  resolution  tool.  Banks  coming  from  countries 
where special management is already in place were in favour of the proposal. 

49  

In the last 8 years, 20 administrators/special managers were appointed in France. 

50   A similar system is in place in the Netherlands. 

- 35 - 

 
 
                                                 
The  preferred  option  is  the  introduction  of  minimum  set  of  powers  together  with  the 
possibility to appoint a special manager. Even though the appointment of a special manager is 
an intrusive measure which should be applied only in exceptional cases, this tool proved to be 
a very effective and efficient measure in a number of countries (e.g. France, Italy). Hence it 
would  be  useful  to  provide  this  power  for  all  EU  authorities  without  any  obligation  for 
eventual application.  

Table 9. Early intervention tools - comparison of options 

Operational objective 

Policy options 

Enabling all 
supervisors with a 
common set of effective 
tools to intervene at an 
early stage 

1. No policy change 
2. Expanded minimum set of early 
intervention tools (minimum harmonisation) 
3. Single set of harmonised early intervention 
tools (maximum harmonisation) 
4. Introduction of special management 
5. Minimum set of tools + special 
management 

Comparison criteria 

Effectiveness 
0 

Efficiency 
0 

Coherence 
0 

+ 

+ 

++ 

++ 

++ 

- 

++ 

++ 

++ 

- 

+ 

++ 

Table 10. Early intervention tools - impact on main stakeholders 

Bank 
shareholders 

Bank 
management 

Bank 
creditors 

1. No policy change 
2. Expanded minimum set 
of early intervention tools 
(minimum harmonisation) 
3. Single set of harmonised 
early intervention tools 
(maximum harmonisation) 
4. Introduction of special 
management 
5. Minimum set of tools + 
special management 

0 

+/- 

+/- 

+/- 

+/- 

0 

+/- 

+/- 

-- 

- 

0 

+ 

+ 

+ 

+ 

Bank clients 
(depositors, 
borrowers) 
0 

++ 

++ 

+ 

++ 

Supervi
- sors 

Taxpayers / 
governments 

0 

++ 

+/- 

++ 

++ 

0 

++ 

++ 

++ 

++ 

4.2.3.  Possible policies to shorten time period for capital increase in emergency situation 

Policy option 

1. No policy change 
2. A shortened 
convocation period 

3. Mandating the 
management body 

Description 

The baseline scenario applies 
In this option the general meeting would ex ante – i.e. outside any crisis - decide on a 
shortened period to convene the general meeting to decide on an increase of capital in 
an  emergency  situation.  Shareholders'  Rights  Directive  (2007/36/EC)  would  need  to 
be  amended  accordingly.  Such  authorisation  would  be  part  of  a  credit  institution's 
preparatory recovery plan or a group preparatory recovery plan, where appropriate. 
In this option, the general meeting would ex ante mandate the management body of a 
credit institution to take a decision on the capital increase in an emergency situation. 
The mandate should specify the term of the mandate and the maximum amount of the 
increase.  The  Second  Company  Law  Directive  (77/91/EEC)  would  need  to  be 
amended accordingly. Such mandate would be part of a credit institution's preparatory 
recovery plan or a group preparatory recovery plan, where appropriate. 

The  decision  of  the  general  meeting  to  shorten  the  convocation  period  to  convene  the 
general meeting to increase capital by existing shareholders in an emergency situation would 
be very effective in shortening the time required for capital increase. A decision on a capital 
increase  could  be  taken  faster  than  under  the  current  rules.  Shareholders  would  retain  their 
ultimate  decision  making  powers  as  they  first  were  to  decide  on  the  shortened  convocation 
period and secondly on the capital increase.  

Subject to the decision of the general meeting on a mandate to the management body, the 
management  body  could  also  take  a  rapid  decision  on  a  capital  increase.  As  the  general 

- 36 - 

 
 
 
meeting would not need to be convened for the decision on the capital increase, it could take 
place faster than in the first option. From the point of view of shareholders' rights this option 
is  more  intrusive  than  the  first  as  shareholders  would  not  have  the  final  decision  making 
power on the increase, and it would not be possible for them to assess whether the situation in 
question qualifies as an emergency and whether there is a need for a capital increase.  

The above options would also help supervisors in an emergency situation. With the immediate 
action  of  authorities  and  cooperation  of  banks,  quick  capital  increase  could  prevent  the 
degradation of the situation. 

The  preferred  option  is  option  two.  It  is  not  as  efficient  and  effective  as  option  three.  It  is, 
however,  less  intrusive,  because  it  safeguards  the  ultimate  voting  rights  and  thus  decision-
making  powers  of  the  shareholders.  This  is  particularly  important  as  this  situation  would 
occur  already  in  the  early  intervention  stage.  Option  two  is  also  more  coherent  within  the 
overall  framework.  In  addition,  it  allows  for  a  much  faster  decision-making  process  and  is 
therefore much more effective and efficient than the status quo.  

Table 11. Shortened time for capital increase - comparison of options 

Operational objective 

Policy options 

Remove legal 
obstacles to early 
intervention 

1. No policy change 
2. A shortened convocation period 
3. Mandating the management body 

Effectiveness 
0 
+ 
++ 

Comparison criteria 
Efficiency 
0 
+ 
++ 

Coherence 
0 
++ 
- 

Table 12. Shortened time for capital increase - impact on main stakeholders 

Bank 
shareholders 

Bank 
management 

Bank 
creditors 

1. No policy change 
2. A shortened convocation period 
3. Mandating the management body 

0 
- 
- 

0 
+ 
++ 

+ 
+ 
+ 

Bank clients 
(depositors, 
borrowers) 
0 
+ 
+ 

Supervisors 

0 
+ 
++ 

- 37 - 

 
 
 
 
4.3. 

Bank resolution 

4.3.1.  Possible policies to provide authorities with clear and reliable resolution triggers 

Policy option 

1. No policy change 
2. Assessment of 
authorities (soft 
triggers) 
2.1 Insolvency like 
conditions 
2.2 Conditions of 
authorisation 

3. Automatic, hard 
triggers 

4. Combination of soft 
and hard triggers 

Description 

The baseline scenario applies 
Resolution  tools  could  be  activated  following  the  assessment  and  decision  of 
supervisory  and  resolution  authorities.  The  assessment  can  be  based  on  different 
considerations.  One  sub-option  to  decide  whether  a  credit  institution  is  failing  or 
likely to fail is to examine if one or more of the following circumstances applies: 
(a) it has incurred or is likely to incur in losses that will deplete its equity, 
(b) the assets of the credit institution are or are likely to be less than its obligations, or 
(c) it is or is likely to be unable to pay its obligations in the normal course of business. 
A  second  sub-option  could  suggest  a  condition  based  on  supervisory  assessment  of 
continued compliance with the conditions for authorisation. Accordingly supervisors 
would need to decide whether a credit institution is failing or likely to fail if the credit 
institution  no  longer  fulfils,  or  is  likely  to  fail  to  fulfil,  the  financial  conditions  for 
authorisation. 
In  addition  to  a  condition  that  the  institution  is  failing  or  likely  to  fail  two 
supplementary conditions could be used:  
-  no  other  measures51  are  likely  to  avert  failure  and  restore  the  condition  of  the 
institution in a reasonable timeframe.  
-  the  application  of  resolution  tool  is  necessary  in  the  public  interest  (e.g.  financial 
stability, continuity of essential services, protection of public funds and protection of 
depositors) 
An  option  could  propose  a  purely  quantitative,  capital  trigger.  Authorities  could 
decide whether a credit institution is failing or likely to fail by for example concluding 
that the credit institution no longer possesses, or is likely to fail to possess, sufficient 
Tier 1 capital instruments52 i.e. 4% of total risk weighted assets.  
In their assessment about the need for bank resolution measures, authorities might use 
both  soft  and  hard  triggers.  If  selected  indicators  are  hit,  resolution  authorities  will 
have the right to intervene. Action is however not compulsory, only a possibility.  

For reasons of financial stability, the threshold conditions for the use of resolution tools and 
powers need to ensure that authorities are able to take an action before a bank is economically 
insolvent.  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.  Both  the  introduction  of  'likely  failure'  and 
'failure to fulfil authorisation conditions' aim at bringing forward the point of intervention, 
when there are realistic chances for successful and effective resolution. The two sub-options 
overlap  to  a  certain  extent,  but  differ  in  focus  and  emphasis.  The  first  would  require 
supervisors  to  determine  that  an  institution  is,  or  is  likely  to  become,  financially  insolvent 
based on either a solvency or a liquidity test. This is closer to the nature of the assessment of 
the  conditions  for  ordinary  corporate  insolvency,  and  may  be  difficult  to  apply  in  a  timely 
fashion to a large and complex bank: experts agree that it may be difficult to determine with a 
sufficient  degree  of  certainty  (given  the  extremely  intrusive  nature  of  the  intervention  that 
may  be  triggered)  that  solvency  or  liquidity-based  tests  are  met.  The  second  would  require 
supervisors  to  determine  that  an  institution  breaches  or  is  likely  to  breach  its  core  financial 
operating  conditions.  This  requires  an  assessment  that,  overall,  the  institution  has  sufficient 
resources  to  carry  on  its  operations.  Although  this  clearly  overlaps  with  the  solvency  and 
liquidity  assessment  of  the  first  option,  the  focus  of  the  test  is  closer  to  the  on-going 

51   Such as fresh capital raising by the ailing institutions or asset disposal, and excluding public support measures. 

52   Basel III and accordingly CRD4 will raise this level to 6%. 

- 38 - 

 
 
 
                                                 
supervisory  assessment  of  firms,  and  draws  more  readily  on  information  that  they  have 
available.   

The  assessment  whether  an  institution  meets  the  conditions  set  out  under  sub-option  1  or  2 
could  be  made  by  the  supervisor,  advising  the  resolution  authority  that  those  conditions  are 
met.  The  resolution  authority  would  then  make  the  public  interest  assessment  and  decide 
which  resolution  tool  (if  any)  would  be  most  appropriate  in  the  light  of  the  resolution 
objectives.  

The  undefined  nature  of  soft  triggers  and  any  uncertainty  around  them  may  be  mitigated  if 
Authorities  issue  guidance  to  market  participants  about  their  code  of  conduct  in  crisis 
situations. 

However,  as  the  possible  tools  may  involve  a  significant  interference  with  the  fundamental 
rights  of  shareholders  and  creditors53,  the  triggers  for  resolution  must  also  ensure  that 
resolution  action  is  not  taken  before  all  other  realistic  recovery  options  are  exhausted 
(resolution  is  a  'last  resort')  and  that  the  intervention  is  in  the  public  interest.  The  proposed 
framework  could  include  a  condition  that  the  use  of  resolution  tools  is  necessary  on  public 
interest grounds, and public interest is defined by reference to financial stability, continuity of 
essential services, protection of public funds and protection of depositors. This is necessary to 
justify interference with property rights. However, this does not mean that only a category of 
systemic  institutions  could  effectively  fall  within  the  scope  of  the  resolution  regime.  The 
assessment of public interest could be made in the circumstances of each specific case. Small 
institutions  may  provide  essential  services,  and  the  objective  of  protecting  public  funds  or 
insured depositors could apply in any case. This element of the test does not target institutions 
that are, per se, 'systemic'. Rather, it requires authorities to assess the appropriateness of using 
resolution tools in the circumstances of the case. 

Hard  triggers  for  resolution  would  bring  transparency  to  the  resolution  framework  by 
making  it  known  ex-ante  to  all  stakeholders  when  a  possible  public  intervention  might  be 
prompted. This would leave less room for disputes about the necessity of a resolution and thus 
it would be more difficult for stakeholders (i.e. shareholders) to block or hinder the resolution. 
It would also reduce scope for divergence in the single market across resolution authorities' 
practices.  On  the  other  hand,  hard  triggers  have  a  number  of  disadvantages.  They  could 
provide opportunities for regulatory arbitrage on the part of banks. Hard triggers might also 
reduce supervisors’ incentives to maintain comprehensive oversight of financial institutions. 
Moreover,  it  is  difficult  to  identify  single  indicators  to  detect  every  possible  problem  that 
could cause the failure of banks. In the recent crisis, for example, capital ratios of many banks 
were above the minimum but their liquidity situation necessitated government support. 

The  combination  of  soft  and  hard  triggers  seems  to  have  advantages  by  combining 
flexibility with certain key indicators. Supervisory forbearance could somewhat decrease as at 
certain  thresholds  authorities  would  need  to  contemplate  action.  However  as  cases  differ, 
conditions  and  needed  reaction  could  also  differ  in  particular  situation,  which  would  limit 
tailored  solutions.  Moreover,  the  disadvantages  of  hard  triggers  (listed  above)  would  still 
remain in this case. 

In  the  public  consultation,  Member  States  were  split  between  favouring  option  2.1,  option 
2.2 or their combination. The majority of banks and federations indicated their preference for 
option 2.1. A number of respondents expressed concerns about the use of the term "likely", 
which  might  create  legal  uncertainty.  Federations  suggested  a  number  of  conditions  for  the 

53   Detailed analysis on the impacts on fundamental rights can be found in Annex XVI. 

- 39 - 

 
 
                                                 
use  of  resolution  tools  like:  it  should  only  be  used  after  all  other  alternatives  have  been 
explored;  not  automatic  and  as  objective  as  possible;  aligned  with  the  triggers  for  bail-in; 
harmonised  across  EU  and  internationally;  and  easy  to  understand  for  investors.  These 
conditions are largely in line with the principals incorporated in the proposal. 

During  the  discussions  the  Commission  undertook  in  April  201254  with  key  stakeholders 
on  the  bail-in  tool,  all  parties:  Member  States,  banking  industry  representatives  as  well  as 
legal  experts,  agreed  that  there  should  be  only  one  single  trigger  point  for  all  possible 
resolution  tools.  In  addition,  legal  experts  as  well  as  the  Member  States  supported  the  soft 
trigger.  Banks  expressed  some  degree  of  concern  about  the  possible  impact  of  discretion 
involved in a soft trigger. 

In the US, the Dodd Frank act has also opted for "soft" criteria55 that need to be examined and 
fulfilled in order to launch a bank resolution. The Financial Stability Board (FSB) is also in 
the process of developing a trigger mechanism which is close to the second sub-option. This 
would provide international alignment for both banks and authorities.  

The preferred option is to leave the decision to the assessment of authorities (soft trigger). 
However  authorities  can  use  resolution  tools  only  if  the  institution  is  close  to  failure  (i.e.  a 
combined  consideration  of  options  2.1  'likely  failure'  and  2.2.  'failure  to  fulfil  authorisation 
conditions')  and  no  other  measures  can  restore  its  viability  and  the  intervention  is  in  the 
imperative public interest.  

Soft  triggers  for  resolution  are  necessary  to  capture  the  range  of  factors  that  might  cause  a 
bank to fail. Hard triggers, such as capital triggers, would be too restrictive and may apply too 
late  –  for  example,  capital  is  a  lagging  indicator  of  stress  –  to  allow  timely  and  effective 
intervention. Moreover, even if a 'hard' element could be included, an element of judgement 
to assess the public interest test that is a necessary part of the trigger for the use of resolution 
tools which by their nature interfere with rights to property.  

It is acknowledged that there is potential for divergent application of such judgement-based 
triggers  by  national  authorities.  To  address  this,  it  is  proposed  that  the  EBA  shall  issue 
guidelines, to promote the convergence of supervisory and resolution practices regarding the 
interpretation of the different circumstances when an institution will be considered as failing 
or likely to fail. 

Furthermore,  the  cooperative  process  of  resolution  planning  and  communication  between 
authorities  in  resolution  colleges  should  assist  in  promoting  consistent  assessments  with 
respect to cross-border groups. 

54   See Annex XVIII for more details. 

55   For example: the company is in default or in danger of default; the default of the financial company would have a serious adverse effect 
on the financial stability of the United States; no viable private sector alternative is available to prevent the default; the effect on the 
claims or interests of creditors, counterparties and shareholders of the financial company and other market participants of proceedings 
under the Act is appropriate, given the impact that any action under the Act would have on the financial stability of the United States; 
and an orderly liquidation would avoid or mitigate such adverse effects. 

- 40 - 

 
 
                                                 
Table 13. Bank resolution triggers - comparison of options 

Operational objective 

Policy options 

Developing effective 
bank resolution 
framework with clear 
and reliable triggers 

1: No policy change 
2. Assessment of authorities (soft triggers) 
3. Automatic, hard triggers 
4. Combination of soft and hard triggers 

Effectiveness 
0 
++ 
+/- 
+/- 

Comparison criteria 
Efficiency 
0 
++ 
+/- 
+/- 

Coherence 
0 
+ 
+/- 
+/- 

Table 14. Bank resolution triggers - impact on main stakeholders 

Bank 
management 
+ staff 

Bank 
share-
holders 

Bank 
debt 
holders 

0 

+/- 

+/- 

+/- 

0 

+/- 

+/- 

+/- 

0 

+ 

+ 

+ 

Bank 
clients 
(depositors, 
borrowers) 
+ 

+ 

+ 

+ 

Supervisors 

Resolution 
authorities 

Taxpayers 
/govern-
ments 

0 

++ 

+/- 

+/- 

0 

++ 

+/- 

+/- 

0 

++ 

++ 

++ 

1. No policy change 
2. Assessment of 
authorities (soft 
triggers) 
3. Automatic, hard 
triggers 
4. Combination of soft 
and hard triggers 

- 41 - 

 
 
 
 
4.3.2.  Possible policies to enable all resolution authorities with a set of resolution tools and 

powers to resolve banks 

Policy option 

Option 1. No policy 
change 
Option 2. Minimum set 
of harmonised bank 
resolution tools 
(minimum 
harmonisation) 

Option 3. Single set of 
bank resolution tools 
(maximum 
harmonisation) 
Option 4. Debt write 
down tool 
4.1 Comprehensive 
approach 
4.2 Targeted approach 

3 aspects within the 
above approaches: 

(i) The interaction 
between ex-ante funds and 
bail-in 

(ii) The amount of bail-in-
able liabilities 

(iii) Phasing-in 

5. Recapitalisation by 
using taxpayers' money 
/nationalisation 

The baseline scenario applies 

Description 

Resolution  authorities  could  have  the  power  to  apply  the  following  resolution  tools, 
where the circumstances and conditions apply and are satisfied: 
(a) the sale of business tool; 
(b) the bridge bank tool; 
(c) the asset separation tool; 
The  goal  would  not  be  that  each  authority  should  have  exactly  the  same  tools,  but 
rather that measures implemented by different authorities should deliver the same or 
equivalent  results.  In  addition  to  the  minimum  set  of  resolution  tools,  national 
authorities could keep their specific tools and powers in relation to bank resolution. 
Under this option a closed list of tools and powers could be defined for all resolution 
authorities  dealing  with  cross  border  banks.  Under  an  EU  framework,  tools  and 
powers could be harmonised to a maximum extent. 

This tool would enable resolution authorities to write down the claims of some or all 
of the unsecured creditors of a failing institution and, possibly, to convert debt claims 
to equity. It could be used to recapitalise a failing bank in order to help it to be viable 
in the long term; or to reduce those liabilities of a failing bank which are transferred to 
a 'bridge bank', thus effectively capitalising it. 56    
There are two approaches which can be followed:  
Under  a  Comprehensive  approach,  resolution  authorities  could  be  given  a  statutory 
power  to  write  down  by  a  discretionary  amount  or  convert  to  an  equity  claim,  all 
senior debt deemed necessary to ensure the credit institution is returned to solvency.  
Under a Targeted approach, resolution authorities could require credit institutions to 
issue a fixed volume of 'bail-in able' debt which, in addition to the power to write off 
all equity, and either write off existing subordinated debt or convert it into an equity 
claim, could be written down or converted into equity on a statutory trigger.  
For more description of the different approaches please see Annex XIII. 

Recapitalisation of banks with the use of taxpayers' money was the option applied by 
most Member States in the recent crisis. 

Option 2. Minimum set of harmonised bank resolution tools (minimum harmonisation) 

The  introduction  of  special  bank  resolution  tools  in  all  Member  States  (minimum 
harmonisation) would significantly increase the ability of authorities to achieve a successful 
and  effective  resolution  and  hence  maintain  financial  stability.  By  introducing  a  special 
resolution procedure for banks, authorities could use techniques which are more suited to the 
needs of a bank resolution (e.g. decision on measures to be taken over a short period of time) 

56   The debt write down tool is different from contingent capital or contingent convertible bonds (cocos). Cocos are special fixed-income 
securities  that  convert  into  equity  when a  predetermined  capital  ratio  threshold  has been  breached  thereby increasing  the  company’s 
Tier  1  Capital  and  decreasing  the  need  to  raise  capital.  Cocos  are  generally  triggered  in  the  early  stage  of  problems  when  banks 
approach the 8% capital adequacy limit. The debt write down tool is, on the contrary, triggered when the bank fails or very likely to 
fail. In this case not only special bonds but shareholders and, depending on the policy choice, certain liabilities could be written down 
in proportion to the losses of the bank. Certain parts of these debts could be converted to equity. 

- 42 - 

 
 
 
 
 
 
 
 
                                                 
and  allow  for  a  more  appropriate  balance  of  priorities  to  be  exercised  with  regard  to 
stakeholders  (resolution  favours  depositors,  continuity  of  services  for  all  customers  and 
eventually financial stability as opposed to only creditors under an insolvency procedure). If 
banks  are  sold  to  a  viable  market  participant,  or  their  viable  parts  are  separated  from  bad 
assets, depositors can continue to access the bank and major banking services (e.g. payment 
systems) can stay operational. This would help to avoid runs on deposits, contagion to other 
banks and further risk to the stability of the financial system as a whole. Capital of the new 
entity  (bridge  bank)  could  be  provided  from resolution  funds  (see  under  section  4.5)  and/or 
debt conversion (see option 4). Central banks could provide liquidity to the new entity, given 
that it would be deemed to be solvent. 

Maintaining financial stability requires prompt action  from resolution authorities. In case of 
imminent  failure  of  a  bank,  they  would  exercise  their  resolution  powers  and  tools  without 
consent from the creditors or shareholders of the credit institution. Since one of the aims of 
resolution is to as far as possible avoid that public funds are needed, losses would be imposed 
first  on  shareholders.  During  a  resolution,  management  would  most  likely  be  removed  and 
new directors appointed. In order to minimise distortions of competition between banks and 
between  Member  States,  State  aid  rules  will  need  to  be  complied  with.  Partial  transfer  of 
assets to the new, viable entity could prompt the triggering of certain contractual clauses (e.g. 
netting, set-off), which could aggravate problems at the failing bank and in financial markets. 
Hence  these  contract  and  counterparties  need  to  be  protected.  This  point  was  widely 
supported by consultation respondents. 

Option 3. Single set of bank resolution tools (maximum harmonisation) 

A  maximum  harmonisation  approach  could  bring  some  benefit  in  terms  of  consistency, 
compared  with  the  baseline  scenario.  However,  such  an  approach  would  most  likely  cause 
problems  in  many  Member  States  because  of  differences  between  legal  systems  (e.g. 
constitutional  limitations)  and  differences  in  responsibilities  of  authorities  (banking 
supervisor,  national  bank,  ministry  of  finance,  deposit  guarantee  scheme).  Furthermore, 
authorities would be deprived of tools and powers that are currently available for them and are 
suitable for national specificities. This might risk undermining the successful management of 
certain cases. 

Option 4. Debt write-down tool (bail-in) 

A supplementary resolution tool designed to enable the healthy part of a financial institution 
to continue as a going concern could also be developed. Under this tool authorities would be 
able  to  write-off  equity,  subordinated  debt  and  either  write-down  certain  other  liabilities  or 
convert  them  to  new  equity57  (jointly  referred  to  as  'debt  write-down'  or  'bail-in'  below). 
The bail-in tool would also entail some form of reorganisation of the failing bank.  

This  tool  could  be  particularly  useful  in  cases  where  the  resolution  tools  presented  under 
option  two  are  not  sufficient  to  resolve  a  large,  complex  financial  institution  in  a  way  that 
protects  financial  stability.  For  example,  traditional  resolution  procedures  may  not  enable 
authorities  to  maintain  the  systemically  important  activities  of  a  large  bank,  such  as  its 
payments and lending functions. In fact, such business may be too large to sell to other banks 
in 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 
market players or new entrants.  

57   A detailed analysis on debt write down or 'bail-in' can be found in Annex XIII. 

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Had the bail-in tool been available and applied in the recent crisis, most of the state support 
that was provided to distressed banks would not have been required. Instead, either only their 
subordinated debt or also a (often only small) part of their non-subordinated liabilities would 
have  been  written  down,  in  order  for  the  bank  to  fully  absorb  its  losses  and  continue  as  a 
going concern.58  

Design of the debt write-down tool: scope 

As regards the scope of the bail-in tool, there are two possible ways to determine the scope of 
the write-down tool: (i) a comprehensive/broad scope where a wide range of liabilitites (such 
as unsecured debt, uncovered deposits, unsecured interbank exposures, etc.) could be haircut 
or converted and (ii) a restricted  scope where only unsecured long  term  debt and long term 
uncovered deposits could be bailed-in. 

(i)  A  large  base  of  liabilities  for  bail-in  purposes  ensure  that  losses  could  be  written-down 
when  needed.  On  the  other  hand,  certain  categories  of  liabilities  might  be  systemic  or  too 
complex  to  write-down  and  could  be  considered  for  exclusion  from  the  regime.59  Such 
exclusions may be also justified where one or more of the following conditions apply: (i) the 
net value of the liabilities is unstable, uncertain or difficult to ascertain in a timely manner; (ii) 
they  are  transactional  counterparty  exposures  where  the  transaction  would  need  to  continue 
following resolution (such as IT suppliers); (iii) they are essential for the value or continued 
operation of the firm  (e.g. employees, contractors, trade suppliers);  and (iv)  they are tied to 
specific assets as security. 

Reflecting these considerations, derivatives (too complex), trade credit (to protect suppliers), 
deposits  covered  by  DGS  (as  their  inclusion  generates  risks  of  bank  runs),  very  short  term 
debt  with  maturity  less  than  1  month  (as  they  could  cause  a  liquidity  run  on  the  distressed 
bank before it goes into resolution) and secured debt (as this would clash with its treatment in 
insolvency) could be excluded from the bail-in regime. 

In  addition,  if  bail-in  is  applicable  for  almost  all  liabilities,  the  funding  cost  of  banks  risks 
increasing more than if bail-in is applied only to certain types of liabilities.60  

(ii) A restricted approach to debt write-down in which bail-in is is confined to unsecured long 
term  debt  and  long  term  uncovered  deposits  would  entail  running  the  risk  that  there  is  too 
little of bail-inable instruments available on banks' balance sheet, should losses be substantial. 
In  addition,  a  restricted  approach  could  cause  difficulties  for  progressively  more  distressed 
banks to refinance such bail-inable instruments. On the other hand, if losses can be absorbed 
only by specific instruments, the increase in yields due to their bail-in-able nature would be 
limited to these instruments. The funding costs of other liabilities (e.g. senior unsecured debt) 
would in this case not change.61 

58   For further details see a presentation shown in one of the GEBI meetings and available at 

ec.europa.eu/internal_market/bank/group_of_experts/index_en.htm. See also section 4.9 in Annex XIII. 

59   Certain categories could be considered to be excluded from the bail-in debt category for financial stability reasons. Holders of those 
liabilities  which  are  redeemable  on  demand  (such  as  deposits)  or  within  a  short  time  period  (such  as  short-term  debt)  might,  if  they 
believed that a resolution and possible bail-in was imminent, be likely to withdraw their funding. Such an action might likely cause a 
banking failure which via 'contagion' damaged other parts of the financial system. Thus it is considered important to 'carve out' certain 
liabilities to prevent a liquidity run on a stressed bank.  

60   More information about the impact on the cost of funding can be found later in the text and in Annex XIII. 

61   More information about the impact on the cost of funding can be found later in the text and in Annex XIII. 

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Based on an analysis of EU banks' balance sheet structure (see section 4.3 in Annex XIII), the 
share of bail-in-able liabilities for an average EU bank and for an average EU large banking 
group indicates the following results: (i) under the comprehensive bail-in, the share of bail-
inable liabilities ranges between 30% for an average EU large banking group and 38% for an 
average EU bank. Under the restricted bail-in, the share of bail-in-able liabilities is obviously 
more limited, and it ranges between 13% for an average EU large banking group and 21% for 
an average EU bank. 

This confirms, generally speaking, that the restricted bail-in option presents a theoretical risk 
of not providing a sufficient amount of bail-in-able liabilities, especially when large banking 
EU groups default and they need to be recapitalised for resolution purposes.62. 

During  the  discussions  the  Commission  Services  undertook  in  April  201263  with  key 
stakeholders on the bail-in tool, most Member States supported a broad/comprehensive scope, 
while some Member States expressed reservations over the inclusion of DGS at least as a first 
buffer;  and  finally  others  expressed  reservations  over  the  exclusion  of  short  term  debt  (<  1 
month). Overall, there was a general support among Member States to include derivatives in 
the scope of bail-in. The banking industry preferred a much narrower scope. Should however 
a comprehensive approach be used, industry expressed their preference to exclude short term 
debt (< 3-6 months) and derivatives, while they were inclined to involve DGS. Legal experts 
were divided between the two options and generally agreed it would not be easy to distinguish 
liabilities on the basis of their maturity.  

The interaction between ex-ante funds and bail-in 

Ex-ante  funds  collected  with  contributions  from  the  banking  industry  (Deposit  Guarantee 
Scheme  (DGS)  and  Resolution  Funds  (RF))  could  greatly  help  in  absorbing  losses  and 
recapitalizing  distressed  banks  of  systemic  importance.  If  e.g.  DGS  were  to  help  to  absorb 
part of the losses, a lower amount of bail-inable liabilitites would be necessary.  

Furthermore, the increase in the funding costs of banks due to the bail-in tool can be expected 
to be lower if ex-ante funds are also called upon to cover losses and provide new capital. This 
is due to the fact that expected haircut on bail-in-able liabilities would decrease.64 

Finally, the involvement of DGS in resolution activities would be of great benefit for the DGS 
itself, as the total pay-out of the DGS would be considerably lower than if the bank failed and 
the DGS had to pay-out all covered deposits. 

The amount of bail-in-able liabilities 

The next question is whether banks would always hold enough bail-in-able liabilities that can 
be written down or whether banks should be requested to hold a minimum amount of bail-in-
able liabilities. After the introduction of the bail-in tool, there is in fact a risk that financial 
institutions would shift their liabilities to excluded liabilities because the yields paid on bail-
in-able  liabilities  would  increase.  As  a  result,  banks  might  not  hold  enough  bail-in-able 
liabilitites to absorb losses and finance recapitalisation. 

62   For a more detailed analysis see Annex XIII, section 4.3 and 4.4. 

63   See Annex XVIII for more details. 

64   Detailed calculations, assumptions and results can be found in section 5 of Annex XIII. 

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Setting a minimum amount of liabilities subject to bail-in in the first place would help address 
this problem. The minimum amount should be proportionate and adapted for each (category 
of)  institution  on  the  basis  of  their  risk  or  their  capital  structure.  Harmonised  application  of 
the minimum requirement at Union level could be ensured by EBA technical standards.  

Since  imposing  a  minimum  requirement  on  bail  in-able  liabilities  considered  alone  could 
penalize banks which prefer to hold more excess capital (capital above the minimum required 
by Basel III) and thus could unduly increase their funding costs, it would seem more efficient 
to  take  into  consideration  the  regulatory  capital  of  banks  and  define  a  'Minimum  Loss 
Absorbing  Capacity  (LAC)  rule'  as  follows:  Total  Regulatory  Capital  +  'bail-in  able 
liabilities  >  x%  of  Total  Liabilities.  The  advantage  of  using  total  liabilities  instead  of  risk 
weighted assets in this formula is that it can better capture the actual amount of liabilities that 
are  outstanding  at  the  time  of  failure.  On  the  other  hand,  using  risk  weighted  assets  in  the 
formula  would  take  into  consideration  the  differing  risk  profile  of  banks,  e.g.  mortgage 
banks.65 

The required levels of bail-in-able liabilities and the funding need of DGS/RF depend on the 
decision  of  how  severe  a  crisis  the  framework  needs  to  withstand.  Model  calculations 
considered extremely severe (SYMBOL model 99.99% percentile simulation) and very severe 
crisis (SYMBOL model 99.95% percentile simulation) scenarios which were similar in size to 
the recent crisis started in 2008. 

If  the  resolution  framework  is  to  be  able  to  absorb  losses  in  a  very  severe  crisis  scenario, 
depending  on  the  level  of  ex-ante  funds  available,  a  minimum  LAC  of  up  to  12%  of  total 
liabilities could be needed.66 If the resolution framework is to be able to recapitalise banks as 
well, a minimum LAC of up to 25% of total liabilities could be needed, still depending on the 
level of available DGS/RF funds. 

Considering the two different crisis scenarios mentioned above, different combinations of ex-
ante  funding  and  of  minimum  LAC  were  examined  (see  Chart  3  and  sections  6  and  7  in 
Annex XIII).  An optimal combination of the two parameters could be considered to be: 10% 
LAC  and  1%  of  total  covered  deposits  as  ex-ante  funds.  With  this  combination  the  system 
could in fact withstand a very severe crisis, by using resources most efficiently (i.e. if more 
ex-ante funds were required the minimum LAC would not significantly decrease). 

65   A comparison between these two options can be found in section 8 of Annex XIII. 

66   The more ex-ante funds are available, the fewer bail-inable liabilities banks need to hold to cope with a given simulated crisis scenario. 

- 46 - 

 
 
                                                 
Chart  3:  Possible  combination  of  ex-ante  funding  and  minimum  LAC  levels  with 
sequenced (option 3 as detailed in Annex XIII) application of bail-in to absorb losses and 
recapitalise banks 

During  the  discussions  the  Commission  Services  undertook  in  April  2012  with  key 
stakeholders  on  the  minimum  level  of  bail-in-able  liabilities,  some  Member  States  have 
indicated support for the idea of a harmonised minimum level but did not have firm views on 
the  suggested  level  (i.e.  the  10%  LAC).  Other  Member  States  who  also  favoured  a 
broad/comprehensive  scope  of  bail-in-able  instruments  argued  that  no  minimum  level  was 
required.  One  Member  State  expressed  a  preference  for  national  authorities  to  be  able  to 
determine  any  required  level  on  a  case-by-case,  taking  account  of  differences  in  banks' 
funding profiles and systemic relevance. Industry was overall critical of a common minimum 
requirement. Many argued that it would fail to take account of different banking models and 
that  it  would  force  them  to  raise  new  capital  or  issue  debt  which  is  costly  or 
inconsistent/inefficient  from  the  point  of  view  of  their  funding  model.  Legal  experts  who 
favoured a restricted bail-in argued that a minimum level would be needed, although they also 
indicated preference for flexibility to work it out together with authorities. 

Impact on the cost of funding 

The  decision  about  the  minimum  level  of  bail-in  able  liabilities  also  needs  to  take  into 
consideration  the  impact  of  bail-in  on  the  funding  cost  of  banks  and  eventually  on 
macroeconomic developments. 

Although  the  eventual  use  of  the  debt  write-down  in  a  crisis  situation  would  be  at  the 
discretion  of  authorities,  the  proposal  would  make  certain  debt  categories  bail-in-able.  This 
would have an impact on bank funding markets. The actual costs will depend, first of all, on 
the  increase  in  yields  of  the  bail-in-able  instruments,  for  which  a  central  estimate  can  be 
considered to be 87 bp, following industry estimates. 67Secondly it will depend on the share of 
bail-inable  liabilities  within  total  liabilities,  since  the  increase  will  affect  only  this 
categoryThirdly,  the  costs  of  bail-in  will  depend  on  the  existence  and  extent  of  possible 
mitigating  factors  which  include,  among  others:  (i)  the  inclusion  in  the  framework  of  a  no 
creditor worse-off principle, (ii) the presence of a proportionate application of the bail-in tool, 

67  

JP  Morgan  estimated  an  average  downgrade  for  a  group  of  55  European  banks  of  3-4  notches  on  Moody's  ratings  scale  from  the 
removal  of  implicit  government  support  to  banks.JP  Morgan  suggests  in  particular  that  investors  would  demand  an  87  basis  points 
premium of a single A bank if debt write-down was feasible. See Annex XIII for more details. 

- 47 - 

 
 
 
 
                                                 
which  would  apply  mainly  to  SIFIs  only,  (iii)  the  existence  of  ex-ante  funds  financing  and 
supporting resolution in addition to bail-in and (iv) banks' incentive to protect their unsecured 
senior  debt  by  issuing  either  more  equity  capital  or  more  subordinated  liabilities.68  These 
factors can significantly (overall by 65%) reduce the increase in overall funding cost due to 
bail-in.  

Taking into account all above assumptions and factors, calculations show that if a minimum 
Loss Absorbing Capacity (regulatory capital + bail-in-able liabilities) were set at 10% and ex-
ante funds (DGS/RF) of 1% of covered deposits were available to finance bank resolution, the 
total funding cost of banks in the EU would increase on average by a range of 5 to 15 bp. 

Impact on the macro economy 

Macroeconomic calculations were carried on the basis of an appropriately adapted version of 
a model first proposed by the Bank of England. to see what would be the effect of different 
levels of funding cost increases for the banking sector on the EU's GDP. If the overall cost of 
funding for banks increases by 5 or 15 bp, this would cause a cost equivalent to 0.14% - 0.4% 
of EU GDP annually;69 Annex XIII presents the macroeconomic costs of bail-in in detail, as 
well as its benefits for financial stability. 

Phasing-in 

The impact of the bail-in tool also depends on the phasing-in approach. There are two options 
to  be  examined:  (i)  In  case  of  a  failure,  the  bail-in  tool  can  be  applied  from  the  date  of 
transposition of the directive by Member States for any eligible liabilities banks have in their 
balance  sheet  (either  issued  before  or  after  the  implementation  day,  no  grandfathering).  (ii) 
The bail-in tool can be applied only on newly issued eligible liabilities (issued after a specific 
date e.g. 2013, grandfathering). 

The first option has the advantage that from the date of transposition authorities could write 
down any eligible (i.e. non-excluded) liabilities, which would offer a large base for absorbing 
potential  losses.  A  large  majority  of  the  16  largest  banking  groups  in  the  EU  could  already 
fulfil  the  10%  minimum  requirement  at  present,  so  they  can  offer  a  wide  basis  to  absorb 
losses.  

The immediate application of the bail-in tool on all outstanding eligible liabilities in case of a 
failure  after  the  directive  is  transposed  would,  however,  have  an  immediate  impact  on  the 
bank debt market. It would even change the nature of some of the currently outstanding bank 
debts  (liabilities  issued  before  the  introduction  of  the  bail-in  tool  and  maturing  after  the 
transposition date), which could weaken legal certainty. In addition, under the current difficult 
market  conditions  it  would  make  new  debt  issuance  even  more  difficult  for  banks,  which 
could further deteriorate the liquidity and financial position of some of the banks. 

Under the second option, authorities could not haircut liabilities issued before a specific date. 
The disadvantage of this option is that authorities would need to wait until banks accumulate 
adequate levels of bail-in-able liabilities i.e. if a bank fails in the build-up period, authorities 
could not use the bail-in tool as effectively as in the first option, for a while they would have 
only banks' capital to rely on. On the other hand, this option would respect legal certainty and 

68   More detailed analysis can be found in section 4 of Annex XIII. 

69   Macroeconomic  calculations  were  also  carried  out  with  the  QUEST  model  of  the  European  Commission.  Results  confirm  the 

estimation of the model also used by the Bank of England, which is presented in Appendix 5 to Annex XIII. 

- 48 - 

 
 
                                                 
would  give  time  for  both  investors  and  banks  to  prepare  for  this  new  instrument.  Under 
current  fragile  market  circumstances,  the  application  of  the  bail-in  tool  on  liabilities  issued 
only after a specific date would also help banks re-establish their healthy funding. 

During  the  discussions  the  Commission  undertook  in  April  201270,  there  was  very  little 
support  among  all  types  of  stakeholders  for  the  grandfathering  of  existing  debt.  Rather  a 
preference was given to delayed implementation of the bail-in tool. 

Preferred options for the bail-in tool 

Based on the above considerations, bail-in tool is preferred to be applied to all liabilities with 
only  a  limited  number  of  exclusions:  secured  liabilities,  covered  deposits,  trade  liabilities, 
very short term debt (< 1 month) as well as some derivatives. Member State authorities could 
be  given  powers  to  exclude  certain  other  liabilities  on  case  by  case  basis  depending  on  the 
impact  that  applying  bail-in  to  them  could  have  on  financial  stability.  Harmonisation  and 
relative certainty as to the use of this power would be ensured by EBA issuing guidelines or 
implementing rules. 

Since  creditors  will  suffer  losses  on  their  assets  in  an  administrative  resolution  process,  it 
needs  to  be  assured  that  the  tool  is  used  in  a  justified  and  proportional  way.  This  can  be 
achieved by using three principles. Firstly bail-in should be triggered close to insolvency. In 
this moment creditors would anyway imminently face a judicial process, where their claims 
would  most  likely  not  be  granted  to  100%.  Secondly,  the  process  must  ensure  that  the 
rankings  of  ordinary  insolvency  process  are  respected  as  much  as  possible71.  Finally,  a 
minimum  amount  of  bail-in-able  liability  could  be  determined  by  resolution  authorities 
depending  on  the  systemic  importance  of  each  bank/financial  institution  and  taking  into 
consideration  the  differences  in  organisational  structure  of  banking  groups.  According  to 
model results the reference value of the minimum LAC would on average be around 10% of 
total liabilities. 

Links with CRD 

The  debt  write  down  tool  also  has  links  to  the  CRD  and  the  objectives  are  complementary. 
Capital eligible for regulatory purposes should absorb losses on a 'going concern' basis. The 
bail-in regime would go further – effectively requiring bail-in-able liabilities to absorb losses 
when  the  banks  approach  failure  (insolvency).  The  required  level  of  bail-in-able  liabilities 
would  take  into  consideration  regulatory  capital  (tier  1  and  tier  2  capital  regulated  by  the 
CRD), since banks would need to hold minimum (possibly 10%) LAC (regulatory capital plus 
bail-in-able liabilities). 

Calculations  carried  out  on  the  impact  of  the  bail-in  tool  assuming  a  10%  minimum  LAC 
have espicitly taken into consideration the existing and coming Basel III regulations on capital 
requirements. When calculating the benefits and costs of the bail-in regime, only the costs and 
benefits  compared  to  a  fully  implemented  Basel  III  framework  (i.e.  total  regulatory  capital 
using the more stringent Basel III definition>10.5% of RWA) were considered.  

The link between the 10% LAC and the 3% leverage ratio proposed by Basel III and CRD 4 
for  application  from  2018  has  also  been  analysed.  Both  create  a  theoretical  risk  of 
deleveraging  for  banks.  Calculations  show  that  the  minimum  LAC  on  average  would  not 

70   See Annex XVIII for more details. 

71   Financial stability reasons could justify divergence e.g. exclusion of interbank deposits. 

- 49 - 

 
 
                                                 
create  any  substantial  deleveraging  neither  in  itself  nor  vis-à-vis  the  leverage  ratio 
implemented  from  2018.  There  might  be,  however,  selected  cases  of  deleveraging  if  the 
minimum LAC rule were introduced before 2018 (where the leverage ratio would still to be 
implemented).  

International considerations 

In  terms  of  the  ongoing  debate  at  international  level  in  the  Financial  Stability  Board72 
regarding  Systemically  Important  Financial  Institutions  (SIFIs),  we  need  to  separately 
examine the issue of bail-in and the additional loss absorbency (the 'SIFI surcharge') as they 
fulfil  two  different  purposes.  The  first  provides  additional  loss  absorbency  in  a  resolution 
context, i.e. when the bank is likely to fail or has already failed. It does so by writing down 
the value of debt, thus providing the institution with time during which it can restructure its 
business  or  be  closed  down  in  a  more  orderly  manner.  A  capital  surcharge  strengthens  an 
institution's ability to absorb losses in normal times (far from bankruptcy situation). Basel III 
will significantly strengthen the capital adequacy of banks, by e.g. improving both the level 
and quality of their regulatory capital. Higher capital requirements will therefore decrease the 
probability of failure but cannot exclude it. 

The  Commission  is  working  closely  with  its  international  partners  in  the  FSB  to  develop  a 
framework  for  bank  resolution.  The  'Key  Attributes  of  effective  Resolution  Regimes  for 
Financial Institutions' prepared by the FSB and approved by the G20 includes the debt write 
down  tool  as  part  of  the  resolution  framework.  The  Commission  has  assessed  carefully  the 
proposed  regime  and  will  align  the  proposed  recovery  and  resolution  framework  with  the 
FSB's 'Key Attributes'.  

The  risk  that  the  introduction  of  a  bail-in  tool  in  the  EU  alone  might  significantly 
disadvantage  EU  banks  vis-à-vis  their  competitors  elsewhere73  would  also  have  to  be 
considered and weighed against the benefits of the tool. In the US, the Dodd-Frank Act has 
introduced the debt write down tool. The FDIC has the power to write down senior debt that 
is transferred to a bridge bank (closed bank approach). However, by contrast to the preferred 
options  of  the  EU,  FDIC  is  not  allowed  to  use  'bail-in'  and  keep  the  bank  open  as  a  going 
concern. 

Moreover  there  is  a  need  to  ensure  that  non-EU  authorities  accept  decisions  taken  by  EU 
resolution authorities in respect of debt issued outside the EU by EU banks, which is subject 
to  non-EU  law.  Finally,  if  the  bail-in  tool  is  implemented  consistently  at  global  level,  the 
increase in funding costs of debt instruments is expected to be lower than in the case of EU 
only implementation, since the possibility of substitutions for investors would be lower. 

Option 5. Recapitalisation by using taxpayers' money /nationalisation  

As a last option in bank resolution, failing banks can be recapitalised by the state by using 
taxpayers' money. This option is very effective as it immediately restores the solvency of a 
bank  and  hence  avoids  contagion  and  reduces  risks  to  financial  stability.  It  could  be  very 
beneficial  for  bank  debt  holders  if  their  claims  remain  fully  protected  (no  write  down).  In 
certain cases shareholders can be also on the beneficiary side, as their shares could appreciate 

72   The  Financial  Stability  Board  (FSB)  is  currently  working  on  'bail-in'  in  the  context  of  improving  the  resolvability  of  SIFIs.  The 
Commission, as participants on FSB meetings, intends to closely follow the work and align with the results in order to provide level 
playing field for EU banks on international markets. 

73   The experience of Denmark, which introduced a particular form of debt write down in 2010, suggests that the banks of a country which 

applies it could suffer higher funding costs than their rivals from countries which do not. 

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in  case  the  bank  recovers.  However  this  tool  could  put  significant  burden  on  taxpayers  and 
future  generations  as  evidenced  several  examples  during  the  recent  crisis.  Given  that  the 
purpose of the framework is to avoid that cost of bank failures in the future would be borne by 
taxpayers, this  tool does not  support  the achievement of that objective. In addition it would 
maintain moral hazard of banks. 

In  the  public  consultation,  respondents  believed  that  the  proposed  resolution  tools  are 
sufficiently  comprehensive.  Some  proposed  to  include  partial  nationalisation  and/or  capital 
injection as resolution tool, provided that it is adequately restricted to special cases in order to 
avoid  moral  hazard.  Responding  authorities  favoured  "minimum"  harmonisation  of  the 
toolkit.  There  were  suggestions  that  national  resolution  tool  should  only  be  used  as  long  as 
they are compatible with the principles and objectives of the bank resolution framework and 
they  do  not  hinder  the  possibility  of  achieving  cross  border  group  resolution.  A  number  of 
industry  respondents  favoured  maximum  harmonisation  of  resolution  tools.  The  majority  of 
respondents agreed with the core principle that no creditor should be worse off as a result of 
bank resolution than in liquidation under judicial insolvency proceedings. 

Respondents  to  the  public  consultation  supported  that  authorities  should  have  to  power  to 
write  down  any  debt.  They  requested  high  transparency  and  clarity  around  the  use  and 
triggering of this tool. All respondents agreed that rules for 'bail-in' must be consistent with 
international  recommendations  and  standards,  as  capital  and  liquidity  markets  are  highly 
integrated worldwide. 

The  preferred  option  is  the  introduction  of  a  minimum  set  of  resolution  tools  with  the 
possibility  to  write  down  and  convert  debt  to  equity.  The  'basic'  resolution  tools  can  be 
applied  with  great  expected  success  in  cases  when  the  failure  concerns  only  an  individual 
bank  or  a  group  and  is  not  of  systemic  nature.  Furthermore,  they  are  mostly  applicable  for 
small or mid sized banks. The debt write down tool (bail-in) could therefore be added to the 
'basic' toolkit of authorities and thus contribute to increasing the chances of a bank resolution 
in all segments of the banking sector especially for systemically important institutions. Taking 
into  consideration  the  views  of  stakeholders  the  framework  will  be  flexible  and  allow 
authorities  to  apply  rules  regarding  bail-in  (e.g.  minimum  level  of  LAC)  on  a  case  by  case 
basis  and  with  proportionality  that  takes  into  account  their  specificities  deriving  from  their 
business model, organisational structure, sources of financing, size or cross-border operations. 

- 51 - 

 
 
Table 15. Bank resolution tools - comparison of options 

Operational objective 

Policy options 

Enabling all 
resolution authorities 
with a set of 
resolution tools and 
powers to reorganise 
banks 

1: No policy change 
2. Minimum set of harmonised bank 
resolution tools (minimum 
harmonisation) 
3. Single set of bank resolution tools 
(maximum harmonisation) 
4. Debt write down 
5.  Recapitalisation by using 
taxpayers' money /nationalisation  
6. Minimum set of tools + debt write 
down 

Effectiveness 
0 

Comparison criteria 
Efficiency 
0 

Coherence 
0 

++ 

+ 

++ 

+ 

++ 

++ 

- 

++ 

-- 

++ 

++ 

- 

+ 

-- 

++ 

Table 16. Bank resolution tools - impact on main stakeholders 

Bank 
manage-
ment  

Bank 
employees 

Bank 
share-
holders 

Bank 
debt 
holders 

1. No policy change 
2. Minimum set of 
harmonised bank 
resolution tools  
3. Single set of bank 
resolution tools 
4. Debt write down 
5.  Recapitalisation by 
using taxpayers' 
money/nationalisation 
6. Minimum set of tools 
+ debt write down 

0 

- 

- 

- 

+ 

- 

0 

+/- 

+/- 

+/- 

+ 

+/- 

0 

- 

- 

- 

+/- 

- 

0 

+/- 

+/- 

+/- 

+ 

+/- 

Bank 
clients 
(depositors, 
borrowers) 
0 

++ 

++ 

++ 

+ 

++ 

Taxpayers 
government
s 

Resolution 
authorities 

0 

++ 

++ 

++ 

-- 

++ 

0 

++ 

+/- 

++ 

-- 

++ 

- 52 - 

 
 
 
 
4.3.3.  Possible  options  to  amend  EU  and  national  legislation  to  eliminate  legal 

uncertainties around the use of resolution tools 

Policy option 

1. No policy change 
2. Adjustments in EU 
Company Law Directives to 
support bank resolution by 
giving the Member States 
the possibility to derogate 
from the relevant provisions.  

3. Adjustments in EU 
Company Law Directives to 
support bank resolution by 
requiring the Member States 
to derogate from the relevant 
provisions. 

Description 

The baseline scenario applies 
In  this  option  Member  States  would  be  given  the  possibility  to  derogate  from 
clearly  defined  company  law  provisions  which  imply  having  to  seek  consent 
from  the  stakeholders  (creditors  or  shareholders)  or  otherwise  can  hinder  the 
effective use of resolution tools and powers. Derogating would be possible from 
parts  of  2nd  Company  Law  Directive,  Article  5(1)  of  the  Takeover  Bids 
Directive,  and  the  whole  of  Company  Law  Directives  concerning  mergers  and 
divisions,  Cross-border  mergers  Directive  and  Shareholders'  Rights  Directive. 
This  would  enable  the  Member  States  to  allow  their  resolution  authorities  to 
apply  the  resolution  powers  effectively  without  taking  into  account  the 
requirements  imposed  by  mandatory  EU  rules.  As  it  is  vital  to  guarantee 
maximum legal certainty for the stakeholders, derogating would only be possible 
to  the  extent  necessary  for  the  application  of  resolution  powers  provided  that 
trigger conditions and public interest test for their use are met.  
In this option, the Member States would have to derogate from clearly  defined 
company law provisions listed above to the extent necessary for the application 
of resolution powers provided that trigger conditions and public interest test for 
their use are met.  

Both options two and three would significantly diminish shareholders' procedural rights in the 
resolution  phase74.  On  the  other  hand,  this  would  facilitate  the  effective  use  of  resolution 
powers  by  resolution  authorities  as  shareholders'  views  on  capital  or  restructuring  measures 
would not need to be taken into account. This corresponds to the overall objective of the bank 
recovery  and  resolution  framework  notably  to  minimise  losses  for  society  as  a  whole  and 
especially for taxpayers. The threat of losing the rights should also incite stakeholders to take 
necessary actions earlier on in the process, before the threshold conditions for resolution are 
met75. 

With regard to the Takeover Bids Directive the derogation from the mandatory bid rule in the 
resolution phase would have a negative impact on the protection of minority shareholders in 
case  of  change  of  control  as  they  would  be  faced  with  a  new  controlling  shareholder  and 
possible  devaluation  of  their  investment.  However,  if  the  credit  institution  would  fail  the 
value of the shares would certainly decrease and may even be zero.  

The difference between the two options is the margin of discretion left to the Member States. 
Option  two  would  enable  the  Member  States  create  a  framework  that  guarantees  effective 
application  of  resolution  tools  and  powers.  However,  there  is  a  risk  that  this  option  would 
result in different minimum resolution tools and powers for resolution authorities in different 
Member States as regards the stakeholders' rights. This could have a negative impact for an 
effective  resolution  in  cross-border  situations.  Option  three  would  better  guarantee  that 
resolution authorities in different Member States can apply the resolution tools and powers in 
a more harmonised way and is thus the preferred option.  

The preferred option is option three as it would better guarantee that resolution authorities in 
different Member States can apply the resolution tools and powers in a more harmonised way.  

74   See Annex XV for details on the derogations from specific shareholders' and creditors' rights as foreseen by EU company law. 

75   See also Annex XVI for more details on the fundamental rights aspects. 

- 53 - 

 
 
 
                                                 
Table 17. Legal changes - comparison of options 

Operational objective 

Policy options 

Amending EU and 
national legislation to 
eliminate legal 
uncertainties around the 
use of resolution tools 

1: No policy change 
2. Adjustments in company laws to support 
bank resolution (possibility to derogate) 
3. Adjustment in company laws to support 
bank resolution (requirement to derogate) 

Table 18. Legal changes - impact on main stakeholders 

Comparison criteria 

Effectiveness 
0 

Efficiency 
0 

Coherence 
0 

+ 

++ 

+ 

++ 

+ 

++ 

1. No policy change 
2. Adjustments in company 
laws (possibility to derogate) 
3. Adjustment in company 
laws (requirement to 
derogate) 

Bank 
shareholders 
0 

Bank debt 
holders 
0 

Bank 
management 
0 

- 

- 

+/- 

- 

- 

- 

Supervisors 

0 

+ 

++ 

Resolution 
authorities 
0 

+ 

++ 

4.4. 

Cross border crisis management  

4.4.1.  Possible  policies  to  foster  efficient  cooperation  of  authorities  in  cross  border 

resolution 

Policy option 

1. No policy change 
2. Establish 
cooperation 
arrangements 
(resolution colleges) 
between resolution 
authorities  

3.  Increased  powers  to 
EU  authorities  in  bank 
resolution 

4.  Setting  up  an  EU 
Resolution Authority 

Description 

The baseline scenario applies 
Resolution  authorities  could  establish  resolution  colleges  to  facilitate  the  exercise  of 
the  tasks  in  relation  to  group  resolution  plans  and  the  effective  coordination  and 
cooperation between resolution authorities and, where appropriate, with third country 
authorities  that  perform  equivalent  functions  within  their  territories.  Resolution 
colleges would provide a framework for resolution authorities to exchange information 
and  to  undertake  the  planning  and  coordination  of  activities  related  to  resolution,  in 
preparation  for  and  during  emergency  situations  in  cooperation  with  colleges  of 
supervisors.  Agreements  with  third  countries  regarding  the  coordination  of  bank 
resolution could be established.  
Under  a  new  European  framework,  EU  authorities  could  be  given  decision-making 
roles  in  a  cross  border  bank  resolution.  EU  authorities  (e.g.  the  European  Banking 
Authority)  could  be  empowered  to  coordinate  and/or  lead  a  resolution  of  banking 
groups.  If  national  resolution  authorities  were  unable  to  reach  an  agreement,  an  EU 
authority might be best placed to make the final binding decision. EBA could be given 
a  role  in  the  development  and  coordination  of  recovery  and  resolution  plans. 
Furthermore,  EBA  could  be  given  a  responsibility 
if  required,  resolve 
disagreements  between  resolution  authorities  of  the  application  of  preparatory  and 
preventative powers.  
It  is  also  an  option  to  set  up  a  new  Authority  which  would  be  responsible  for  the 
management of a cross border resolution mechanisms within the EU.  

to, 

Cooperation  of  resolution  authorities  could  be  formalised  with  the  establishment  of 
resolution  colleges.  This  would  ensure  that  national  authorities  inform  each  other  about 
emergency situation, discuss and decide on joint or coordinated actions in case of cross border 
failing  banks.  The  decisions  made  in  colleges  would  not  be  binding  but  members  would  be 
obliged  to  give  explanation  in  case  of  non-compliance.  Efficiency  and  effectiveness  at  EU 
level  will  be  significantly  increased  if  the  group  level  resolution  authorities  establish  and 
coordinate  activities  of  resolution  colleges.  Decision  on  which  of  the  authorities  eligible  to 
participate  in  the  resolution  colleges  will  also  increase  efficiency  especially  when  time  is 
running out. The decision of the group level resolution authorities would take into account the 
relevance of the meetings or activities in question for those authorities and the stability of the 
financial  system  in  the  Member  States  concerned.  The  participation  and  possible  mediation 
role of EBA on meetings and activities of all resolution colleges would further ensure that the 

- 54 - 

 
 
 
interest of all Member States and stakeholders are taken into account and the fragmentation of 
the  internal  market  is  avoided.  Agreements  with  third  country  authorities  could  ensure  that 
authorities could consult each other when the use of a resolution power or tool may have an 
impact on the financial stability in third countries or in the EU, and strive to reach common 
and consistent approaches to the resolution of a credit institution, or a third country branch. 

Increased  powers  to  EU  authorities  in  bank  resolution  could  bring  certain  benefits. 
However,  it  is  unlikely  that  Member  States  would  currently  be  in  the  position  to  shift  their 
powers on bank resolution to any EU body. To come to a situation where an EU body could 
decide  on  these  issues,  further  steps  are  needed  to  come  to  robust  burden-sharing 
arrangements  between  Member  States  and  harmonisation  of  insolvency  laws.  Regarding 
EBA's possible power in relation to resolution, it is important to note that some may consider 
it inappropriate for EBA's Board of Supervisors, which is composed of representatives from 
supervisory  authorities,  to  take  decisions  relating  to  disagreements  between  resolution 
authorities.  

An  EU  resolution  authority  would  be  expected  to  consider  all  interests,  benefits  and  cost  at 
national  and  EU  level,  and  choose  the  most  optimal  solution  for  all  EU  and  third  country 
stakeholders.  Decisions  on  resolution  could  be  granted  to  the  EU  authority  hence  Member 
States  would  need  to  resign  of  their  rights  to  resolve  local  banks  of  cross  border  groups. 
Decisions of the Authority could however oblige Member States (depending on the financing 
scheme)  to  contribute  to  the  cost  of  resolution.  In  the  absence  of  jointly  accepted  financing 
mechanism  at  EU  level,  politically  this  seems  to  be  not  feasible  until  at  least  the  EU  has 
harmonised  insolvency  laws.  The  setting  up  and  operation  of  a  new  Authority  would  also 
entail cost for the budget of Member States and the EU. 

Most respondents of the public consultation, except a few Member States, supported the idea 
of  resolution  colleges.  Member  States  disagreed  however  about  the  composition  (e.g.  all  or 
selected  authorities),  and  the  decision  making  mechanism.  Most  Member  States  considered 
that the effectiveness of the proposed coordination mechanism is diminished if host resolution 
authorities can decide not to comply with the scheme. They all agreed that coordination by the 
group  level  resolution  authority  is  desirable.  The  industry  supported  the  proposed  solutions 
and  believed  that  it  would  strike  a  reasonable  balance.  Respondents  agreed  that  an 
internationally  coordinated  approach  is  the  most  desirable  and  suggested  representing  this 
principle in negotiations at G-20, FSB and the Basel Committee. 

The  preferred  option  is  the  establishment  and  operation  of  resolution  colleges  with  the 
assistance  of  EBA76.  Even  though  this  solution  does  not  necessarily  ensure  that  all  issues 
regarding the misalignment of the responsibilities of national authorities and the cross border 
nature of the industry will be solved in the most effective way in a crisis situation, this option 
has  the  highest  acceptance  among  Member  States,  hence  this  is  the  most  realistic  under 
current circumstances. 

EBA  has  been  entrusted  with  responsibilities  to  ensure  a  coordinated  approach  to  crisis 
management  and  prevention  (articles  23-27  of  the  Regulation  1093/2010).  These  include, 
inter  alia,  developing  criteria  for  the  measurement  and  identification  of  systemic  risk, 
ensuring an ongoing capacity to respond to the materialisation of systemic risks, contributing 

76   Article  1(2)  of  the  EBA  regulation  makes  it  clear  that  the  EBA  shall  act  within  the  scope  of  certain  directives,  such  as  the  Capital 
Requirements Directive, and any further legally binding Union Act which confers tasks on the authority. Thus it is clear that the EBA 
may be given certain tasks under the current proposal. In terms of the authorities that may be represented, Article 40(5) provides for the 
possibility  that  Members  of  the  Board  of  Supervisors  of  the  EBA  may  bring  a  non  voting  representative  from  the  relevant  national 
authority. 

- 55 - 

 
 
                                                 
and  participating  actively  in  the  development  of  recovery  and  resolution  plans,  and 
developing best practices for cross border resolution. The EBA will be able to bring together 
national  authorities  –  both  through  its  own  management  structure  (board  of  supervisors, 
management  board  and  sub  committees)  and  within  resolution  colleges,  to  exchange  best 
practices and ensure the highest standards. Additionally, the EBA's powers to coordinate both 
during  and  before  a  crisis  (as  outlined  above),  to  develop  best  practices  and  technical 
standards, and if necessary mediate disputes, will all contribute to ensuring a consistent and 
effective approach across Member States.   

In  terms  of  formal  decisions,  the  EBA  can  clearly  be  given  a  strong  binding  role  in  the 
prevention and preparation phases. In the resolution phase, the complexity and speed at which 
resolution decisions must be taken, and the importance of legal certainty, means that further 
consideration needs to be given to the exact mechanics of any binding EBA role in this phase. 

Table 19. International cooperation - comparison of options 

Operational objective 

Policy options 

Comparison criteria 
Effectiveness  Efficiency  Coherence 

Enabling all resolution 
authorities with a set of 
resolution tools and 
powers to reorganise 
banks 

1: No policy change 
2. Establish cooperation arrangements 
(resolution colleges) 
3.  Increased  powers  to  EU  authorities  in  bank 
resolution 
4. Setting up an EU Resolution Authority 

0 

+ 

++ 

++ 

Table 20. International cooperation - impact on main stakeholders 

1. No policy change 
2. Establish cooperation arrangements (resolution 
colleges) 
3. Increased powers to EU authorities in bank resolution 
4. Setting up an EU Resolution Authority 

4.5. 

Financing resolution 

Banks 

0 

+ 

+ 
+ 

Resolution 
authorities 
0 

Supervi 
sors 
0 

++ 

+/- 
- 

++ 

+/- 
≈ 

0 

+ 

++ 

++ 

EBA 

0 

+ 

+/- 
≈ 

0 

++ 

- 

- 

Taxpayers / 
governments 
0 

+/- 

+/- 
+/- 

4.5.1.  Possible  policies  to  develop  arrangements  to  finance  bank  resolution  that  provide 

optimal and even level of protection for all Member States  

Policy option 

Description 

1. No policy change 
2. Calibrating national Resolution Funds (RF) 
(in isolation from other prudential measures) 
(ex-ante or ex-post) 

3. National Resolution Funds jointly calibrated 
with Deposit Guarantee Schemes (DGS) and the 
debt write down/bail-in tool (ex-ante or ex-post) 

4. Setting up and calibrating a European 
Resolution Fund  (ex-ante or ex-post) 

The baseline scenario applies 
All Member States could set up national funds that would 
finance bank resolution.  
Under this option, the calibration would not take into account 
other prudential measures in place such as increased capital 
requirements under Basel 3, and the existence of DGS.  
The funds to finance resolution could be calibrated in a way 
that takes into account available funds in DGS and the ability 
of the bail-in tool. Both can absorb losses and provide new 
capital in a bank resolution. 
A single European Resolution Fund could provide funding 
for all banks operating in the EU. 

The purpose is to give resolution authorities available funds to finance resolution measures. 
The trigger of the fund would coincide with the resolution trigger. In a resolution, it is crucial 
to preserve the liquidity and re-establish capital position of the systemically important part of 
the  failing  bank.  In  this  way,  contagion  to  other  banks  is  blocked,  and  financial  stability  is 
preserved. In addition, resolution measures require financing for other purposes as well e.g. to 
provide funding for a bridge bank.  

- 56 - 

 
 
 
The option of calibrating a Resolution Fund (RF) in each Member State in isolation from 
other prudential measures would have the advantages of (a) providing dedicated funds for 
resolution  purposes,  and  (b)  empowering  resolution  authorities  to  use  funds,  should  they 
become  the  administrators  of  such  funds.  In the  case  that  funds  for  financing  resolution  are 
calibrated in separation from the Deposit Guarantee Schemes (DGS), Member States would 
be  free  as  to  how  to  organise  resolution  financing  and  how  to  determine  the  criteria  for 
financing resolution. However, the main drawback of such an arrangement would be the lack 
of  coordination  with  other  existing  safety  nets,  such  as  DGS.  This  entails  the  risk  that  the 
funds  raised  from  banks  are  not  optimal.  It  could  be  either  too  low  for  ensuring  financial 
stability, or too high and creating an excessive burden to banks. Moreover, in a cross border 
case, the decision to finance the resolution of cross border banks could be jeopardised by the 
conflicting interests of national authorities (i.e. financing resolution of banks in other Member 
States). 

Despite the different scope of DGS and RF, there are a number of synergies from a combined 
design  and  calibration.  Economies  of  scale  would  exist,  as  the  existence  of  optimally 
calibrated  financing  needs  for  resolution  allows  the  DGS  needs  to  be  reduced.  When  a 
resolution framework that stops contagion is in place, the DGS fund would only finance a few 
banks (pay out depositors) that default eventually. In contrast, when no resolution measures 
are available and contagion spreads through the financial system, the amount of money that 
the DGS needs to pay out in a MS is considerably higher. In countries where the interbank 
market  is  more  developed  the  synergies  of  the  two  funds  are  higher  (as  contagion  risk  is 
higher). In addition if DGS finances resolution measures (e.g. deposits transferred to a healthy 
bank),  its  payment  obligation  would  mostly  likely  be  smaller  than  the  payout  of  all  eligible 
deposits if the bank is liquidated. 

As  synergies  do  not  depend  on  whether  one  single  or  two  separate  institutions  perform  the 
tasks  of  protecting  depositors  and  allow  the  resolution  of  banks,  Member  States  can  be  left 
free to choose to have one single institution or two separate institutions to perform DGS and 
RF tasks. The disadvantage of national funds financing a cross border resolution is however 
maintained at this option. 

The calibration brings further synergies if it takes into account the possibility to write down 
and  convert  certain  liabilities  to  equity  in  a  failing  bank.  If  losses  are  spread  more  evenly 
among different liability holders, the need for ex-ante funding decreases. 

A  single  European  Resolution  Fund  (ERF)  would  have  the  advantage  of  creating  one 
common fund across the Single Market, which could facilitate in particular the financing of 
resolution measures aimed at banks active across the Single Market. Furthermore, if funds are 
collected  at  EU  level,  the  large  pool  of  funds  would  provide  credibility  as  an  ERF  could 
finance the resolution of larger banks or SIFIs, too. 

However, there are a number of disadvantages. First, it is not immediately clear who should 
administer the fund. In view of insolvency rules and procedures not yet being harmonised and 
resolution measures being of predominantly national kind, a European Resolution Authority is 
neither desirable nor feasible at this current juncture. Furthermore, even though the EU now 
has  new  supervisory  authorities  (ESAs),  their  involvement  is  not  assured  if  resolution 
measures  have  fiscal  consequences.  Accordingly,  there  is  no  natural  candidate  for 
administering an EU Resolution Fund neither from a resolution nor a supervision perspective.  

- 57 - 

 
 
Ex-ante versus ex-post funding 

Regarding  the  choice  of  ex-ante  versus  ex-post  financing  of  funds,  the  arguments  are  the 
following. Ex post financing is pro-cyclical, as raising resources from financial institutions in 
the midst of a crisis would be difficult, as it would drain resources from the financial sector at 
a  time  when  they  are  most  needed.  Accordingly  this  might  further  accentuate  a  financial 
crisis.  Ex  post  can  be  regarded  as  unfair,  as  contributions  would  exclusively  be  paid  by  the 
surviving  institutions,  not  the  failed  institution  (which  creates  moral  hazard).  Banks  that  do 
not  have  to  pay  ex-ante  contributions  are  able  to  generate  returns  on  these  funds,  which 
constitutes  a  competitive  advantage  vis-à-vis  their  competitors  in  other  Member  States  with 
ex-ante funded funds. Furthermore it does not affect incentives; raising funds after an event 
would not address the incentives of a failed financial institution and would accordingly create 
a free-rider problem. 

Ex  ante  financing  would  eliminate  all  disadvantages  of  ex-post  financing  listed  above.  Its 
disadvantage  however,  is  that  it  might  increase  cost  for  banks,  depending  on  the  method  of 
collection.  This  higher  cost,  which  results  from  a  more  accurate  pricing  of  risk,  could  be 
passed  on  to  bank  clients  (depositors,  borrowers)  who  could  get  banking  services  at  less 
favourable terms.  

Appropriate target amount 

In  addition  to  determining  the  best  policy  about  the  operation  of  resolution  financing,  the 
most crucial issue is the optimal amount of funds that should be made available for resolution 
purposes. The optimal calibration of financing needs for resolution is performed on the basis 
of the so called SYMBOL model77.  

If  ex-ante  funds  need  to  absorb  banks'  losses  that  their  capital  could  not  absorb  and  also 
provide  new  capital,  estimations  based  on  the  model  concluded  that  the  appropriate  target 
size78 of the DGS and RF would be between 1% and 4% of EU banks' total covered deposits. 
The actual number depends on the size of the crisis the framework needs to withstand and on 
the  method  how  the  bail-in  tool  interacts  with  the  ex-ante  funds  in  a  bank  resolution.  The 
preferred  option  is  to  collect  ex-ante  funds  equal  to  1%  of  EU  banks'  covered  deposits  to 
finance resolution. Further analysis can be read in Annex XIII. 

Contribution base 

The  contribution  base  of  a  bank  levy  that  is  appropriate  for  DGS  (covered  deposits)  is  not 
appropriate  for  RF.  If  the  resolution  framework  were  funded  solely  on  the  basis  of  insured 
deposits, this would not ensure the appropriate funding for the resolution of those banks that 
even if not especially funded by deposits, do create important systemic risk due to either their 
size  or  their  interconnections.  In  general,  these  banks  would  need  to  be  saved  without 
contributing  at  all  to  the  funding  of  their  resolution.79  The  funding  of  resolution  is  to  be 
expected very dependent on the size of banks' liabilities.  

77   SYMBOL  model  was  developed  by  the  Joint  Research  Centre  and  DG  Internal  Market  and  Services.  Detailed  presentation  of  the 

methodology and the results of the model can be found in Annex XIII. 

78   Calibrations  were  executed  on  the  basis  of  Symbol  simulation  of  99.95%  percentile,  which  is  similar  to  the  banking  crisis  of  2008-

2010. 

79   A  contribution  base  centred  on  insured  deposits  would  most  likely  unfairly  penalise  smaller  banks  (specialised  mainly  in  deposit 
taking) to the advantage of larger, universal banks that have a more diversified balance sheet structure and are, instead, potentially more 
systemically important. 

- 58 - 

 
 
                                                 
When calibrating for joint DGS-RF, it seems appropriate to calculate contributions according 
to  two  basis:  (i)  covered  deposits  –  for  ensuring  the  pay-out  of  covered  deposits    (or,  as  an 
alternative,  their  transfer  to  a  sound  institution);  and  (ii)  liabilities  excluding  capital  and 
covered deposits – for financing crisis management and resolution. The actual contribution of 
each  banks  could  also  vary  depending  on  the  riskiness  and  nature  of  the  business. 
Methodology for risk based calculation could be developed by EBA. 

Relationship between target fund and banks levies where they already exist 

The impact of the calculated, optimal target level of DGS+RF, financed with the contributions 
of banks, were also analysed vis-à-vis Member States already using some form of bank levy 
or tax. From a legal point of view, the Commission's proposal would not create any obligation 
on Member States to change and/or revise their existing levies. Nonetheless, it is fair to say 
that certain Member States might be under pressure to reduce their levies once the proposal of 
the Commission is implemented. 

In  the  public  consultation  many  Member  States  called  on  the  Commission  to  propose  a 
general  requirement  for  them  to  make  financing  available  for  resolution  but  to  leave  the 
design of such a requirement to the discretion of Member States. The industry mostly argued 
against  resolution  financing  since  alternative  arrangements  (DGS,  national  levies)  already 
exist or are in the process of being introduced and since it can increase moral hazard.  

There was strong support for exploiting synergies with DGS with some reservations related to 
the differences in objective and scope (pay-out of depositors in a failure). Some respondents 
also argued that if the two instruments become integrated, then safeguards will be needed to 
ring fence resources for the depositor pay-out function. Respondents had mixed views about 
ex-ante versus ex-post financing. Some were against ex-ante financing because it is difficult 
to  foresee  how  much  funds  would  be  needed  and  because  of  economic  inefficiency  (funds 
could  be  used  to  finance  real  economy).  Others  supported  ex-ante  financing  because  it  is 
fairer (every institution pays not only the survivors) and reduces adverse incentives (free rider 
problem).  

There  were  mixed  views  the  on  level  of  harmonisation,  notably  as  regards  whether  the 
objective,  base  and  rate  of  contributions  should  be  harmonised.  Among  Member  States, 
proponents of a harmonised European regime are typically those that have already instituted 
one.  Other  Member  States  generally  promoted  the  freedom  to  design  key  aspects  of  a 
financing regime (e.g. base, contribution). Industry and some Member States strongly urged 
the Commission to ensure that the outcome was coordinated and avoided double imposition 
resulting from uncoordinated national financing approaches. 

The  preferred  option  is  a  jointly  calibrated  DGS  and  Resolution  Funds  (RF)  that  are 
financed  ex-ante  and  managed  at  national  level.  Despite  opposing  views  of  stakeholders,  if 
funding in the future should not come from public sources, there is a need to set up a private 
resolution funding mechanism. However to minimise the impact of ex-ante funds, and hence 
cater  for  the  concerns  of  some  of  the  stakeholders,  the  calibration  has  chosen  the  smallest 
fund size that would still be effective in tackling a very severe crisis in combination with the 
bail-in tool. 

- 59 - 

 
 
Table 21. Financing - comparison of options 

Specific objective 

Policy options 

Develop arrangements to 
finance bank resolution 
that provide optimal and 
consistent protection for 
all Member States (in 
line with other 
prudential measures) 

1. No policy change 
2. Setting up and calibrating national 
Resolution Funds in isolation from other 
prudential measures 
3. National Resolution Funds jointly calibrated 
with DGS and bail-in 
4. Setting up and calibrating a European 
Resolution Fund  

Table 22. Financing - impact on main stakeholders 

Comparison criteria 

Effectiveness 
0 

Efficiency 
0 

Coherence 
0 

+ 

++ 

++ 

+ 

++ 

++ 

+ 

++ 

+ 

Banks 
management 
+ staff 

Bank 
share 
holders 

Bank 
debt 
holders  

1: No policy change 
2. Setting up and calibrating 
national Resolution Funds in 
isolation from other 
prudential measures 
3. National Resolution 
Funds jointly calibrated with 
DGS and bail-in 
4. Setting up and calibrating 
a European Resolution Fund 

0 

≈ 

≈ 

≈ 

0 

- 

-- 

- 

0 

+ 

+/- 

+ 

Bank 
customers 
(depositors, 
borrowers) 
0 

+/- 

+ 

++/- 

Resolution 
authorities 

DGS 

Taxpayers 
Governments 

0 

+ 

++ 

++ 

0 

≈ 

++ 

+ 

0 

+ 

++ 

++ 

5. 

OVERALL IMPACT OF PREFERRED OPTIONS 

5.1. 

The proposed framework 

The  proposed  crisis  management  framework  at  EU  level  intends  to  further  enable  financial 
stability, reduce moral hazard, and protect depositors, crucial banking services and taxpayers' 
money.  In  addition  it  aims  to  protect  and  further  develop  the  internal  market  for  financial 
institutions. The framework would consist of three stages which constitute a coherent system: 
Preparation  and  Prevention,  Early  intervention  and  Bank  Resolution.  These  are  so 
interconnected  that  policies  could  not  be  introduced  in  isolation.  The  three  stages  are 
complemented with the international cooperation aspect and the issue of financing.  

The  Preparation  part  would  include  a  voluntary  intra  group  financial  support  agreement 
framework  and  contingency  planning.  Prevention  powers  would  ensure  that  banks  are 
resolvable  in  case  of  failure.  This  part  would  aim  to  prevent  the  development  of  a  crisis 
situation. The presently existing early intervention framework would be further developed. 
Supervisors would be able to intervene at an even earlier stage and would be equipped with an 
expanded list of tools and powers. This part would aim to prevent the further deterioration of 
financial difficulties in banks.  

The  Resolution  framework  would  allow  the  managed  failure  of  any  bank.  Special  bank 
resolution  tools  (e.g.  sale  of  business,  asset  separation,  bridge  banks),  applied  outside  of 
judicial  insolvency  proceedings,  would  enable  timely  intervention,  the  maintenance  of  key 
banking  services  and  the  protection  of  depositors.  Debt  write-down  and  conversion  would 
protect  taxpayers'  money  even  in  the  case  of  large  and  complex  institutions.  Changes  in 
company law would ensure legal certainty for stakeholders. This part aims to put the burden 
on  bank  shareholders  and  debt  holders  instead  of  taxpayers  and  at  the  same  time  maintain 
financial stability and discourage moral hazard.  

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International  cooperation  through  the  establishment  of  resolution  colleges  would  provide 
optimal  solutions  for  cross  border  banks  at  EU  level.  Jointly  calibrated  Resolution  Funds 
with  DGS  financed  by  the  industry  would  increase  the  success  of  resolution  measures  and 
provide further safeguards for taxpayers.  

The new bank recovery and resolution framework would remove the implicit state guarantee 
from the banking sector. In other words, the cost previously borne by taxpayers will be now 
borne by bank stakeholders (clients and owners). This could lead to possible downgrades of 
banks  by  credit  rating  agencies.  The  debt  write  down  tool  could  also  increase  the  expected 
yields on bank debt. The overall effect of these measures could increase the funding cost for 
banks. If the funding cost is maintained at a higher level than presently, banks could transmit 
this cost to their clients or to their shareholders.  

Of  course,  the  proposal  cannot  solve  all  the  underlying  problems  of  (cross  border)  banking 
failures. The misalignment between the mandate of authorities and the cross border nature of 
banks can be managed to a certain extent but an overhaul of the supervisory structure would 
be  beyond  the  objectives  of  this  proposal.  The  proposal  cannot  fully  ensure  either  that  the 
measures  would  be  applied  the  same  way  in  all  Member  States.  Harmonisation  of  powers, 
triggers  and  tools  provide  a  basis  for  a  common  approach  and  the  European  Banking 
Authority could facilitate coordinated application.  

It cannot be excluded that eventually for political or other reasons authorities would not apply 
certain  resolution  tools  (e.g.  special  administration,  bail-in)  that  would  be  available  to  them 
within  the  bank  resolution  framework.  However,  the  framework  sends  a  clear  signal  to 
stakeholders that risk should be borne by shareholders and creditors in the first place and not 
by taxpayers.  

Some of the Member States (e.g. the UK, Germany, Denmark, Ireland, Greece, Portugal, the 
Netherlands) have recently introduced or are in the process of developing their national bank 
resolution  systems.  These  systems  are  largely  compatible  with  the  present  proposal,  hence 
these Member States will not need to substantially adjust their existing systems. In general the 
proposed  EU  framework  includes  more  tools  and  powers  (especially  the  bail-in  tool)    than 
existing national systems and also introduces the cross border cooperation framework, which 
national legislations do not address at all. 

Resolutions of banking groups need to take into consideration the various ways EU banking 
groups  are  organised.  Already  resolution  plans  should  reflect  the  different  treatments  of 
different structures. 

If  a  group  is  operated  in  a  less  interrelated  way,  where  the  subsidiaries  can  function 
independent  of  the  mother  and  each  other  (e.g.  Santander  model),  the  resolution  could  take 
place at the subsidiary level, without involving the mother company. 

If  the  group  is  highly  integrated  (e.g.  BNB  Paribas)  and  financing  of  subsidiaries  is 
substantially  managed  by  the  mother  or  the  holding  company  (e.g.  JP  Morgan),  it  may  be 
sufficient  to  initiate  the  resolution  at  the  holding  level.  Losses  of  subsidiaries  could  be 
transferred  to  the  holding,  which  assumes  them  and  haircuts  its  (long  term)  creditors.  To 
cover capital needs, creditors of the holding can be converted into shareholders. 

If the resolution plan concludes that the group structure is highly interlinked and entities are 
interdependent,  authorities  (working  closely  together  in  colleges,  where  appropriate)  should 
have  the  power  to  request  to  group,  in  good  times,  to  establish  a  holding  company.  The 

- 61 - 

 
 
holding  company  should  issue  certain  instruments  (e.g.  long  term  liabilities)  in  order  to 
finance  its  subsidiaries.  This  would  greatly  improve  the  resolvability  of  integrated,  large 
groups because: 

- bail-in would become a much simpler and faster exercise as no effort would be needed to 
map and unwind the interlinkages within the group. 

-  it  would  not  disturb  the  deposit  taking  subsidiaries  thus  reduce  the  risk  of  deposit  and 
interbank run. 

- the process would be clearer and more predictable for stakeholders, investors. 

Bank  resolution  has  many  ties  with  insolvency  procedures  (e.g.  bridge  banks,  debt  write 
down).  Liquidation  under  judicial  insolvency  procedure  is  not  discussed  in  this  impact 
assessment,  as  the  current  proposal  does  not  aim  to  change  insolvency  procedures  and 
legislation  in  the  EU.  Work  on  the  insolvency  phase  of  bank  crisis  management  will  be 
carried out in the next stage of the work stream starting in the second half of 2011. 

5.2. 

Proportionality 

Given the scale of impacts that the failure of a financial institution may cause to the economy, 
the proposed measures are the minimum necessary to achieve the objectives. Authorities that 
will  eventually  apply  the  bank  recovery  and  resolution  framework  will  need  to  strikes  the 
right  balance  between  financial  stability,  public  interest  and  the  rights  of  different 
stakeholders. The principle of proportionality implies that the requirements laid down by the 
framework  as  well  as  the  tools  and  powers  provided  in  it,  have  to  be  applied  in  a 
proportionate  manner,  having  regard  to  the  impact  that  the  failure  of  the  institution  could 
have, due to the nature of its business, its size or its interconnectedness to other institutions or 
to  the  financial  system  in  general,    on  financial  markets,  on  other  institutions,  on  funding 
conditions or on the economy in general. This means that the more an institution (or banking 
group) is large, complex and interconnected with other institutions and the financial system as 
a whole, the more it will be subject to stringent requirements and the more likely it is that, if it 
becomes insolvent, one or more resolution tools will apply to it, instead of liquidation under 
ordinary insolvency proceedings. For instance, a large and complex banking group will have 
to submit comprehensive information concerning all the entities affiliated to the group for the 
purposes of drafting the resolution plan for the whole group. A small local bank that carries 
out  only  retail  business  may  submit  much  simpler  information  and  it  is  more  likely  that  its 
failure  will  be  resolved  through  an  ordinary  liquidation  process  and  the  payment  of  the 
deposit  guarantee  scheme  without  any  systemic  consequence.  However,  as  the  systemic 
importance of a bank failure cannot be determined with full certainty in advance, the proposed 
framework should apply in principle to all banking institutions, irrespective of their size and 
complexity. The proportional application of the requirements and tools will be assessed on a 
case-by-case  basis  by  the  responsible  authorities  (supervisors  or  resolution  authorities).  It  is 
important  to  leave  discretion  to  the  authorities  in  this  respect.  It  is  not  desirable  to  pre-
determine in an abstract and rigid way which institutions are systemic, as the systemic nature 
depends on the market conditions and evolutions. Harmonised application of the principle of 
proportionality at European level would be ensured by technical standards developed by the 
European  Banking  Authority  (EBA)  in  order  to  assess  the  impact  of  institutions'  failure.  In 
addition,  In  addition,  EBA  shall  take  into  account  the  criteria  for  the  identification  and 
measurement  of  systemic  risk  that  it  shall  develop  in  accordance  with  Article  23  of 
Regulation  (EU)  No  1093/2010.  These  common  criteria  will  contribute  to  guarantee  a 

- 62 - 

 
 
consistent interpretation of the principle of proportionality in the application of the resolution 
framework by national authorities. 

5.3. 

Impacts on fundamental rights 

This  proposal  has  been  scrutinised  in  order  to  verify  whether  its  provisions  are  fully 
compatible with the Charter of Fundamental Rights and notably the right to property (Article 
17)  and  the  right  to  an  effective  remedy  and  to  a  fair  trial  (Article  47).  In  accordance  with 
Article 52 of the Charter, limitations on these rights and freedoms are allowed. However, any 
limitation on the exercise of these rights and freedoms must be provided for by the law and 
respect the essence of these rights and freedoms. Subject to the principle of proportionality, 
limitations  may  be  made  only  if  they  are  necessary  and  genuinely  meet  the  objectives  of 
general  interest  recognised  by  the  Union  or  the  need  to  protect  the  rights  and  freedoms  of 
others.  A  detailed  legal  analysis  concerning  the  impact  of  the  proposal  on  the  fundamental 
rights can be found in Annex XVI. 

5.4. 

Safeguards 

Safeguards need to be built in the framework in order to protect the interest of stakeholders if 
intrusive measures are implemented. Proposed safeguards fall into the following categories: 

(i) triggers for resolution aim to ensure that resolution action is taken as late as possible before 
the point of actual insolvency. A trigger that requires the bank to be insolvent is too late for 
resolution because of the rapid and precipitous value destruction associated with insolvency. 
In particular, one of the trigger conditions requires that no viable private sector alternative is 
available  to  prevent  the  failure  of  the  institution.  This  aims  to  ensure  that  resolution 
intervention  is  a  last  resort,  and  will  not  be  made  if  there  are  other,  less  expropriating 
measures  that  could  be  taken  that  would  be  likely  to  redress  the  problem  within  a  suitable 
timeframe.  Moreover  resolution  can  be  triggered  only  in  the  overwhelming  interest  of  the 
public. 

(ii) safeguards for counterparties prevent authorities from splitting linked liabilities, rights and 
contracts:  the  'no  cherry  picking'  rule  that  is  conventional  in  special  resolution  regimes.  
Arrangements  covered  by  this  safeguard  will  include  those  covered  by  close  out  netting 
agreements, security arrangements and structured finance arrangements.   

(iii)  application  of  the  'no  creditor  worse  off'  ('NCWO')  principle  to  ensure  that  creditors 
whose claims are reduced as a result of resolution – for example, because they are left behind 
in the residual bank while assets are moved to another entity, or because of the application of 
the  debt  write-down  tool  –  do  not  suffer  a  loss  greater  than  they  would  have  incurred  in  a 
whole bank insolvency. 

(iv)  rights  for  affected  parties  to  judicial review  of  resolution  actions,  and  compensation  by 
way of damages if the action was ultra vires. The limited right to judicial review (only review 
of  vires,  and  remedies  restricted  to  pecuniary  damages)  maximises  the  effective  use  of 
resolution tools and powers because they ensure the legal certainty of actions by authorities.  
However,  any  further  restriction  on  rights  of  challenge  would  be  inconsistent  with 
fundamental rights and the rule of law. 

These safeguards aim to strike an appropriate balance between the public interest in fast and 
effective  intervention,  and  fundamental  rights  to  property  and  access  to  justice  that  are 
guaranteed  by  the  European  Convention  on  Human  Rights  ('ECHR')  and  embedded  in  MS 
constitutions.  It  is  considered  that  the  restrictions  imposed  strike  the  right  balance  between 

- 63 - 

 
 
ensuring  that  authorities  have  sufficient  flexibility  to  intervene  quickly  and  effectively  and 
protecting  legitimate  rights.  If  those  rights  are  subject  to  excessive  restrictions,  this  could 
make  EU  markets  less  attractive,  bank  funding  more  expensive,  and  might  be  inconsistent 
with fundamental rights.   

5.5. 

Increased responsibility and powers for authorities 

The  framework  proposes  to  empower  authorities  with  new  tools  and  responsibilities  to 
manage banking failures. This approach has the advantage that problems can be assessed on a 
case  by  case  basis  and  the  most  suitable  solutions  for  each  institution  could  be  developed 
under given circumstances. It is not possible to design legislation that can take into account all 
possible  future  developments  and  emerging  new  risks  and  problems.  Moreover,  authorities 
during  the  crisis  could  not  deliver  because  they  lacked  special  powers  and  tools  geared  for 
managing banking failures in the interest of maintaining financial stability. 

On the other hand, there may however be a risk that certain authorities will not be able to fully 
exploit  their  powers,  which  could  lead  to  suboptimal  solutions.  The  experiences  of  the 
financial crisis have evidenced that lax supervision and unjustified forbearance could lead to 
accumulation of financial problems and systemic risk. Forbearance is a risk that needs to be 
specifically addressed, but a framework whereby the use of specific tools would be automatic 
does  not  provide  the  degree  of  flexibility  that  is  needed  to  cater  for  different  situations. 
Resolution  powers  are  expressed  as  an  obligation  to  act  when  a  trigger  is  reached.  Legal 
obligation to act should address forbearance risk as stakeholders (that may be more strongly 
hit if a situation is not addressed at an early stage) may challenge the absence of decisions. 
The requirement for banks to submit a recovery plan, and for authorities to develop resolution 
plans would be key to both addressing the forbearance risk and banks' likely attempts to guard 
their effective independence. 

5.6. 

Interaction of supervisors and resolution authorities 

The division of functions between supervision and resolution is proposed to be clearly defined 
in order to ensure the smooth and effective function of the new system. In fact, it is important 
to  create  a  resolution  function  in  order  to  ensure  that  resolution  and  resolvability  are  given 
adequate  importance  in  the  overall  regulatory  framework.  The  proposal  would  suggest  the 
following: 

In normal times supervisors are proposed to improve their supervisory practices (preparation) 
while  resolution  authorities  are  proposed  to  prepare  resolution  plans  in  cooperation  with 
banks and supervisors.  

Recovery plans are to ensure that banks have strategies in place that enable them to take early 
action  to  restore  their  long  term  viability  in  the  event  of  a  material  deterioration  of  their 
financial situation. 

A  resolution  plan,  prepared  by  the  resolution  authorities  in  cooperation  with  supervisors  in 
normal  times,  will  set  out  options  for  resolving  the  institution  in  a  range  of  scenarios, 
including  systemic  crisis.  Such  plans  should  include  details  on  the  application  of  resolution 
tools and ways to ensure the continuity of critical functions.  

If  the  resolution  plans  shows  there  impediments  to  the  resolution  of  a  bank  ,  resolution 
authorities  are  proposed  to have power, after  consulting the supervisors, to require banks to 
restructure  their  business  organisation  or  structure  in  order  to  remove  such  impediments.  In 

- 64 - 

 
 
the  early  intervention  phase,  supervisors  are  proposed  to  play  a  role  and  pre-empt 
deterioration of problems. 

It is proposed that the assessment whether an institution meets the conditions for resolution 
should  be  made  resolution  authorities  on  request  of  the  supervisor.  .  The  request  for 
commencing  a  resolution  could  also  come  from  the  concerned  bank(s).  The  resolution 
authority shall then decide what resolution tool (if any) would be most appropriate in the light 
of the resolution objectives.  

 In an international context the college of supervisors and the college of resolution authorities 
will discuss and approve the group recovery and resolution plans and any measure to improve 
the resolvability of groups. The college will be led by the consolidating supervisor. The EBA 
will  play  a  role  in  resolving  the  disputes  irrespective  of  the  national  assignment  of  the 
resolution  functions  in  Member  States  and  under  these  circumstances  its  decision  will  be 
binding. National authorities will only be able to depart from the group approach for justified 
reasons  of  financial  stability.  EBA,  in  consultation  with  the  ESRB,  will  issue  guidelines  on 
group recovery and resolution plans and on the resolvability assessments in order to converge 
national practices. 

The resolution process would be managed by the resolution authority; the supervisors would 
be  involved  in  the  process.  The  decision  on  the  use  of  funding  (DGS  and/or  RF)  would  be 
made  by  the  resolution  authority.  If  eventually  public  funding  proves  to  be  necessary,  the 
Ministries of Finance would need to be involved (if the Ministry of Finance is not a resolution 
authority).  In  the  international  context,  resolution  colleges  with  the  mediation  of  EBA  will 
decide about any resolution measures at group level, including the trigger events, tools to be 
applied  and  use  of  the  financing  arrangement  and  Deposit  Guarantee  Schemes  .  EBA  will 
develop  draft  regulatory  standards  in  order  to  specify  the  operational  functioning  of  the 
resolution colleges. 

44  supervisory  colleges  have  been  established  so  far.  They  are  composed  of  supervisory 
authorities of each cross border bank or group. EBA has a mediating and coordinating role in 
the work of  the  colleges  which  ensures approximation of national supervisory practices and 
solutions of disputed situation. The resolution colleges will be established based on the best 
practice of supervisory colleges. Most of the participants will be identical in supervisory and 
resolution  colleges,  so  they  will  have  experience  working  under  such  arrangements.  This 
ensures that the institutional set-up will be simple to follow for both participants and banks.  
EBA will also have adequate experience by the time resolution colleges will be set up, hence 
competing powers and objectives of various authorities can be effectively reconciled. 

The  ESRB  would  issue  warnings  about  systemic  problems,  accumulation  of  excessive  risk 
that  could  endanger  financial  stability.  Resolution  authorities,  together  with  the  supervisor 
and  the  EBA,  are  expected  to  take  these  warnings  seriously  into  account  when  they  decide 
about resolvability and actual resolution of financial institutions. 

5.7. 

Cross border recovery and resolution 

There  is  a  misalignment  between  the  responsibilities  of  national  authorities  and  the  cross 
border  nature  of  the  banking  industry.  First  priorities  of  national  supervisors  and  resolution 
authorities  are  financial  stability  within  their  own  jurisdiction  and  protection  of  national 
creditors,  depositors  and  taxpayers.  In  addition,  host  countries  have  strong  interest  in 
influencing  decisions  made  by  home  countries  concerning  the  whole  banking  group.  The 
above  misalignments  can  be  experienced  in  all  phases  of  the  bank  recovery  and  resolution 

- 65 - 

 
 
process: e.g. approval of group recovery and resolution plans, measures to ensure resolvability 
of banking groups and single entities, early intervention measures and finally implementation 
of cross border resolution for a group. 

The framework is proposed to be based on cooperation of national authorities but additionally 
it aims to establish strong incentives for cooperation. For the first time in European legislation 
there  will  be  a  group  approach  to  resolution  established  in  law.  This  means  that  since  the 
moment  of  the  preparation  (resolution  plans)  the  groups  will  be  treated  as  such.  Resolution 
plans will be prepared for the whole group. Resolution colleges are proposed to be established 
with clearly designated leadership (in this case the authority of the head office) and the EBA 
is proposed to participate and mediate. Cooperation in times of crisis should be well prepared 
in  advance  and  thus  the  different  problems  that  could  arise  when  the  bank  fails  should  be 
already considered and risks mitigated during the preventative phase.  

The  college  structure  seems  to  be  the  most  appropriate  format  for  cross  border  resolution, 
based on the successful operation of supervisory colleges for cross border banks. The college 
structure  allows  direct  exchange  of  information  and  coordination  among  all  concerned 
authorities. EBA mediation and coordination can foster the decision making process. 

The system cannot ensure that there would be no disagreement among national authorities but 
this  does  not  necessarily  mean  that  each  of  them  can  take  its  own  decisions.  National 
authorities should only be able to exclude themselves from the group approach if they have 
overarching and justified reasons of financial stability (a 'burden of proof'). The EBA would 
play a role in resolving the disputes irrespective of the national assignment of the resolution 
functions  in  a  Member  State.  The  EBA  has  been  entrusted  with  responsibilities  to  ensure  a 
coordinated approach to crisis management and prevention (articles 23-27 of the Regulation 
1093/2010).  These  include,  inter  alia  developing  criteria  for  the  measurement  and 
identification of systemic risk, ensuring an on-going capacity to respond to the materialisation 
of systemic risks, contributing and participating actively in the development of recovery and 
resolution plans, and developing best practices for cross border resolution. The EBA will be 
able  to  bring  together  national  authorities  –  both  through  its  own  management  structure 
(board of supervisors, management board and sub committees) and within resolution colleges, 
to exchange best practices and ensure the highest standards. Additionally, the EBA's powers 
to  coordinate  both  during  and  before  a  crisis,  to  develop  best  practices  and  technical 
standards,  and  if  necessary  mediate  disputes,  will  contribute  to  ensuring  a  consistent  and 
effective approach across Member States.  

It  should  be  acknowledged  that  the  proposal  does  not  address  the  fundamental  underlying 
conflict of interest that arises in the EU from a disconnect between the pan-European nature 
of cross border group and national financial stability and fiscal responsibilities. This has been 
discussed in the October 2009 communication where the benefits of an integrated approach to 
resolution have been put forward. Only pan EU European Resolution/DGS Schemes backed 
by  burden  sharing  arrangements  between  Member  States  would  address  the  fundamental 
conflict of interest between national authorities. The initiative on bank resolution should only 
be seen as a first step towards a more integrated approach to resolution.  

5.8. 

Benefits of the framework 

Benefits  of  the  framework  arise  firstly  from  the  expected  reduction  in  the  probability  of  a 
systemic  banking  crisis  and  the  avoidance  of  the  fall  in  GDP  that  follows  a  banking  crisis. 
Secondly, the bank resolution framework aims to avoid taxpayers' money being used again in 
a potential future crisis to bail out banks. The cost of banking crises, if they happen, should be 

- 66 - 

 
 
borne  by  banks'  equity  and  debt  holders  in  the  first  instance.  As  a  result  funding  cost  of 
Member  States'  debt  should  also  decrease  reflecting  the  removal  of  the  implicit  state 
guarantee of banks' debt. 

Of  course  improvement  in  financial  stability  also  entails  costs  which  need  to  be  considered 
together with the benefits it creates. Macroeconomic costs of the framework derive from the 
increase in lending rates introduced by banks as a reaction to their higher overall funding cost 
due to tighter capital requirements, the introduction of ex-ante funds to finance resolution and 
the bank resolution framework especially the bail-in tool. This would entail an increase in the 
cost of capital in the macro economy that will be reflected in a decrease in firms’ investments 
and a fall in GDP. A methodology also used by the Bank of England80 was applied to estimate 
the net macroeconomic gains. The results of the model show (see Table 23) that the additional 
macro-economic  benefits  of  introducing  the  framework  is  positive  and  can  range  between 
0.7% and 1% of the EU GDP annually.  

Table 23. Cumulative impact of Basel III, RF/DGS and Debt Write Down tool (bail-in) 
(costs and benefits as % of annual GDP.) 

Basel III  DGS/RF 

Bail-in 

Sum 

Costs (% of EU GDP annually) 

Benefits (% of EU GDP annually) 

0.16% 

0.30% 

0.04% 

0.14% - 0.42% 

0.34% - 0.62% 

0.32% 

0.76% 

1.38% 

Net Benefits (% of EU GDP annually) 

0.14% 

0.28% 

0.34% - 0.62% 

0.76% - 1.04% 

5.9. 

Impact on stakeholders and cost of preferred options 

Table  24  presents  the  direct  and  indirect  cost  of  the  preferred  policy  options.  Table  25 
summarises  the  major  impacts  (both  positive  and  negative)  of  the  preferred  options  on  the 
most important stakeholders. 

80   The methodology and the detailed presentation of the results can be found in Annex XIII. 

- 67 - 

 
 
 
 
                                                 
Table 24. Cost of preferred options 

Direct cost 

Indirect cost 

Preparation and Prevention 
Annual supervisory program 

Enhanced supervision 

Stress test 

Voluntary group financial 
support agreement (approval 
and transfer by supervisor) 

Recovery plans 

Resolution plans 

Power for authorities to 
require change in business 
structure, operation and 
exposures 

Early intervention 
Triggers based on assessment 
of authorities (likely or actual 
breach of CRD) 
Expanded minimum set of 
tools 

Special management 

Cost  of  supervisors  is  not  expected  to  increase 
materially as a result of this option. 
Some  increase  in  the  operational  cost  (e.g.  due  to 
increased  on-site  supervision)  of 
the  national 
supervisor  is  expected.  Since  respondents  of  the 
public  consultation  did  not  indicate  either  any 
significant one-off or on-going cost, the overall cost 
of this policy option is assumed to be immaterial. 
Stress  testing  would increase  costs  for  supervisors. 
The extent of the cost depends on the policy choice 
of whether all regulated entities would be examined 
or only those that may have systemic importance. 
No  direct  cost.  Banking  groups  should  voluntarily 
decide on actual transfers based on analysis of pros 
and cons.  
In the case that supervisors oblige banks to transfer 
assets  within  the  banking  group  under  a  group 
financial  support  agreement, 
this  could  mean 
financial costs for the healthy entity. 
Banks will incur cost in developing these plans and 
supervisors  when 
Since 
respondents  of  the  public  consultation  did  not 
indicate  either  any  significant  one-off  or  on-going 
cost,  the  overall  cost  of  this  policy  option  is 
assumed to be immaterial. 
Resolution  authorities  would need  to  use  resources 
for developing such plans. The cost depends on the 
policy  choice  of  whether  all  regulated  entities 
would  be  examined  or  only  those  that  may  have 
systemic  importance.  Since  respondents  of  the 
public  consultation  did  not  indicate  either  any 
significant one-off or on-going cost, the overall cost 
of this policy option is assumed to be immaterial. 
If  resolution  authorities  require  banks  to  change 
their  operation,  business  structure  or  exposures 
(based  on  their  resolution  plans),  banks  will  bear 
cost. This cost depends on the actual measures that 
Authorities  have  to  contemplate  and  decide  on.  As 
an illustrative figure, the separation of the insurance 
and banking business at ING Group cost 85 million 
euros  in  the  preparation  phase  and  200  million 
euros in the execution phase.  

validating 

them. 

No indirect cost.   

especially 

activity 
increase 

supervisory 
requirements 

Banks,  especially  those  that  are  regarded  as  more 
risky,  may  bear  some  cost  as  a  result  of  the 
increased 
if 
reporting 
and  on-site 
supervision  becomes  more  frequent.  This  cost  is 
expected to be negligible. 
Published  results  would  support  trust  in  financial 
institutions. Positive results could decrease funding 
costs  (lower  risk  premium)  while  negative  results 
could increase it. 
If  asset  transfer  is  possible  or  even  enforceable  by 
in  an 
supervisors  within  a  banking  group 
emergency  situation  then  the  yields  of  debt  of 
smaller  subsidiaries  might  theoretically  decrease, 
while that of larger entities might increase. 

The  actual  application  of  recovery  plans  in  critical 
situations  would  entail  cost  for  both  the  banks  and 
supervisors. 

See next policy option. 

Changes in business operation and structures might 
be  beneficial  in  a  potential  resolution  but  might 
weaken or eliminate business synergies. This could 
increase  operational  cost  and  result  in  increased 
prices  of  banking  services  and/or  downsizing  of 
employment,  if  no  measures  to  increase  efficiency 
are implemented in parallel. 

No direct cost.  

No indirect cost.   

intervention  measures 

Additional  direct  cost  compared  to  the  normal 
course  of  supervisory  activities  occurs  only  in 
problematic  situations  when  the  implementation  of 
potentially 
early 
implemented.  Supervisory  authorities  need 
to 
examine  and  find  a  balance  between  the  costs  and 
benefits of each intervention. 
Direct  cost  occurs  only  if  supervisors  decide  to 
nominate  a  special  manager.  Cost  benefit  analysis 
needs to be based on the actual situation. 

is 

intervention 
Implementation  of  certain  early 
measures  (e.g. 
limitation  of  exposures)  might 
decrease  profitability  of  banks.  Limiting  dividend 
pay-out might decrease shareholders' value. 

Measures decided by the special manager can have 
an impact on the profitability of the banks. 

Shortened convocation period  No  direct  cost.  Decision  is  made  voluntarily  by 

No indirect cost.   

shareholders. 

- 68 - 

 
 
 
Bank resolution 
Triggers based on assessment 
of authorities 

No direct cost. 

Minimum set of resolution 
tools 

Debt write down (bail-in) 

Derogations from Company 
law to create legal certainty 
Cross border crisis management 
Establishment of resolution 
colleges 

Direct  cost  occurs  only  if  the  resolution  process  is 
prompted.  
Resolution  authorities  need  to  examine  the  costs 
and benefits of each intervention. 
Expected  returns  on  newly  issued  debt  that  can  be 
written down in a resolution will likely increase. 
J.P.  Morgan  estimated82 
investors  would 
demand  an  87  basis  point  premium  of  a  single  A 
category bank if bail-in is possible. 
In  Denmark,  where  the  bail-in  tool  is  already 
introduced,  banks'  debts  are  traded  100  bp  higher 
than their Scandinavian peers. 
Overall funding cost of banks could increase by 5-
15 basis points. 
No direct cost. 

that 

National  resolution  authorities  would  bear  the  cost 
of  cross  border  coordination  (i.e. 
information 
exchange,  meetings  etc.).  In  normal  times,  this 
should  be  minimal,  while  in  a  crisis  situation  it 
might be more tangible, but still not material. EBA 
would also bear some cost if it takes part. 

Financing 
Ex ante funds to finance 
resolution (DGS/RF) 

According  to  the  model  the  optimal  target  funding 
level  for  the  ex-ante  funds  financing  resolution 
would  be  1%  of  covered  deposits.  This  amount  is 
calculated  taking  into  consideration  of  the  bail-in 
tool. 
The increased contribution of the banking sector to 
their 
ex-ante 
profitability. 

funds  would 

decrease 

cost 

Triggering the resolution process would impose the 
cost  firstly  on  shareholders  and  secondly  on  bank 
debt holders. 
This cost should be lower than the potential cost of 
a failure of a bank and its impacts on the economy, 
social systems and taxpayers. 
Removed  implicit  state  guarantee  from  the  debt  of 
even  the  largest  and  most  important  banks  and 
possible  consequent  downgrades  by  credit  rating 
agencies might increase the funding cost for banks. 
Using  the  existing  Moody’s  ratings  for  a  group  of 
55  European  banks,  J.P.  Morgan  estimated81  an 
average  downgrade  of  3-4  notches,  if  the  existing 
senior  unsecured  ratings  are  downgraded  to  the 
level of the stand-alone rating. 
If  funding  costs  are  maintained  at  a  higher  level 
than  presently,  banks  could  transmit  this  cost  to 
their clients. Due to higher cost of loans, companies 
may decrease  their investments, which  may  reduce 
the GDP by 0.1-0.4% annually. 
Under  resolution  shareholders  will  be  the  first  to 
suffer losses.  

No indirect cost.   

If the optimal funds are collected ex-ante by banks 
its cost would partially be passed to  banks' clients. 
The macroeconomic cost of an ex-ante fund would 
be around 0.04% of EU GDP annually. 

81   The Great Bank Downgrade, What Bail-In Regimes Mean For Senior Ratings? J.P. Morgan, January 2011 

82   European Bank Bail-In Survey Results, Investor Views on Bail-In Senior and Subordinated Debt, J.P. Morgan, October 2010 

- 69 - 

 
 
 
 
 
 
                                                 
Table 25. Summary of impacts on stakeholder groups  

Key 
Stakeholders 

Policy options 

No policy change 

Banking Industry 

Bank debt 
holders 

Bank shareholders 

Bank employees 

Depositors 

Bank customers 
(borrowers, 
payment services 
clients) 

Supervisors/ 
Resolution 
authorities 

Taxpayers 

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

+/- 
Legal 
uncertainty 

Implicit state 
guarantee 
(moral hazard) 

+/- 
Continued protection 
of rights under EU 
and national 
legislation, but 
uncertainty about 
how resolution 
measures will be 
applied 

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

If banks are bailed 
out, lay-offs are less 
likely 

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

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

- 
Lack of powers 
and tools, Absence 
of clear incentives 
to fully cooperate 
and coordinate 

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

Improved 
preparedness and 
prevention 
(enhanced 
supervision, 
contingency 
planning, increased 
preventative 
powers for 
authorities, intra-
group financial 
support agreement) 

Improved early 
intervention 
framework (earlier 
intervention, 
expanded set of 
supervisory 
powers, faster 
rebuilding of  
capital) 

+/- 
Better awareness of 
own risks, improved 
contingency planning 
(de risking 
possibilities) 

Increased supervision 
and control; 
possibility of 
reorganisation and 
downsizing to ensure 
resolvability of too 
big or complex or 
interconnected banks 
+/- 
Higher likelihood of 
pre-empting 
aggravation of 
deteriorating financial 
situation 

More intrusive 
intervention in the 
operation of banks 

+ 
More 
information 
about stress 
bearing 
capabilities of 
banks 

Higher control 
over the 
operation of 
banks 

+/- 
More information 
about the risks of 
their own banks 

Possible 
restructuring 
obligations requested 
by supervisors might 
decrease 
shareholders’ value 

+/- 
Safer operation of 
employer 

Possible 
restructuring, 
divestments might 
render certain jobs 
redundant 

+ 
Supervisors’ 
early, more 
effective 
intervention can 
pre-empt larger 
increase in the 
risk of debt 
instruments 

+/- 
Supervisors’ early, 
more effective 
intervention can pre-
empt larger decrease 
in shareholders’ 
value 

Suspension of 
dividends 

+/- 
Pre-emption of 
deteriorating 
financial situation 
of employer 

Possible, 
divestments might 
render certain jobs 
redundant 

+ 
Safer, more 
controlled 
operation, safer 
deposits 

+ 
Safer, more 
controlled 
operation, safer 
bank relations, 
lower counterparty 
risk 

+ 
Pre-emption of 
deteriorating 
financial 
situation of 
banks, safer 
deposits 

+ 
Pre-emption of 
deteriorating 
financial situation 
of banks, safer 
bank relations, 
lower counterparty 
risk 

+ 
More information 
about potential risk 
at banks, better 
knowledge about 
de risking 
possibilities,  

Powers to change 
operation of too 
complex, too 
interlinked, 
irresolvable 
institutions 

+ 
Earlier possibility 
to intervene 
More effective 
tools to pre-empt 
aggravation of 
financial problems 
at supervised 
institutions 

+ 
Safer, more 
controlled 
operation, 
Lower likelihood 
of failure and need 
for bail out from 
taxpayers’ money 

+ 
Pre-emption of 
deteriorating 
financial situation 
of banks, 
Lower likelihood 
of failure and need 
for bail out 

- 70 - 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Key Stakeholders 
Policy options 

Banking Industry 

Bank debt 
holders 

Bank shareholders 

Bank Employees 

Depositors 

Bank customers 
(borrowers, 
payment services 
clients) 

Supervisors/ 
Resolution 
authorities 

Taxpayers 

Introduction of an EU 
bank resolution 
framework (special 
resolution tools + debt 
write down) 

+/- 
Improved financial 
stability, but no bank 
would be too big to 
fail (decreased moral 
hazard) 
Higher cost of 
funding as implicit 
state guarantee 
disappears and bail-in 
becomes an option 

+/- 
Increased 
prospects of 
continuous bank 
operation; better 
debt recovery than 
in insolvency 
Debt write down 
could decrease 
value of debt, 
eliminates implicit 
state guarantee 

+/- 
First one to suffer losses in a 
resolution; forced measures, no 
bail out policy eliminates 
implicit state protection. 
Fundamental rights could be 
limited in public interest. 
Greater certainty about when 
and how authorities are 
allowed to act, backed, when 
necessary, by safeguards and 
compensation mechanisms 

Improved cooperation 
(through resolution 
colleges) 

+ 
Treatment of groups 
in cooperation would 
serve the interest of 
cross border banks 

+ 
Improved 
prospects of equal 
treatment across 
the group 

+ 
Resolution at group level 
increase the chances of optimal 
solutions for all shareholders 
of a group 

+/- 
Ability of 
authorities to 
resolve banks and 
groups would 
increase chances 
of continued 
operation but  
Allowing a bank 
to fail 
(resolution) may 
result in job 
losses. 

+ 
Group level 
approach 
optimises 
outcomes for all 
entities of a 
group, hence for 
all employees as 
well. 

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

+ 
Maintenance of 
continuous banking 
services. 
Increased financial 
stability 

+ 
Effective powers to 
resolve banks and 
avoid financial 
meltdown 
Increased financial 
stability 

+  
A new framework to 
enable effective crisis 
management and 
bail-in should reduce 
or eliminate fiscal 
burdens 

+ 
Group level 
approach optimises 
outcomes for all 
entities of a group, 
hence for all 
depositors 

+ 
Group level approach 
optimises outcomes 
for all entities of a 
group, hence also for 
all customers 

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

+ 
Group level 
resolution optimises 
results for all 
Member States, 
possible fiscal 
responsibilities will 
be decreased 

Private financing 
(national resolution 
funds) 

+/- 
Ex ante  financing 
availability increases 
the success of 
resolution 
Resolution funds 
would be financed by 
banks 

++ 
Higher probability 
of successful 
resolution and 
continuity of 
business. 
Lower expected 
losses falling on 
banks' debt 
holders. 

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

+/- 
Ex ante financing availability 
increases the success of 
resolution 
Resolution fund would be 
financed by banks which 
decreases profits 

+ 
Higher 
probability of 
successful 
resolution and 
continuity of 
business 

+ 
Higher probability 
of successful 
resolution and 
continuity of 
business 

+ 
Higher probability of 
successful resolution 
and continuity of 
business 

+ 
Increased credibility 
and effectiveness of 
resolution 

+ 
Higher probability of 
successful resolution 
and less likely fiscal 
liability 

- 71 - 

 
 
 
 
5.10.  Administrative burden 

The preferred options do not lead to any significant administrative burden. Some elements of 
this proposal could be seen as implying administrative burden such as the obligations of banks 
and  supervisory/resolution  authorities  to  develop  recovery  and  resolution  plans.  Under 
enhanced  supervision,  potentially  increased  reporting  obligation  of  certain  banks,  bearing 
higher  risk,  could  also  increase  administrative  burden.  However,  this  is  not  a  regular 
obligation since they are incurred only in special cases. 

Increased  early  intervention  and  resolution  powers  granted  to  authorities  will  not  affect 
administrative  burden  per  se.  If  authorities  require  banks  to  provide  additional  or  more 
frequent  reporting  on  their  activities  in  an  emergency  situation,  authorities  need  to  examine 
whether the cost of reporting is in balance with the gravity of the situation and its potential 
negative  spill  over  effects.  Resolution  colleges  are  not  expected  to  increase  administrative 
burden either. Banks would not need to provide additional information to current obligations 
and  those  mentioned  in  the  preparation  phase  of  the  current  proposal  (e.g.  recovery  and 
resolution  plans).  The  preferred  option  on  financing  arrangements  will  increase  the  cost  of 
banks  if  a  special  ex-ante  levy  is  introduced83,  but  the  effect  on  administrative  burden  is 
expected to be negligible. Based on the results of the latest public consultation, administrative 
burden  is  expected  to  be  insignificant  or  respondents  could  not  estimate  it.  Some  perceived 
the policy options as too general to estimate the actual costs they might entail.  

In  Germany,  the  assessment  prepared  for  the  Bank  Resolution  Act84  concluded  that  new 
information requirements would be rarely applied, mostly only if a bank gets into difficulties. 
The  estimated  cost  is  negligible.  In  the  UK,  the  impact  assessment  prepared  for  the 
consultation  on  the  new  Banking  Act85  that  introduced  the  special  resolution  regime 
concluded that many costs are non-monetised because they will only be incurred in the case of 
financial instability, a bank failure, or a bank getting into difficulties. Thus they are contingent 
on  unpredictable  and  infrequent  events.  They  will  vary  by  institution,  the  financial  climate 
etc. It also concluded that the impact on administrative burden is negligible. 

5.11. 

Impact on EU budget 

The above policy options will have implications for the budget of the Union. 

The present proposal would require EBA to (i) develop around 23 technical standards and 5 
guidelines  (ii)  take  part  in  resolution  colleges,  mediate  and  make  decisions  in  case  of 
disagreement,  and  (iii)  provide  for  recognition  of  thrid  country  resoltuion  proceedings  and 
conclude non-binging framework cooperation arrangements with third countries. The delivery 
of  technical  standards  is  due  12  months  since  the  entry  into  force  of  the  Directive  which  is 
estimated  to  be  between  june  and  december  2013.    Since  EBA  will  have  to  develop  an 
expertise in a completely new area, it is estimated that 5 temporary and 11 national seconded 
experts  will  be  needed  for  2014  and  2015  to  deliver  the  required  technical  standards  and 
guidelines and other tasks as explained in (ii) and (iii) above. 

83   Detailed information can be found in Annex XIII. 

84   Entwurf  eines  Gesetzes  zur  Restrukturierung  und  geordneten  Abwicklung  von  Kreditinstituten,  zur  Errichtung  eines 
Restrukturierungsfonds  für  Kreditinstitute  und  zur  Verlängerung  der  Verjährungsfrist  der  aktienrechtlichen  Organhaftung 
(Restrukturierungsgesetz) 
http://dipbt.bundestag.de/dip21/btd/17/030/1703024.pdf 

85   Banking Bill: Impact Assessment, October 2008 

http://webarchive.nationalarchives.gov.uk/20100407010852/http://www.hm-treasury.gov.uk/d/banking_bill_ia081008.pdf 

- 72 - 

 
 
                                                 
 
 
 
 
5.12. 

Social impact 

The proposed crisis management framework is expected to have a very positive social impact. 
The  framework  would  ensure  high  level  financial  stability  as  enhanced  supervision,  more 
effective  early  intervention  and  bank  resolution  measures  help  economic  development  and 
jobs will be less at risk. The protection for depositors and bank customers would increase due 
to  the  lower  probability  of  bank  failure,  and  the  specialised  bank  resolution  process  which 
would help maintain the continuity of key financial services and payment systems. Since the 
resolution  of  banks  would  put  the  burden  on  shareholders  and  debt  holders  (no  bail-out 
policy), it would avoid putting the burden on taxpayers as happened in the latest crisis. This 
would alleviate concerns about the social welfare systems too. 

With  regards  to  jobs  in  banks,  employees  may  be  affected  by  restructurings  required  by 
resolution authorities if the banks prove to be too complex to resolve. In certain cases, such 
restructuring may decrease the necessary labour force, but in others it may even increase it. 
For  example  if  a  bank  needs  to  disentangle  certain  operations,  certain  functions  (e.g.  IT, 
marketing,  administration)  need  to  be    split  up  and  total  staff  numbers  may  increase.  Bank 
resolution might also lead to making certain employees redundant but this would not compare 
to the vast loss of employment as a result of a bank failure or economic recession prompted 
by a banking crisis. 

5.13.  Environmental impact 

This proposal has no impact on the environment. 

5.14. 

Impact on SMEs 

The  proposal  aims  to  maintain  financial  stability  in  the  EU  as  a  whole.  SMEs  will  benefit 
from  the  increased  stability  of  financial  institutions,  the  continuity  of  key  banking  services 
and the lower likelihood of a devastating financial crisis (like the recent one, when economies 
turned  to  recession).  SME  will  probably  see  lending  costs  rise  however  this  should  be  seen 
against the background of an overall safer financial system and reduced chances of a systemic 
crisis which very often produce a much tighter credit environment. 

Smaller  banks  will  also  be  part  of  the  crisis  management  framework.  If  they  fail,  their 
resolution will also be managed by a specialised authority which is tasked to consider a wide 
range of national and EU interests. The contagion of problems will also be less likely which 
improves the economic environment of these banks. 

The  methodology  used  by  the  Commission  to  compute  the  impact  of  the  new  capital 
requirements under Basel III accord, the impact of the level of funding of DGS/RF as well as 
the  impact  of  the  minimum  level  of  bail-in-able  liabilities  on  non-financial  firms  costs  of 
capital is based on assumptions that once banks are faced with new costs, they tend to pass 
these on to other non-financial firms via increasing lending spreads, which increase costs of 
capital for these firms.  

The results of the model (see table 26) used indicate that as far as Basel III requirements are 
concerned,  these  would  lead  to  increase  of  costs  of  capital  for  firms  by  3.8bp.  The 
employment of DGS in resolution should bring additional cost increase of 1bp and lastly the 
bail-in  results  in  an  increase  between  3.29  –  10.5bp.  The  total  combined  effect  of  all  three 

- 73 - 

 
 
 
parameters impacting on cost of bank funding consequently lead to increase in costs of capital 
for firms in range of 8.08bp and 15.3bp (0.08% - 0.15%). 

Table 26. Cumulative impact of Basel III, RF/DGS and Debt Write Down tool (bail-in) 
on cost of capital for firms/SMEs  

Variation in banks' funding costs (bps) 

Variation in lending spreads (bps) 

Variation  in  non-financial  firms  cost  of 
capital (bps) 

Basel III 
(10.5%) 

5.8 

12.7 

3.8 

DGS/RF 

Bail-in 

Sum 

1.4 

2.9 

1.0 

4.7 – 15.0 

11.9 - 22.2 

9.87 – 31.5 

25.4 – 47.1 

3.29 – 10.5 

8.08 – 15.3 

For more details on these calculations please consult Annex XIII Appendix V.  

5.15.  Coherence with other proposals 

The crisis management framework  is in strong relation with the deposit  guarantee  scheme 
system in the EU. The modification of the relevant Directive 94/19/EC is currently discussed 
in  the  Council  and  the  Parliament.  Synergies  between  DGS  funds  and  bank  resolution 
measures  are  significant,  especially  when  it  relates  to  financing  issues.  When  a  resolution 
framework that stops contagion is in place, the DGS fund will only finance a few banks that 
default initially. In contrast, when no resolution measures are available and contagion spreads 
through the financial system, the amount of money that the DGS needs to pay out in a MS is 
considerably higher.86  

To  ensure  that  the  sector  makes  a  fair  contribution  to  public  finances  and  for  the  benefit  of 
citizens, enterprises and Member States, the European Commission on 28 September 2011 put 
forward a proposal for a financial transaction tax (FTT). The revenues of the tax would be 
shared between the EU and the Member States. Part of the tax would be used as an EU own 
resource  which  would  partly  reduce  national  contributions.  A  part  of  the  revenues  could  be 
channelled to national resolution funds that could finance the orderly resolution of EU credit 
institutions and investment firms. 

The  proposal  also  relates  to  the  Capital  Requirements  Directive  (CRD),  which  sets 
prudential requirements for banks and investment firms. Recent amendments to the CRD aim 
to  increase  the  quantity  and  quality  of  capital  that  banks  hold,  so  that  they  could  actually 
absorb  potential  losses.  New  liquidity  requirements  intend  to  make  sure  that  banks  remain 
liquid even in a stressed market period and develop a liability structure that provides further 
stability.  All  these  measure  will  make  the  banking  sector  safer  and  decrease  the  chances  of 
bank failure and the need for public interventions. Despite all these measures, the failure of 
banks  in  the  future  cannot  be  excluded.  Hence  there  is  a  need  to  develop  a  complementary 
legal  framework  (bank  recovery  and  resolution)  that  ensures  that  financial  stability  is 
maintained even in the negative scenarios. 

86   More information can be found in Annex XV. 

- 74 - 

 
 
 
                                                 
Table 27. Coherence and complementary objectives of different proposals 

Capital Requirements 
Directive (CRD) 

Credit institutions and 
investment firms 

Scope 

Time of application 

Normal course of business 

Managing 
authorities 

Supervisors 

New Bank Recovery and 
Resolution Directive 
(present proposal) 
Credit institutions and 
investment firms in a 
proportional way, as per the 
CRD 
Normal course of business 
Banks are failing or likely to 
fail 
Resolution authorities 

Deposit Guarantee Scheme 
Directive (DGS) 

Credit institutions 

Banks are unable to repay 
deposits 

DGS 

General objectives 

Protect savings 
Ensure competition and sound 
management of banks 
Ensure that banks are adequately 
capitalised. 
Ensure equivalent supervision by 
Member States 

Ensure financial stability 

Protecting depositors 

Minimise losses for society 
and taxpayers 

Protect the single market 

Contributing to financial 
stability (by strengthening 
depositor confidence and 
avoiding bank runs) 

Decrease pay-out period 
Harmonisation of eligibility of 
deposits  
Harmonise financing (ex-ante 
and ex post) 
Improve cross border 
cooperation and depositor 
information  
Allow DGS funds to be used 
for resolution and early 
intervention purposes, 
however with the necessary 
safeguards to prevent the 
funds being depleted 

Specific objectives 
of recent 
amendments to EU 
directives 
(independent of the 
Bank Resolution 
Directive) 

CRD 4 proposal: 
Increase the amount and improve 
the quality of capital. 
Introduce liquidity requirements 
Limit leverage 
Better manage counterparty risk 
Enhanced supervision (annual  
supervisory programs, stress 
testing, intensified supervision) 

N.A. 

Specific objectives 
of the Bank 
Resolution Directive 
that also amends 
other  directives 

Recovery planning by banks, 
approval by supervisors 
Extend early intervention powers 
of supervisors, ensure 
intervention as soon as financial 
difficulties arise 
Ensure coordinated action of 
supervisors in a crisis situation 
Mediation by EBA in cross 
border cases 

Resolution planning 
Ensure resolvability by 
preventative powers 
Introduce administrative 
resolution process, special 
tools and powers (e.g. bridge 
bank, debt write down) to 
manage failure of banks 
Resolution colleges for cross 
border institutions with the 
assistance of EBA 
Ensure adequate level of 
financing for resolution from 
private sources taking into 
account CRD and DGS 

Table  28  below  presents  in  detail  the  interaction  of  this  proposal  with  the  Capital 
Requirements  and  the  Deposit  Guarantee  Scheme  Directives.  The  shaded  boxes  show  the 
measures that the current proposal addresses.  

Chart 6 below presents how the different proposals of the European Commission concerning 
the  financial  sector  pursue  its  objectives  and  contribute  to  the  ultimate  aim  of  financial 
stability. It shows how the current proposal fits in the range of legislative proposals prepared 
by the European Commission as a response to the financial crisis. The detailed presentation of 
Commission  initiatives  that  aim  to  respond  to  the  financial  crisis  and  their  relations  can  be 
found in Annex XIV. 

- 75 - 

 
 
 
 
 
 
 
 
Objectives 

Main tools 

Ensure sound banking 
operation 
Protect savings 
Ensure competition and 
sound management of 
banks 
Ensure that banks are 
adequately capitalised. 
Ensure equivalent 
supervision by Member 
States 
Capital requirements 
Liquidity regulation 
On-off site supervision 
Reporting 
Etc. 

Role of DGS 

Acquire data from banks, 
collect levies, invest funds 

Cross border 
aspects 

Supervisors cooperate in 
colleges with EBA 
mediation and 
coordination 

Table 28. Relation of the Bank Recovery and Resolution proposal, the CRD and DGS 
Problems arising 
Timing 
Early intervention measures 
Actions 
Capital Requirements 
Applicable 
Directive and Bank 
legislation 
Resolution Directive 
Supervisor 

Preparation 
Capital Requirements 
Directive and Bank 
Resolution Directive 
Supervisors 

General supervision 
Capital Requirements 
Directive 

Prevention 
Bank Resolution Directive 

Normal course of business 

Supervisors 

Supervisors and Resolution 
authority 

Responsible 
authority 

Improve supervisory 
practices to avoid 
problems at banks 

Ensure that any bank could be 
resolvable within a short 
period of time (e.g. 48 hours) 
Protect the single market 

Help the bank to solve 
problems and re-establish 
financial soundness 

Near insolvency situation 
Trigger for intervention 
Bank Resolution Directive 

Bank resolution 
Bank Resolution 
Directive 

Non viability 

Insolvency (liquidation) 
National Insolvency law(s) 

Supervisor informs about 
situation 
Resolution authority takes 
decisions 
Ensure that authorities have 
the power to intervene 
before insolvency 

Resolution authority 

National judges and 
insolvency administrators 

Protection of creditors and 
maximisation of their payout 

Financial stability, 
protection of depositors 
and key banking 
functions 
Protection of taxpayers' 
money. 
Protect the single 
market 

Supervisory programs 
Enhanced supervision 
Stress tests 
Recovery plans 
prepared by banks and 
approved by supervisors 

Development of  Resolution 
plans by resolution authorities 
If bank not resolvable change 
the business and legal 
structure, sell or limit 
business lines, exposures, etc. 

Early intervention tools: 
Raise own funds by 
shareholders, Replace 
managers, Implement 
recovery plan, Divestment of 
activities, More frequent 
reporting, Special 
management 

Decision by resolution 
authorities to place the bank 
either into administrative 
resolution or allow 
bankruptcy (liquidation) 

Resolution authorities 
decide which tools to 
use in a resolution: 
Sale of business 
Bridge bank 
Asset separation 
Debt write down 

Sale of assets and payout of 
creditors by insolvency 
administrators 

Prepare for action 

Supervisors cooperate in 
colleges with EBA 
mediation and 
coordination and decide 
about acceptance of 
group recovery plans 

Supervisors and Resolution 
authorities cooperate in 
colleges with EBA mediation 
and coordination and decide 
about resolution plans and 
actions to make banking 
groups resolvable 

Supervisors cooperate in 
colleges with EBA 
coordination to implement 
early intervention tools at 
group level 

Supervisors together with 
Resolution authorities 
cooperate in colleges with 
EBA coordination and 
decide about triggering 
resolution of part or all 
entities of banking groups 

Financing of resolution 
measures (e.g. transfer 
of covered deposits to 
bridge bank) 
Resolution authorities 
cooperate in colleges 
with EBA coordination 
to decide about 
application of resolution 
tools in relation to a 
banking group 

Protecting depositors 
If eligible deposits are 
unavailable, pay them out up 
to €100.000 
Judges and administrators 
cooperate based on 
international law and 
Directive 2001/24/EC about 
liquidation actions 
concerning cross border 
banks 

- 76 - 

 
 
 
 
 
Chart 6. Interaction of European Commission policies in financial services 

- 77 - 

 
 
Table  29  gives  an  overview  of  how  the  different  issues  included  in  the  proposal  on  bank 
recovery  and  resolution  are  discussed  in  the  FSB/Basel  negotiations  and  how  the  US  has 
implemented related measures. 

Table 29. International comparison of different issues included in the proposals 

EU Commission proposal 

FSB/Basel 

Applies to credit institutions and 
Investment Firms as defined by 
the CRD (includes systemically 
relevant and not). 

Any financial institution that 
could be systemically significant 
or critical if it fails,  not only 
banks 

Scope 

Authorities 

US Regime 
Dodd-Frank applies to 
systemically relevant institutions 
(defined as those of more than 
50bn assets). It also applies to 
holding companies. 
The general FDIC regime applies 
to all deposit taking institutions. 
Dedicated resolution authority: 
FDIC. 
Decision as to whether to enter 
into resolution is not left 
exclusively to the FDIC but is 
shared together with the FED and 
the Treasury (three key 
approach). 

Resolution 
plans 

Obligation for systemically 
relevant firms to draw up a 
resolution plan that is to be 
assessed by the resolution 
authority. 

As a result of the assessment of 
the resolution plan the resolution 
authority can impose preventative 
measures to the institution. 

None 

Preventative 
powers 

Early 
intervention 
– special 
manager 

Establishment of a resolution 
authority but left to the member 
states how to institutionally 
implement it (could be at the 
same institution as the 
supervisory authority). 
In principle not explicit as to the 
involvement of treasury in the 
decision to enter into resolution. 
Obligation for the resolution 
authority to draw up a resolution 
plan for all credit institutions and 
investment firms under the scope, 
on the basis of detailed 
information to be provided by the 
credit institutions and investment 
firms. 
If the result of the resolution plan 
indicates that there are 
impediments to the resolvability 
of the institution the resolution 
authority can impose preventative 
measures to remedy them. 

Possibility to appoint a special 
manager under early intervention 
powers. 

Trigger for 
resolution 

Close to insolvency trigger. 
Resolution tools can only be used 
if there is a public interest and no 
private sector solution is 
available. 

Mixed trigger. 
Resolution tools can only be used 
if there is a public interest and no 
private sector solution is 
available. 

Resolution 
tools 

Only gone concern tools: bridge 
bank, purchase and assumption. 

Mechanisms 

FDIC receivership 

Bail-
in/haircut to 
creditors 

No bail-in, haircuts only possible 
on a gone concern basis at the 
discretion of the FDIC and 
applicable to all creditors 
(although the FDIC can 
discriminate amongst the different 
classes). 

Going and gone concern tools: 
transfer of business, bridge bank,  
asset separation and bail-in. 
Mixed model: authorities can 
decide as to whether they want to 
use a receivership or they prefer 
to function through executive 
orders. 

Haircuts possible on a going 
concern (bail-in) and a gone 
concern (bridge bank) basis. 

- 78 - 

Each jurisdiction should have a 
designated administrative 
authority or authorities 
responsible for exercising the 
resolution powers over firms 
within the scope of the resolution 
regime (“resolution authority”).  

Obligation to draw up a resolution 
plan. 

Establishes the criteria for 
determining the resolvability of 
an institution. 

None 

Resolution should be initiated 
when a firm is no longer viable or 
likely to be no longer viable, and 
has no reasonable prospect of 
becoming so. The resolution 
regime should provide for timely 
and early entry into resolution 
before a firm is balance-sheet 
insolvent and before all equity has 
been fully wiped out.  
Transfer of assets and liabilities 
Bridge institution 
Bail-in 

No definition 

Write down equity, unsecured and 
uninsured creditor claims to the 
extent necessary to absorb the 
losses; and to convert into equity 
all or parts of unsecured and 
uninsured creditor claims  

 
 
 
 
 
5.16.  Choice of legal instrument 

It  appears  appropriate  to  ensure  that  crisis  management  powers  and  tools  are  available  for 
national authorities in all Member States. Member States should have flexibility in adapting 
the principles established to their domestic legal order. Because the crisis management tools 
and powers are used at the point when an institution is failing or has failed, they inevitably 
interact with national insolvency regimes. Substantive insolvency law is not harmonised, and 
the  measures  proposed  in  the  bank  resolution  framework  need  to  be  implemented  in  a  way 
that is consistent with that national law. Furthermore, the application of the tools and exercise 
of the powers will almost certainly affect contractual and property rights, that are also rooted 
in national law. Subject to a further analysis of the actual provisions of the future proposal, a 
directive  would  seem  therefore  the  appropriate  legal  instrument  since  transposition  into 
Member  State  law  is  necessary  to  ensure  that  the  framework  is  implemented  in  a  way  that 
achieves  the  intended  effect,  within  the  specificities  of  relevant  national  law.  This  would 
respect both the subsidiarity principle and the proportionality principle. 

The crisis management framework would necessitate the modification of the CRD, especially 
concerning  preparation,  prevention  and  early  intervention  phases.  The  Directive  on  DGS 
would need to be amended in order to establish joint DGS and Resolution Funds to finance 
bank resolution. Discussions on the synergies of the two funds are on-going in the Council. 
Company law directive (2007/36/EC) would need to be amended to enable short convocation 
of  general  meetings  for  capital  increase  in  emergency  situations.  Derogation  from 
shareholders'  procedural  rights  that  might  otherwise  present  a  significant  obstacle  to  the 
timely use of resolution tools would also be needed. The amendments to relevant provisions 
of  company  law  directives  (77/91/EEC,,  82/891/EEC,  2004/25/EC,  2005/56/EC,2007/36/EC 
and 2011/35) would be made through the bank recovery and resolution directive.  

It is not expected that there would be any major problem in the transposition of the proposed 
directive because generally all Member States strongly support the adoption of a framework 
on  bank  recovery  and  resolution.  The  main  policy  options  were  discussed  extensively  in 
working  groups  with  Member  States  and  found  their  support.  In  addition,  some  Member 
States have already introduced, or have indicated their intention to introduce, mechanisms to 
resolve failed credit institutions that partially coincide with what the Commission intends to 
propose.  The  EU  regime  is  broadly  compatible  with  existing  regimes,  apart  from  the  cross 
border  framework,  which  will  place  additional  obligations  on  Member  States  when 
undertaking a resolution of a cross border EU financial institution. 

5.17.  Experience of Member States with bank resolution  

Some  of  the  Member  States  (UK,  Denmark,  Germany,  Netherlands,  Greece,  Belgium)  have 
already introduced bank resolution systems as a response to the financial crisis. Some of them 
have already applied the new framework for a failing bank. Following the entry into force of 
the  UK's  special  resolution  regime  in  February  2009,  it  was  used  to  manage  the  failure  of 
Dunfermline Building Society. In Denmark in October 2011, Sparekassen Sjaelland A/S took 
over the healthy parts of Max Bank while the state assumed the bank’s bad loans after it was 
declared  insolvent.  In  early  2011,  the  senior  creditors  of  the  Danish  Amagerbanken  A/S  had 
suffered  losses  first  time  in  the  EU  within  a  resolution  framework  after  authorities  applied  the 
bail-in tool. The resolution of failed banks entailed smaller cost for all stakeholders, including the 
state, than if the banks had been bailed out or liquidated. 

- 79 - 

 
 
6. 

MONITORING AND EVALUATION 

Since  bank  failures  are  unpredictable  and  hopefully  avoided,  the  functioning  of  bank 
resolution cannot be regularly monitored on the basis of how real bank failures are handled. 
However, the preparation and prevention phase, especially the development of recovery and 
resolution plans and the implemented measures of authorities based on these plans could be 
monitored using the following indicators. 

•  Number of resolution colleges set up 

•  Number  of  recovery  and  resolution  plans  submitted  and  approved  by  resolution 

authorities and resolution colleges. 

•  Number  of  cases  where  adjustments  in  the  operation  of  banks  (and  banking  groups) 

has been demanded by resolution authorities 

•  Number of intra-group financing agreements concluded 

•  Number of banks where minimum loss absorbing capacity (capital+bail-inable debt) is 

required 

•  Overall level of loss absorbing capacities of banks in Member states and the EU 

•  Number of banks undergoing resolution 

•  Number  of  application  of  different  resolution  tools  and  powers  (e.g.  P&A,  bridge 

bank, bail-in) 

•  Cost of bank resolution on an individual MS and EU aggregated level (EUR million) 

(cost include bail-in cost, recapitalisation, contribution of DGS/RF, other costs) 

The involvement of the EBA in all phases of the bank recovery and resolution framework is 
proposed  and  supported  by  the  stakeholders,  even  if  the  EBA  regulation  presently  does  not 
give  competence  to  EBA  in  a  resolution  process.  Based  on  its  involvement,  the  EBA  could 
carry  out  related  monitoring  tasks.  The  transposition  of  any  new  EU  legislation  will  be 
monitored under the Treaty on the functioning of the EU. 

- 80 - 

 
 
ANNEX I 

GLOSSARY 

Administration 

Under  this  resolution  model,  the  resolution  authority  would  appoint  an  administrator  to  the 
failing bank who would carry out the resolution and wind up the residual failed institution. 

Bank resolution 

Basel II 

Basel III 

Procedures  and  tools  for  the  restructuring  or  managed  dissolution  of  ailing  banks  while 
preserving insured deposits and the payment and infrastructure services which are essential for 
maintaining financial stability. Bank resolution uses specific tools (e.g. bridge banks, assisted 
acquisition, partial sale of assets, asset separation, debt write down, debt conversion to equity) 
to reach the above objectives. The process is managed by an administrative resolution authority 
(national  bank,  financial  supervisor,  deposit  guarantee  scheme,  ministry  of  finance,  special 
authority), defined by Member States. 

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

Basel III is a new global regulatory standards on bank capital adequacy and liquidity agreed by 
the members of the Basel Committee on Banking Supervision. The third of the Basel Accords 
was developed in a response to the deficiencies in financial regulation revealed by the financial 
crisis.  Basel  III  strengthens  bank  capital  requirements  and  introduces  new  regulatory 
requirements on bank liquidity and bank leverage. 

Bridge bank 

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

Capital adequacy 
ratio 

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

Consolidating 
supervisor 

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

Direct executive 
powers 

Under  this  resolution  model,  the  resolution  tools  would  be  applied  and  the  resolution  powers 
exercised  through  executive  order  or  decree  in  accordance  with  national  administrative 
competences and procedures, without control of the credit institution to the which the resolution 
tool  is  applied  being  assumed  by  the  resolution  authority  or  a  person  appointed  by  the 
resolution authority. 

Early 
intervention 

Early  intervention:  early  remedial  actions  of  banking  supervisors  (e.g.  raising  private  capital, 
modification  of  business  lines,  divestiture  of  assets)  which  aim  at  correcting  irregularities  at 
banks and hence helping banks returning to normal course of business and avoiding that banks 
enter in a resolution stage. 

European 
Banking 
Authority (EBA) 

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

- 81 - 

 
 
European 
Supervisory 
authorities (ESA) 

ESA is created by transforming the European supervisory Committees87 in a European Banking 
Authority  (EBA),  a  European  Securities  and  Markets  Authority  (ESMA)  and  a  European 
Insurance and Occupational Pension Authority (EIOPA) 

European System 
of Financial 
Supervisors 
(ESFS) 

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

Going concern 

A going concern is a business that functions without the intention or threat of liquidation for the 
foreseeable future, usually regarded as at least within 12 months. 

Good bank – Bad 
Bank 

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

Memorandum of 
Understanding 
(MoU) 

Pillar II 

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

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

Receivership 

Under  this  resolution  model,  and  in  order  to  apply  the  resolution  tools,  resolution  authorities 
would have the power to take control of a credit institution upon a decision that it is failing or 
likely  to  fail.  Upon  taking  control  of  the  credit  institution,  the  resolution  authority  would 
manage  its  property  and  exercise  all  the  powers  of  its  shareholders  and  its  management, 
exercise the transfer powers and wind up the residual failed institution. 

Set-off / Netting 

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

Tier 1 capital 

Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. 
It is composed of core capital, which consists primarily of common stock and disclosed reserves 
(or retained earnings), but may also include non-redeemable non-cumulative preferred stock. 

87 

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

- 82 - 

 
 
                                                 
ANNEX II 

DIFFERENT STAGES OF BANK RECOVERY AND RESOLUTION 

Three stages of bank recovery and resolution 

Preparation  starts  in  the  normal  course  of  supervision.  Supervisory  activity  needs  to  be 
reinforced and enhanced in order to obtain better information on the risks at credit institutions. 
Contingency planning is crucial to prepare both banks and supervisors for stressed situations. 
Preventative powers could be needed in order ensure the applicability of the resolution tools 
and  avoid  the  risk  that  banking  structures  develop  in  such  a  way  as  to  complicate  the 
application  of  the  legal  framework.  For  example,  overly  complex  businesses  can  limit 
supervisors' ability to implement measures in a timely manner in crisis situation. 

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

When banks are close to failure, actions and measures need to be more severe in order to pre-
empt  potential  instabilities  in  the  banking  and  the  whole  financial  system  resulting  from 
bankruptcy.  In  such  situations,  public  authorities  (central  banks,  finance  ministries,  judicial 
and  supervisory  authorities)  or  other  organisations  (e.g.  deposit  guarantee  schemes)  might 
need  to  take  over  certain  decisions  on  the  business  operation  of  a  bank  and  implement  far 
reaching resolution measures. It is key in bank resolution to enable authorities to intervene in 
an ailing bank already at an early stage. Determining the trigger mechanism is a sensitive and 
controversial  issue.  The  optimal  triggering  point  needs  to  fulfil  double  purpose.  Firstly,  it 
needs  to  be  early  enough,  so  that  resolution  measures  could  be  executed  with  success  and 
limited cost for stakeholders (shareholders, bondholders, depositors etc.). Secondly it needs to 
contribute to legal certainty, meaning that it needs to be clear for every stakeholder at what 
point  authorities  have  the  right  to  implement  intrusive  resolution  measures  without  any 
hindrance or blockage by stakeholders.  

- 83 - 

 
 
 
In  addition  to  the  three  stages  of  crisis  management,  two  aspects  deserve  special  attention. 
First:  the  crisis  management  measures  of  authorities  need  to  work  and  reach  results  at 
EU/global  level.  Hence  the  cooperation  of  national  authorities  and  the  involvement  of  EU 
authorities need to be examined and addressed. 

The second important aspect of crisis management is financing. It needs to  be  ensured that 
private financing is available for authorities to carry out resolution of credit institutions.  

- 84 - 

 
 
ANNEX III  CONSULTATIONS WITH STAKEHOLDERS 

The  Commission  stressed  in  its  4  March  2009  Communication  the  importance  of 
strengthening  the  EU's  crisis  management  arrangements.  On  the  20th  of  October  2009  the 
Commission  issued  a  consultative  Communication  and  an  accompanying  staff  working 
document  which  sought  views  as  to  where  essential  changes  are  needed  to  make  possible 
effective  crisis  management  and  resolution  or  orderly  winding  up  of  a  failing  cross-border 
bank.  On  the  19th  of  March  2010  the  European  Commission  hosted  a  high  level  one-day 
conference on the construction of a new crisis management framework in the banking sector. 

On  the  26th  of  May  2010  the  European  Commission  adopted  a  Communication  on  Bank 
resolution Funds that proposed that the European Union establishes an EU network of bank 
resolution  funds  to  ensure  that  future  bank  failures  are  not  at  the  cost  of  the  taxpayer  or 
destabilise  the  financial  system.  These  ideas  were  also  presented  at  the  G-20  Summit  in 
Toronto  on  26-27  June  2010.  On  the  10th  of  September  2010,  the  Commission  organised  a 
seminar  on  the  possibilities  for  decreasing  the  value  of  bank  liability  owners  (debt  write 
down) in the case of failing credit institutions. 

On the 20th of October 2010 the Commission issued a Communication on an EU framework 
for crisis management in the financial sector. The Communication detailed the key aspects of 
the  legal  framework  and  outlined  further  work  on  the  reform  of  insolvency  law  and  the 
resolution of cross-border groups. 

A  working  group  on  Early  Intervention  (EIWG)  was  set  up  in  November  2008  which 
comprised  of  experts  of  all  Member  States,  mostly  representing  Ministries  of  Finance.  The 
working  group  provided  important  insight  and  opinion  to  the  matters  under  examination. 
Experts commented in writing on the first Issues Paper that was circulated for consultation in 
January  2009.  EIWG  also  met  in  December  2010  where  the  Staff  Working  Document  for 
public  consultation  was  discussed.  Member  State  experts  clearly  support  the  Commission's 
work  on  early  intervention  and  bank  resolution,  considering  the  issues  to  be  of  high 
importance and priority. EIWG met two times in February 2011 where all aspects of the crisis 
management framework, based on the public consultation, was discussed. 

In  the  second  half  of  2008,  the  Committee  of  Banking  Supervisors  (CEBS)  conducted  a 
comprehensive survey among all banking supervisors in the EU and delivered its report to the 
Commission  in  March  200988.  The  report  summarises  the  objectives  and  powers,  including 
early  intervention  measures  and  sanctioning  powers  of  financial  supervisors.  The  report  is 
widely quoted in this impact assessment. 

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

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

88 

http://www.c-ebs.org/getdoc/f7a4d0f8-5147-4aa4-bb5b-28b0e56c1910/CEBS-2009-47-Final-(Report-on-Supervisory-Powers)-.aspx 

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An external legal consultant (DBB Law) was hired in August 2008 to support the work with 
key  inputs,  data  and  legal  analysis.  The  Consultant  summarised  the  legal  frameworks  of  16 
Member  States  regarding  early  intervention  possibilities  by  supervisors,  insolvency 
legislations for banks and banking groups, and special intervention possibilities by resolution 
authorities.  The  Consultant  delivered  its  interim  report  in  November  200889  and  its  final 
report in December 2009. 

In  May  2007,  a  public  consultation90  was  launched  to  seek  the  views  of  stakeholders  in 
relation  to  the  Directive  on  the  reorganisation  and  winding  up  of  credit  institutions 
(2001/24/EC).91  The  survey  respondents  broadly  supported  the  development  of  a  legal 
framework tailored to the winding up and re-organisation of cross-border banking groups. The 
consultation's result suggested that the current directive that deals with cross border branches 
might  need  also  some  adjustment  (e.g.  investment  firms  are  not  covered  by  the  directive, 
home-host  responsibilities  can  create  problems  in  managing  cross  border  branches:  to 
determine which should be the applicable law and responsible authority). 

The European Banking Federation92 (EBF) set up a special working group to support the work 
of the Commission and provided their views on early intervention and bank resolution. They 
delivered  their  draft  report  in  April  2009.  EBF  expressed  its  support  for  the  work  of  the 
Commission on early intervention aiming at enhancing the effectiveness of cross-border crisis 
management.  They  also  supported  actions  regarding  coordinated  approaches  in  groups’ 
insolvency.  EBF  called  for  a  clear  policy  around  the  different  stages  of  a  crisis:  who  the 
responsible competent authorities are and what tools are at their disposal at each stage. 

In February 2010 a call for experts in insolvency was issued and in May 2010 the Insolvency 
Law Expert Group (ILEG)93 was established in order to help the Commission Services in the 
field of re-organization, resolution and insolvency law in the banking and financial sector to 
assist in the preparatory work and development of an EU crisis management regime. The first 
meeting of ILEG took place on 14 July 2010, the second on 15 October 2010. 

The Group of Experts in Banking Issues (GEBI), which consists of bankers, consultants, trade 
union  and  consumer  representatives  and  industry  associations,  also  discussed  crisis 
management and bank resolution issues on its meeting in February 201194. 

On  October  2009,  the  Commission  Services  invited  views  in  response  to  its  public 
consultation  regarding  the  establishment  of  an  EU  framework  for  crisis  resolution  in  the 
banking sector. As part of the Consultation a Communication and a staff working document 
was issued. 

89 

90 

91 

92 

93  

http://ec.europa.eu/internal_market/bank/windingup/index_en.htm 

The  summary  of  the  main  findings can  be  found  in  Annex  IV.  All  consultations  documents  can  be  found  on  the  following  website: 
http://ec.europa.eu/internal_market/bank/windingup/index_en.htm 

See description of the Directive in Annex IV. 

Set  up  in  1960,  the  European  Banking  Federation  is  the  voice  of  the  European  banking  sector  (EU  &  EFTA  countries).  The  EBF 
represents  the  interests  of  some  5000  European  banks:  large  and  small,  wholesale  and  retail,  local  and  cross-border  financial 
institutions. www.fbe.be 

Information about ILEG can be found on the following website: 
http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm 

94   The presentation and minutes can be found on the following website: 

http://ec.europa.eu/internal_market/bank/group_of_experts/index_en.htm 

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On  6  January  2011,  a  public  consultation  was  launched  concerning  all  aspects  of  the  crisis 
management framework. Until 4 March 2011, more than 120 responses arrived from national 
supervisors, ministries, banks, federations, law firms etc. 

During  April  2012,  Commission  engaged  in  additional  discussion  with  key  stakeholders 
focused on the debt write-down/bail-in tool as part of the resolution tool-kit. Several meetings 
were  held  with  Member  States,  legal  experts  as  well  as  the  representatives  of  the  banking 
industry. In addition, Commission received around 60 written comments concerning the bail-
in tool and its key attributes. 

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ANNEX IV 

REGULATORY FRAMEWORK 

The  current  EU  financial  stability  framework  is  focused  on  ensuring  banks  are  adequately 
capitalised.  The  Capital  Requirements  Directive  (CRD)95  contains  provisions  aimed  at 
stabilising  capital  within  banks,  but  it  is  not  prescriptive  in  case  the  banks  fail  to  meet  the 
8%96 minimum capital threshold. The handling of situations when a bank does not meet the 
requirements of banking laws (8% CAR) but is still not insolvent is left to national legislation. 

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

The  CRD  also  establishes  rules  about  alerting  other  authorities97  (i.e.  Central  Banks  and 
Ministries  of  Finance)  in  emergency  situations,  requiring  coordination  of  supervisory 
activities and exchange of information in emergency situations98 among Member States.  

National banking legislations enable financial supervisors with different powers and tools to 
intervene at an early stage in the operation of a bank in a crisis situation.  

In  July  2008,  agreement  was  reached  on  an  EU  wide  Memorandum  of  Understanding 
('MoU')99  setting  out  cross-border  crisis  management  arrangements  and  involving  the 
commitment  of  all  signatories  (e.g.  EU  finance  ministries,  Central  Banks  and  supervisory 
authorities) to cooperate across borders between relevant authorities with a view to enhancing 
preparedness for the management of potential cross-border crisis situations. 

95  Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC on the capital 

adequacy of investment firms and credit institutions. 

96 

Capital Adequacy Ratio (CAR): bank's capital expressed as a percentage of its risk weighted assets. 

97  Article 130 CRD 

98  Article 129(1) CRD 

99  Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries 

of the European Union on Cross Border Stability (1 June 2008). 

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Relevant EU and national legislations and agreements 

EU Competence 

Directive/agreement 

Description 

Relevance for this topic 

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

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

requirements: 

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

supervision 

to 

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

implemented 

that 

establishes 

judicial  authorities  are 

the  home 
The  Directive 
administrative  or 
the 
empowered authorities to decide on reorganisation 
measures  and  winding-up  proceedings  for  credit 
institutions that operate branches in other Member 
States.  The  measures  are  governed  by  a  single 
bankruptcy law, that of the home state. It prohibits 
the application of separate insolvency measures to 
branches under the law of the host State. It ensures 
the  mutual  recognition  and  coordination  of 
procedures under home country control, imposes a 
single-entity approach by which all the assets and 
liabilities  of  the  'parent'  bank  and  its  foreign 
branches are reorganised or wound up as one legal 
entity  under,  subject  only  to  exceptions  specified 
in the Directive, the law of the home State.  

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

about 

alerting 

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

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

consolidation 
proceedings 
entities 

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

legal 

Directive on Deposit 
Guarantee Schemes 
(Directive 94/19/EC) 
amended  by 
Directive 2009/14/EC 
and Commission 
proposal 
COM(2010)368 

The Directive aims  at  safeguarding  deposits  from 
bank  customers.  Each  depositor  is  guaranteed  a 
protection of at least € 100,000 since 31 December 
2010.  Member  States  are  obliged  to  ensure  that 
banks  are  members  of  a  scheme.  The  schemes 
must  also  cover  depositors  at  branches  in  other 
Member  States.  The  latest  proposal  of  2010 
introduced  harmonised  rules  on  financing  of 
Deposit  Guarantee  Schemes  (DGS).  Under  the 
proposal banks will have to pay on regular basis to 
the  schemes  in  advance  and  such  'ex-ante  funds' 
will make up 75% of the overall funds in DGS. 

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

- 89 - 

 
 
 
 
Directive/policy 

Description 

Relevance for this topic 

EU Competence 

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

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

Memorandum of 
Understanding 2008 

Although not legally binding in nature, the MoU 
defines  procedures  for  the  involvement  of  all 
relevant parties in a crisis situation, based on the 
existing  legal  responsibilities  and  decentralised 
supervisory framework, and building on existing 
networks  of  authorities  (Domestic  Standing 
Groups, colleges of supervisors, and networks of 
Central  banks).  It  also  defines  coordination 
mechanisms, relying on a national coordinator in 
charge  of  actions  to  be  taken  at  a  national  level 
(who  may  vary  according  to  the  nature,  the 
characteristics  and  stages  of  the  crisis)  and 
Cross-Border Coordinator which, as a rule, is one 
of the authorities of the home country and should 
efficiently  use  internal  cooperation  mechanisms 
of the country. The MoU stipulates that sufficient 
cross-border procedures in normal times between 
all  relevant  authorities  are  to  be  put  in  place  to 
enhance 
tools  for  crisis 
management;  addressing  the  issues  of  burden 
sharing  between  home  and  host  countries;  and 
financial  crisis 
ensuring  preparedness 
situations. 

the  availability  of 

for 

Second Company Law 
Directive 77/91/EEC 

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

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

Directive 2011/35EC  

The Directive concerns mergers of public limited 
liability companies. 

Sixth Company Law 
Directive 82/891/EEC 

The  Directive  concerns  the  division  of  public 
limited liability companies. 

- 90 - 

Mandatory  requirements  on  the 
approval  of  the  merger  /  cross-
border  merger  /  division  by  the 
general  meeting  of  each  of  the 
each 
companies 
merging 
company involved in the division 
together  with  other  requirements 
imposed  by  the  directives  may 

/ 

 
 
 
 
 
hinder 
the  use  of  effective 
resolution  measures  in  an  ailing 
bank.  

Obligation  of  anybody  having 
acquired  control  of  a  public 
company  by  holding  a  specific 
percentage  of  shares  to  make  a 
mandatory  bid  for  the  remaining 
issued  shares  may  hinder  the  use 
of  effective  resolution  measures 
in an ailing bank.  

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

Public  support  must  be  analyzed 
in  the  light  of  state  aid  rules  in 
competition 
limit 
to 
order 
distortion. 

Directive 2005/56/EC  

The  Directive  concerns  cross-border  mergers  of 
limited liability companies.  

The  Directive  on  takeover  bids  provides  a 
general regime for takeover bids within the EU.  

Directive 2004/25/EC  

Directive 2007/36/EC 

DG Competition, 
State Aid policy 

in 

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

for 

the  criteria 

Since the beginning of the global financial crisis 
in the autumn of 2008, the Commission provided 
the 
detailed  guidance  on 
for 
compatibility  of  State  support 
to  financial 
institutions  with  the  requirements  of  Article 
107(3)(b) of the Treaty on the Functioning of the 
Commission  
European 
Communications  on  crisis-related  aid  to  banks, 
as  well  as  all  individual  decisions  on  aid 
measures and schemes falling within the scope of 
those  Communications,  are  adopted  on  the  legal 
basis  of  Article  107(3)(b)  of  the  Treaty,  which 
exceptionally allows for  aid to  remedy  a  serious 
disturbance in the economy of a Member State. 

Union. 

The 

 The Communications in question are:   

-the  Communication  on  the  application  of  State 
aid  rules  to  measures  taken  in  relation  to 
financial institutions in the context of the current 
global 
Banking 
Communication); 

financial 

crisis 

(the 

-  the  Communication  on  the  recapitalisation  of 
financial  institutions  in  the  current  financial 
crisis: limitation of aid to the minimum necessary 
and  safeguards  against  undue  distortions  of 
competition 
Recapitalisation 
Communication);  

(the 

treatment  of 

-the  Communication  from  the  Commission  on 
the 
the 
Community banking sector (the Impaired Assets 
Communication);  

impaired  assets 

in 

-the  Communication  on  the  return  to  viability 
and  the  assessment  of  restructuring  measures  in 
the financial sector in the current crisis under the 
State 
Restructuring 
rules 
aid 
Communication) and  

(the 

- 91 - 

 
 
 
 
-the  Communication  from  the  Commission  on 
the application, from 1 January 2011, of State aid 
rules  to  support  measures  in  favour  of  banks  in 
the  context  of  the  financial  crisis 
,  which 
extended the applicability of Article 107(3)(b) of 
the Treaty and the Restructuring Communication 
for  one  year  until  31  December  2011.  This 
extension  under  changed  conditions  should  also 
be seen in the context of a gradual transition to a 
more  permanent  regime  of  State  aid  guidelines 
for  the  rescue  and  restructuring  of  banks  based 
on Article 107(3)(c) of the Treaty which should, 
market  conditions  permitting,  apply  as  of  1 
January 2012.) 

National Competence 

Legislation 

Relevance for this topic 

Banking laws on 
powers of supervisors 

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

Insolvency laws 

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

Special bank 
resolutions laws 

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

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ANNEX V 

ON-GOING DEVELOPMENTS 

On  the  2nd  of  September  2010  the  European  Parliament,  the  Council  and  the  European 
Commission  reached  a  political  consensus  on  the  creation  of  new  financial  supervisory 
framework for Europe.  

Europe  has  three  new  European  Supervisory  Authorities  (ESAs)  for:  (i)  banking,  (ii) 
insurance  and  occupational  pensions  and  (iii)  securities.  These  Authorities  work  in  tandem 
with the existing national supervisory authorities to safeguard financial soundness at the level 
of  individual  financial  firms  and  protect  consumers  of  financial  services  ("micro-prudential 
supervision").  In  the  case  of  adverse  developments  which  may  seriously  jeopardise  the 
orderly functioning and integrity of financial markets or the stability of the whole or part of 
the financial system in the Union, EBA shall actively facilitate and coordinate any actions of 
national  supervisory  authorities.  Where  the  Council  has  adopted  a  decision  determining  the 
existence  of  an  emergency  situation  and  in  exceptional  circumstances  where  coordinated 
action  by  national  authorities  is  necessary,  EBA  may  adopt  individual  decisions  requiring 
supervisors  to  take  the  necessary  action  to  address  any  negative  developments.  Where  a 
competent  authority  does  not  comply  with  the  decision  of  EBA,  EBA  may,  under  certain 
conditions,  adopt  an  individual  decision  addressed  to  a  financial  institution  requiring  the 
necessary action to comply with its obligations. 

Moreover the European Systemic Risk Board (ESRB) was established which monitors and 
assesses potential threats to financial stability that arise from macro-economic developments 
and  from  developments  within  the  financial  system  as  a  whole  ("macro-prudential 
supervision").  To  this  end,  the  ESRB  would  provide  an  early  warning  of  system-wide  risks 
that may be building up and, where necessary, issue recommendations for action to deal with 
these  risks.  The  creation  of  the  ESRB  addresses  one  of  the  fundamental  weaknesses 
highlighted by the crisis, which is the vulnerability of the financial system to interconnected, 
complex, sectoral and cross-sectoral systemic risks. 

In  emergency  situations,  the  new  Authorities  have  an  important  co-ordinating  role  and  are 
able to adopt decisions requiring supervisors to take jointly action. An example of how this 
power  might  be  used  would  be  to  adopt  harmonised  bans  on  short  selling  on  EU  securities 
markets, rather than uncoordinated actions in different Member States, as witnessed over the 
past years. 

At international level, the G20 has been discussing crisis management and resolution among a 
host of other issues aimed at addressing shortcomings in the international financial regulatory 
system. 

A  number  of  work  streams  are  currently  underway  in  international  fora  to  address  one 
particular resolution measure, namely the possibility to write down the debt of banks (haircut 
of  creditors).  These  include,  in  particular,  the  work  of  the  Basel  Committee  on  Banking 
Supervision  on  capital  instruments  that  absorb  losses  at  the  point  of  non-viability,  and  the 
Financial  Stability  Board  (FSB)  work  stream  on  'bail-in'  in  the  context  of  improving  the 
resolvability  of  systemically  important  financial  institutions  (SIFIs).  The  FSB  has  been 
working on the issue of SIFIs, in particular on how to identify SIFIs and how to overcome the 
moral hazard of too big to fail institutions with implicit bail outs through public money. It is 
important that EU policy in this area should take proper account of the outcome of such work, 
and aim for international consistency as far as possible. 

- 93 - 

 
 
ANNEX VI 

DESCRIPTION AND ANALYSIS OF PROBLEM DRIVERS AND PROBLEMS 

Preparation and Prevention  

Driver: Lack of contingency planning by banks and authorities for crisis situations 

Problem:  Suboptimal  level  of  preparedness  of  supervisors  and  banks  for  potential  crisis 
situations 

Both  banks  and  supervisors  were  unprepared  for  the  crisis  situation  that  started  in  2008. 
Firstly,  as  regards  banks,  levels  of  contingency  planning  (recovery  plans100)  available  that 
would  have  helped  banks  to  decrease  the  risk  they  face  were  insufficient.  According  to  the 
Financial Supervisory Authority (FSA)101 in the UK, there was, for example, too little focus 
on  the  effects  of  ratings  downgrades  on  collateral  calls  and  on  the  availability  of  lines  of 
credit and too little attention was paid to core liquidity holdings. Banks did not know exactly 
what  assets  they  held  in  which  securities-depository  systems;  how  long  it  would  take  to 
deploy them; and which are eligible in which central banks’ routine facilities. Too few banks 
had that information readily to hand. 

Secondly,  as  regards  contingency  planning  carried  out  by  authorities  for  banking  failures 
(resolution plans102), it requires a lot of details on how a bank’s business is structured and run 
and  that  information  needs  to  be  available  for  authorities  at  an  early  stage.  The  lack  of 
resolution  planning  also  made  increasingly  likely  decisions  to  bail-out  several  banks  in 
Member States. Authorities did not only lack adequate tools for resolving banks but they were 
not prepared either to resolve complex entities in a sufficiently short period of time (due to the 
lack of information about their organisation), which is crucial in bank crisis situations. Thus 
large sums of taxpayer's money were rather used to keep banks running.  

Conceptually, recovery plans should make it less likely that a bank will require intervention, 
and resolution plans should lower the impact on society, if intervention is required. 

Driver: Lack of EU rules for intra group financial support 

Problem:  Suboptimal  level  of  preparedness  of  supervisors  and  banks  for  potential  crisis 
situations 

Currently, while supervisory authorities in all Member States have a power to limit or prohibit 
intra-group  transfers  and  transactions103,  no  framework  currently  exists  to  facilitate  (cross-
border)  intra-group  asset  transfers.  The  transfer  of  assets  (provision  of  loans  or  collateral) 
between different companies of the same group can be very useful in crisis situation, when it 
is difficult (high cost) or impossible to obtain financing on the markets. Asset transfers from 
one entity of a cross-border group to another are currently restricted by a number of different 
safeguarding provisions laid down by national laws. These provisions based on the principle 
of  the  separate  legal  personality  are  designed  to  protect  the  creditors  and  shareholders  of 

100   Recovery plans set out the arrangements that banks have in place or the measures that it would adopt to enable it to take early action to 
restore its long term viability in the event of a material deterioration of its financial situation in foreseeable and conceivable situations 
of financial stress. 

101   Paul Tucker: The crisis management menu; see on http://www.bis.org/review/r091118d.pdf 

102   A resolution plan sets out options for applying the resolution tools to the credit institution in a range of conceivable scenarios, including 

circumstances of systemic instability. 

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

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individual  entities  located  and  registered  in  the  given  country.  Only  in  few  national  legal 
systems the concept of group interest has been developed through jurisprudence104 and legal 
rules105. Instead of the immediate interest of each entity, this concept takes into account the 
indirect interest that  each entity affiliated  to  a group has in  the prosperity of the group as a 
whole. When this concept is applied it differs from country to country and consequently does 
not provide the necessary legal certainty. Lack of clarity and legal certainty detains companies 
within a group from supporting each other in case of financial distress. A clarification of the 
circumstances  and  conditions  under  which  financial  support  could  be  mutually  provided 
among entities of a banking group would therefore be useful in the phase of early intervention 
in crisis management. 

The  main  legal  problem  with  the  transfer  of  assets106  from  subsidiaries  to  parents  or  other 
affiliates  within  a  financial  group  in  a  financial  crisis  scenario  is  that  national  legal 
frameworks are oriented towards the stability of each separate legal entity within a financial 
group. The interest of a foreign parent undertaking and/or other companies belonging to the 
same  group  find  less  (if  any)  consideration,  with  the  competent  national  authorities  legally 
bound  to  act  in  the  interest  of  the  domestic  legal  entity  which,  in  particular  cases,  may  be 
contrary to the interest of the group as a whole. In the case of cross border branches, the asset 
transfer is however less problematic since they are part of the same legal entity. 

First,  under  banking  law,  intra-group  transfers  may  be  capable  of  triggering  supervisory 
actions  according  to  the  national  mandates  of  the  competent  supervisory  authorities. 
Supervisors must indeed safeguard the financial soundness of banks in their jurisdiction. This 
results  in  ring  fencing107  of  a  local  bank's  assets.  An  intra-group  transfer  of  assets  is  also 
normally considered to be a transaction with a connected party which is subject to additional 
regulatory conditions, e.g. application of the principles of arm's length dealing. Additionally, 
supervisory authorities have the duty to impose any relevant corrective measure on supervised 
subsidiaries  or  affiliates  of  foreign  credit  institutions  to  ensure  that  they  comply  with 
regulatory requirements, including the duty to prevent or challenge a potentially detrimental 
action. 

Second,  under  company  law,  the  influence  and  liability  of  a  parent  company  over  its 
subsidiary  is  usually  limited,  and  the  group-wide  interest  cannot  prevail  to  the  detriment  of 
the subsidiary or has to be balanced by appropriate compensation to the subsidiary. The board 
of directors' fiduciary duties and duty of loyalty are usually to the individual company, rather 
than the group as a whole. Depending on the relevant State, company laws differ on the extent 
to which parent companies may instruct their subsidiaries to engage in certain transactions108.  

Third,  adverse  tax  implications  can  be  expected  in  many  cases.  In  regard  to  intra-group 
transfers of funds, not all Member States allow the transferor to deduct the sums in question 
from  his  taxable  base.  Moreover,  even  Member  States  that  allow  such  deduction  in  purely 

104  For instance in France,  Cour de Cassation Criminelle 4 fèv. 1985, Rozenblum, Rev. Soc. 1985, p. 665.  

105  For instance, the German Companies Act (Aktiengesetz) of 6 September 1965 

106 

In  the  public  consultation  launched  by  the  European  Commission  in  May  2007  on  the  reorganisation  and  winding-up  of  credit 
institutions,  21  respondents  against  2  confirmed  that  asset  transferability  in  a  crisis  situation  was  critical  for  both  host  and  home 
countries:  European  Commission,  Summary  of  the  public  consultation  on  the  reorganisation  and  winding-up  of  credit  institutions, 
December 2007. 

107   Prohibiting the transfer of assets from that jurisdiction to others. 

108 

In Germany, a majority owned enterprise is presumed to be controlled by the enterprise with a majority shareholding in it (Section 17, 
§2 of the German Stock Corporation Act).  In the absence of a control agreement, the dominant company may not cause the controlled 
stock corporation or association limited by shares (“Kommanditgesellschaft auf Aktien”) to enter into transactions or arrangements that 
are  detrimental  to  it,  except  the  dominant  company  provides  compensation  for  the  resulting  disadvantages  (Sec.  311    seq.  AktG; 
liability in case of omission: Sec. 317; 318 AktG).  

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domestic cases are not obliged to extend this treatment to cross-border (outbound) intra-group 
transfers.109. 

Fourth, under insolvency law, some transfers of assets executed in a suspect period110 before 
the opening of the insolvency proceedings of the transferor might be latter found retroactively 
void or ineffective vis-à-vis other creditors111(claw-back rules). 

As a consequence, cross-border banking groups are unable to mobilise available assets in one 
part of the group in support of another part of the group which may be encountering liquidity 
shortfalls. 

Driver: Too large, too interconnected and too complex banks to fail 

Problem: Irresolvable banking operations and structures 

During the financial crisis it became inevitable that not only the "too big to fail" ("TBTF") but 
also  the  "too  complex  to  resolve"  "too  inter-connected  to  fail"  approach  contributed  to  the 
moral hazard of large complex institutions. If banks seem non-resolvable in a timely manner 
by authorities and if their failure might have systemic implications, decision makers would go 
down the route of bail-out rather than risk a resolution. This was evidenced during the crisis 
in several instances. In September 2008, the US authorities concluded that AIG was too big 
and too inter-connected to be allowed to fail due to its huge volume of outstanding derivative 
contracts  with  a  wide  range  of  counterparties.  Based  on  the  same  considerations,  several 
banks were bailed out in the UK, Germany, Belgium, and Ireland.  

As  regards  their  size,  EU-headquartered  banks  are  comparatively  larger  than  their  US 
counterparts,  especially  when  measured  by  assets.  International  Financial  Services  London 
research112  reports  that  of  the  worldwide  assets  of  the  1,000  largest  banks  in  2008–09,  EU 
banks had the largest share at 56 percent versus 13 percent for US banks and 14 percent for 
Asian banks. In terms of assets to home country GDP, the largest EU banks are much larger, 
and thus even more likely to be considered TBTF, than their largest US counterparts. 

109   Cf. Case C-231/05 Oy AA [2007] ECR I-6373. 

110   See  e.g.  Belgian  insolvency  law  (art.  17,  3°  of  the  law  of  8  August  1997  relating  to  bankruptcy),  according  to  which  the  collateral 
securities granted during the "période suspecte" relating to a previous debt are ineffective. The "période suspecte" starts at a date fixed 
by the Tribunal de Commerce which corresponds to the moment when the insolvent was not yet able to pay its debts (this date being at 
the earliest 6 months before the judgment pronouncing the bankruptcy). 

111   However, if the collateral was given by a credit institution to another credit institution that are participants into a system - according to 
the definition given by the Settlement Finality Directive (SFD) - or to a central bank, Article 9,1 of the Settlement Finality Directive 
98/26/EC provides that the security right cannot be challenged. The question if Article 9,1 SFD applies to collateral provided by a third 
party  (e.g. a subsidiary for the debts of the parent company) is nevertheless controversial.  

112   Source:  Too  Big 

to  Fail:  The  Transatlantic  Debate,  Morris  Goldstein 

and  Nicolas  Véron, 

January  2011, 

http://www.iie.com/publications/wp/wp11-2.pdf 

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Combined assets of the largest three and five banks compared to GDP113 

Source: Bank for International Settlements 

Another  aspect  is  the  complexity  of  financial  institutions.  Due  to  the  non-transparent 
extensive  trading  activity  and  the  large  number  of  group  entities,  the  winding  down  of  the 
Lehman brothers is estimated to take more than ten years114. The complex corporate structure 
of  Lehman  Brothers,  which  substantially  hinders  its  on-going  liquidation,  can  be  found  in 
Annex VIII. 

The importance of inter-connectedness via trading relationships has hugely increased over the 
last  ten  to  fifteen  years.  The  soaring  total  volume  of  OTC  derivative  contracts  is  a  good 
indicator  for  the  high  interconnectedness  and  interdependence  of  banks,  which  is  a  major 
source of contagion (see next chart).  

OTC derivative volume by product type115 

Source: ISDA 

Although  Article  136  of  the  CRD  provides  supervisors  with  the  possibility  of  restricting  or 
limiting  the  business,  operation  or  network  of  banks,  in  case  of  non-compliance  with  the 
CRD, in contrast, resolution authorities do not have similar powers. Even if certain banks are 
too complex or interrelated to undergo a resolution process, should they get close to failure, 

113   Source:  Too  Big 

to  Fail:  The  Transatlantic  Debate,  Morris  Goldstein 

and  Nicolas  Véron, 

January  2011, 

http://www.iie.com/publications/wp/wp11-2.pdf 

114   “Based on industry experience, including cases like Polly Peck, Enron and [Robert] Maxwell, it could take a decade or more to close 
this administration, not least because it threatens to become bigger and more complex that any of these previous cases,” Tony Lomas, 
chairman of business restructuring at PwC, source: http://app1.hkicpa.org.hk/APLUS/0811/Institute_news.pdf 

115   Source: Turner Review Conference Discussion Paper, October 2009; see: http://www.fsa.gov.uk/pubs/discussion/dp09_04.pdf 

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currently  it  is  not  possible  to  force  banks  to  reduce  such  impediments.  If  managers  and 
shareholders  are  aware  that  their  bank  cannot  undergo  a  resolution  (too  big  or  complex  to 
fail),  where  they  lose  their  control  and  ownership  over  a  bank,  their  approach  towards 
excessive risk taking (moral hazard) will not change. 

Early intervention  

Driver: Divergence and lack of effective early intervention triggers for supervisors 

Problem: Sub-optimal early intervention arrangements for supervisors 

All  Member  States  operate  some  form  of  pre-intervention  mechanism  in  order  to  handle  a 
crisis in an ailing bank. Divergence in national approaches to early intervention arises in all 
phases  of  the  process.  Early  warning  indicators  and  their  threshold  levels  that  prompt 
supervisors to take appropriate measures vary across Member States as they are embedded in 
the Pillar 2 process. In this regard, CEBS116 has observed that currently there is no minimal 
common set of early warning indicators and no commonly agreed definition for each of them.  

Effective prevention of crisis situations is conditional on accurate and early detection of stress 
situations.  Results  of  a  CEBS  survey  shows  that  only  a  few  Member  States'  domestic  legal 
frameworks  specify  triggers  that  lead  to  automatic  corrective  action,  which  means  that 
supervisors  are  obliged  to  act  if  an  indicator  hits  a  threshold.117  However,  CEBS 
acknowledges  that  such  threshold  levels  for  above  indicators  are  too  low  for  remedial 
measures to be considered true early intervention measures and supervisory action will need 
to be taken long before the situation of an individual institution deteriorates to such a level.  

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

More specifically, the crisis has demonstrated that current approaches focus too narrowly on 
capital ratios118 while underestimating the effects of leverage and liquidity on the 'soundness' 
of an institution as perceived by market participants. In this regard, the predictive power of 
certain  market-based  indicators  has  not  been  given  due  attention.  The  amendments  of  the 
CRD (CRD 2 ,3 and 4), which require banks to hold better quality and more capital and fulfil 
liquidity requirements will substantially reduce the risks at banks. The application of the new 
rules for prompting early intervention measures however remains unsolved. 

116   CEBS,  Mapping  of  supervisory  objectives and  powers,  including  early  intervention  measures  and  sanctioning  powers,  January  2009 
http://www.c-ebs.org/getdoc/f7a4d0f8-5147-4aa4-bb5b-28b0e56c1910/CEBS-2009-47-Final-(Report-on-Supervisory-Powers)-.aspx

117  For instance, in Czech Republic, the supervisory authority must impose remedial measures (e.g. capital increase, acquisition of assets 
having a risk weighting of less than 100%, prohibition to acquire any interest in any other legal entity, prohibition to grant a loan to a 
person  having  a  special  relation  with  the  institution)  if  it  becomes  aware  that  an  institution's  capital  is  lower  than  two  thirds  of  the 
minimum required capital; in Hungary, the supervisory authority shall use corrective measures if the own funds are less than 75% or 
less  than  50%  of  the  capital  requirements;  while  in  Slovakia,  the  supervisory  authority  shall  place  a  credit  institution  under  forced 
administration if the own funds of the institution concerned fall below 50% of the minimum requirement. 

118   Tier 1 capital ratio (ratio of a bank's core equity capital to its total risk-weighted asset) at Fortis, Dexia and Hypo Real Estate Holding 
were  at  9.1%,  11.3%  and  8.6%,  respectively,  at  the  time  when  their  share  price  was  experiencing  a  precipitous  decline,  eventually 
prompting national governments to take action in late September 2008. 

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Driver: Divergence and lack of effective early intervention tools for supervisors 

Problem: Sub-optimal early intervention arrangements for supervisors 

With regard to the toolkit of early intervention measures and powers available to supervisors, 
Article 136 of the CRD already specifies some of these. It stipulates that in order to address a 
distress situation at an early stage, supervisory authorities should be able to require banks to 
hold  additional  capital,  improve  governance,  systems  and  internal  control  arrangements, 
increase  reserves,  limit  business  operations  and  risk  exposures  stemming  therefrom.  The 
stocktaking of supervisory objectives and powers conducted by CEBS119 revealed that several 
Member  States  implemented  this  Article  differently,  hence  supervisory  authorities  have 
slightly  different  tools,  and  that  a  number  of  authorities  lacked  certain  powers.  Further 
convergence  might  be  needed  in  this  respect  if  such  differences  have  the  potential  to 
complicate cross-border cooperation between authorities.  

In order to intervene effectively and promptly to restore the soundness of a bank, supervisors 
might  also  need  to  resort  to  additional  domestic  measures  that  go  beyond  the  legal 
requirements of the EU legislation. However, a number of supervisors either cannot achieve 
certain measures through general powers or do not have access to the same specific powers 
that are available to the supervisory authorities in other Member States (see next Chart).  

Supervisory authorities' access to selected powers and measures 

Source: CEBS 

Given that a speedy action is often critically important to the survival of an institution and to 
the  ability  for  supervisors  to  minimise  costs  associated  with  its  failure120,  differences  in 
national pre-intervention approaches have the potential to complicate or impair efficient and 
coordinated cross-border crisis handling. 

Driver: Too long time required to increase capital in emergency situation 

Problem: Sub-optimal early intervention arrangements for supervisors 

In the early intervention phase, the shareholders' rights as guaranteed by the EU legislation, 
apply. However, there may be a need to create a mechanism for a rapid increase of capital in 
the early intervention phase for emergency situations when the credit institution does not meet 

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

120  This was particularly evident during the resolution of Fortis. 

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or  is  likely  not  to  meet  the  requirements  of  the  Capital  Requirements  Directive  and  an 
increase of capital is likely to restore the financial situation and avoid a resolution.  

Article 25.1 of the Second Company Law Directive requires that any increase in capital in a 
public limited liability company must be decided upon by the general meeting. This applies to 
the  issue  of  all  securities  which  are  convertible  into  shares  or  which  carry  the  right  to 
subscribe  for  shares.  Following  the  rules  of  the  Shareholders'  Rights  Directive,  in  listed 
companies this meeting has to be convened at least 21 days before the meeting. Restoring the 
financial situation of a credit institution rapidly by means of capital increase in an emergency 
situation is therefore not possible.  

Bank resolution  

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

Driver: Divergence and lack of resolution triggers 

Problem: Inefficient bank resolution process and suboptimal outcomes  

A  study  carried  out  on  behalf  of  the  Commission  services121  present  the  differences  in 
national systems in this regard. Not all Member State authorities have the power to intervene, 
stabilise and reorganise an ailing bank at an early stage before the formal point of insolvency 
is  reached.  Where  it  is  possible  (UK,  Italy,  France)  the  responsibility  to  judge  the  crisis 
situation is entrusted to the supervisory authorities which can have a relatively large room for 
manoeuvre. 

In Italy a special administration can be implemented in the case of illiquidity of solvent banks, 
whose  "serious  crisis  situation"  poses  a  threat  to  the  stability  of  the  financial  system.  In 
France,  the  Banking  Commission  may  appoint  a  provisional  administrator  to  a  credit 
institution,  if  the  management  of  the  institution  can  no  longer  be  carried  out  in  normal 
conditions. In the UK, a special resolution regime can be implemented if the bank is failing, 
or is likely to fail and if it is not reasonably likely that action will be taken by or in respect of 
the bank that will enable the bank to satisfy the threshold conditions. 

The  lack  of  clearly  defined  triggering  mechanism  makes  resolution  problematical.  If 
authorities can not intervene at an early enough point in time, administrative resolution may 
not  be  possible  to  carry  out  any  more  and  expensive  bail  outs  or  liquidation  can  just  be 
implemented. The lack of legal clarity around the triggering mechanism can delay or obstruct 

121  DBB Law "Study on the feasibility of reducing obstacles to the transfer of assets within a cross border banking group during a financial 

crisis and of establishing a legal framework for the reorganisation and winding-up of cross border banking groups", 2009. 

 http://ec.europa.eu/internal_market/bank/windingup/index_en.htm 

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resolution measures, which again could lead to much higher cost for stakeholders and society 
as a whole. 

Diverging  threshold  conditions  in  Member  States  for  bank  resolution  may  also  prevent 
coordinated action at cross border level. The diverging conditions for prompting resolutions 
may  reduce  the  chances  of  immediate  actions  at  group  level,  and  thus  favour  national 
solutions. 

Driver: Divergence and lack of resolution tools and powers  

Problem: Inefficient bank resolution process and suboptimal outcomes  

The  study  of  DBB  Law  (see  above)  also  describes  the  extent  to  which  Member  States' 
arrangements differ: they are based on different approaches, pursue different goals and have 
been  designed  to  fit  with  the  different  wider  legal  systems  of  each  country  (e.g.  provisions 
governing areas such as commercial and contract law, ownership law, labour law, netting and 
set-off,122 tax law, etc.).  

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

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

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

conversion 

–  assets sales 

–  closure of non-viable part of the business 

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

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

–  “Good-Bank/Bad-Bank”  separation  and  bridge  banks123  (selling  of  non-performing  loans 
and other substandard assets for collection or transferring viable assets to a newly set up 
bank) 

–  Nationalisation. 

In  the  EU,  only  the  UK  Banking  Act  2009124  explicitly  lists  specific  bank  restructuring 
techniques  which  can  be  applied  by  the  authorities  without  the  consent  of  the  shareholders 
under  the  Special  Resolution  Regime.  In  other  Member  States,  although  specific  tools  may 
not  be  explicitly  prescribed  in  the  legislation,  specific  restructuring  techniques  may  also  be 
available either under administrative or judicial proceedings applied to banks.  

122  See Glossary in Annex I. 

123  See Glossary in Annex I. 

124 

http://www.opsi.gov.uk/acts/acts2009/pdf/ukpga_20090001_en.pdf 

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

–  In  France,  the  provisional  administrator  nominated  by  the  banking  supervisor  may 
conclude  transactions  in  the  ordinary  course  of  business.  However  a  more  intrusive 
intervention entailing a transfer of shares without the shareholders’ authorisation, requires 
the  administrator  to  obtain  a  court  order.  Settlements  with  creditors  may  be  achieved 
through  various  types  of  proceedings  at  the  initiative  of  the  debtor125.  Specific  bank  re-
structuring techniques may only be used under an insolvency proceeding.  

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

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

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

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

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

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

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

125  For instance, France has three types of proceedings provided by the commercial code and applicable to banks, aimed at a settlement 

with creditors: the "ad hoc mandate", the composition procedure and safeguard procedure.  

- 102 - 

 
 
                                                 
Member States and demonstrate how damaging the absence of adequate EU arrangements can 
be.  

Resolution tools that can be applied with high effectiveness for small or mid-sized banks may 
not be adequate for large or systemically important banks. Resolution powers to tackle such 
banks are missing in almost all Member States. 

The examples (Fortis, Lehman, Icelandic banks) listed in Annex VI also show how diverging 
and lacking tools can undermine optimal results.  

Driver: Legal obstacles to effective and efficient bank resolution 

Problems: Lack of legal certainty in bank resolution and inefficient bank resolutions process 
and suboptimal outcomes. 

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

The financial crisis has shown that interventions by public authorities to ailing banks need to 
be implemented in a very short period of time (within 24-72 hours). If interventions need to 
be delayed due to constraints in the legislation (e.g. need to obtain shareholders’ approval at a 
general meeting) there is a risk that banks might already fail before the necessary procedures 
have been complied with126. Banks, and especially large systematically important banks, are 
susceptible  to  bank-runs,  and  the  in  view  of  the  degree  of  interconnectedness  of  financial 
markets, the knock-on effects could lead to the collapse of other institutions and hence to a 
general  banking  crisis.  Public  authorities  and  many  analysts127  argue  that  due  to  the  special 
nature and high importance of the banking sector in the broader economy, financial stability 
must  take  precedence  over  shareholders'  rights  in  such  situations128.  There  needs  to  be  a 
balance found between shareholders' right and the common interest of financial stability. The 
Fortis  case  has  demonstrated  that  resolution-measures  of  authorities  can  be  attacked  by 
shareholders through courts and in the absence of a clear legal framework they can be ruled 
retroactively void. 

The EU Company Law Directives contain mandatory rules for the protection of shareholders 
and  creditors.  Some  of  these  rules  relating  especially  to  the  shareholders'  decision  making 
powers in the public limited liability companies and shareholders' participatory rights in the 
listed  companies  may  hinder  rapid  actions  by  the  resolution  authorities  in  a  crisis  situation. 
Without  modifications  to  the  Company  Law  Directives,  increase  and  decrease  of  capital, 
mergers and divisions are all subject to shareholders' agreement. Furthermore, whenever the 
capital  is  increased  by  consideration  in  cash,  the  shares  must  be  offered  on  a  pre-emptive 
basis  to  shareholders  in  proportion  to  the  capital  represented  by  their  shares.  Shareholders' 
meeting in listed companies normally has to be convened at least 21 days before the meeting. 
Moreover, the takeover bids directive regulates that any person who acquires shares in a listed 
company above the control threshold  (set by Member States, usually 30-50%)  must make a 

126  Convocation of the general meeting of a company shall be issued not later than on the 21st day before the day of the meeting 

127  E.g.: An Overview of the Legal, Institutional, and Regulatory Framework for Bank Insolvency, Staff of IMF and World Bank, April 17, 

2009. 

128 

If the bank fails and undergo an insolvency proceeding, shareholders would immediately loose their rights in any case. In a situation 
when banks need public intervention, they are technically insolvent (imminent insolvency). 

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mandatory bid for all other shares of the company, in order to protect minority shareholders in 
case of change of control. The Directive also applies when control is acquired by the State.  
The mandatory bid rule may cause a burden for the acquiring party in the resolution phase. 
Furthermore there may be national company law rules not harmonised by the EU law that can 
hinder the use of resolution powers. Example of this is a rule that the transfer of significant 
part of company's asset should be decided by the general meeting.  

In  addition,  different  national  resolution  or  insolvency  systems  would  probably  have 
encounter difficulties to cooperate. Any reorganisation or liquidation would necessarily be 
carried  out  in  accordance  with  national  insolvency  procedures.  Hence,  certain  targeted 
modifications  to  national  insolvency  regimes  may  be  necessary  to  ensure  a  smooth 
resolution process. It should be ensured for instance that bank resolution proceedings take 
precedence  over  ordinary  corporate  bankruptcy  proceedings.  This  could  be  achieved  by 
making the filing of applications for bankruptcy against credit institutions subjected to the 
previous authorization of the supervisor. Appropriate rules should also ensure that when a 
part of a bank's business is transferred to a bridge bank, the residual part of the bank which 
undergoes  liquidation  is  permitted  under  national  bankruptcy  law,  to  continue  to  operate 
and provide services to the bridge bank, to the extent and for the time necessary to ensure 
the continuation of essential functions. 

Driver: Lack of authorities responsible for bank resolution 

Problem: Suboptimal level of cooperation between authorities responsible for bank resolution 

As  bank  resolution  frameworks  are  missing  in  many  Member  States,  the  authorities 
responsible  for  special  bank  resolution  are  not  defined  either.  Resolution  authorities  are 
national  authorities  that  apply  the  resolution  tools  and  exercise  the  powers.  Resolution 
authorities  should  have  the  expertise,  resources,  operational  capacity  and  independence  to 
implement resolution measures, and be able to exercise their resolution power with the speed 
and  flexibility  that  is  necessary  to  achieve  the  resolution  objectives.  In  contrast  with  early 
intervention,  bank  resolution  is  not  necessarily  managed  by  banking  supervisors;  and  for 
various reasons they may not be best placed for this, either. This task can be fulfilled by the 
Central Bank, the Deposit Guarantee Scheme, the ministry of finance or by other bodies. 

The  lack  of  attribution  of  resolution  task  to  a  certain  authority  in  all  Member  states  makes 
cross  border  cooperation  more  difficult,  too.  Even  though  the  2008  Memorandum  of 
Understanding  ('MoU')129  set  up  cross  border  stability  groups  (comprising  of  supervisors, 
central banks and  ministries  of  finance), in practice these groups never worked even during 
the crisis.  

In order to ensure that resolution tools are applied effectively, the power to make decision in 
bank  resolution  need  to  be  attributed  to  a  specific  authority  in  each  Member  State.  The 
nomination of a single authority responsible for bank resolution could notably facilitate cross 
border  cooperation,  where  authorities  with  similar  powers  could  manage  the  resolution  of  a 
group together. 

129  Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries 

of the European Union on Cross Border Stability (1 June 2008). 

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International cooperation 
The  de  Larosière  report130  concluded  that:  "The  regulatory  response  to  this  worsening 
situation was weakened by an inadequate crisis management infrastructure in the EU, both in 
terms  of  the  cooperation  between  national  supervisors  and  between  public  authorities." 
"These [crisis management] actions, given the speed of events, for obvious reasons were not 
fully coordinated and led sometimes to negative spill-over effects on other Member States." 

"Existing  supervisory  arrangements  proved  incapable  of  adequately  preventing,  managing 
and resolving the financial crisis. Nationally-based supervisory models had lagged behind the 
integrated and interconnected reality of today's European financial markets, in which many 
financial firms operate across borders. The crisis exposed serious failings in the cooperation, 
coordination, consistency and trust between national supervisors." 

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

Problem:  Sub-optimal  level  of  supervisory  cooperation  impairing  the  effectiveness  of 
supervisory intervention in crisis situation of cross border banks 

As  a  result  of  industry  consolidation  over  the  recent  years,  large  cross-border  banks  now 
dominate the European banking landscape. Given the degree of banking market integration, it 
has been argued for some time that the key hurdle in developing a functional and effective EU 
financial  stability  framework  is  rooted  in  the  fact  that  fiduciary  responsibilities  of  national 
authorities  are  towards  national  governments  limiting  their  incentives  to  work  towards  a 
common  EU  stability  framework131.  Before  the  crisis,  national  authorities  were  reluctant  to 
develop  commonly  binding  EU  principles  and  procedures  for  cross-border  financial  crisis 
prevention  and  resolution  and  often  resorted  to  introducing  their  own  national  legislation to 
achieve  home  Member  State-oriented  objectives.  As  a  result,  the  behaviour  during  the 
financial crisis has tended to be nationally focused.  

Recent changes to the legislative framework have resulted in some important progress to put 
in  place  cooperation  arrangements  aimed  at  enhancing  EU-wide  financial  stability.  The 
CRD132  already  requires 
in  gathering  and 
dissemination  of  relevant  information  and,  more  generally,  coordinate  their  supervisory 
activities  in  both  going  concern  and  emergency  situations.  However,  the  Directive  does  not 
specify  how  joint  assessment  should  be  conducted.  If  national  law  or  national  supervisors 
interpret  conditions  differently, coordinated  action  by  supervisors  of  different  group  entities 
might be difficult. 

that  supervisory  authorities  coordinate 

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

Problem: Suboptimal level of cooperation between authorities responsible for bank resolution 

Resolution  measures  that  concentrate  only  on  one  entity,  without  taking  into  account  the 
interests of the broader group, risk the possibility of value loss for certain parts of the group. 

130   The high level group on financial supervision in the EU – Report, 25 February 2009;  

http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf 

131 

IMF Country Reports No. 07/260, July 2007, and No.08/262, August 2008 

132  Article 129 (1) 

- 105 - 

 
 
                                                 
The value of synergy, goodwill and certain immaterial assets could decrease leaving creditors 
and  shareholders  with  lower  collateral  against  their  claims.  Disruption  of  information 
technology  systems  and  business  procedures  integrated  at  group  level  could  seriously  block 
the operation of different legal entities in the same group. 

At EU level and in most of the Member States' company laws, there is no concept of 'group 
interest’  which  might  otherwise  facilitate  the  resolution  of  cross-border  banking  groups.  As 
the legal basis of group treatment is missing, it is very problematic to handle banking groups 
as a single economic entity during a resolution. Such limitations might undermine a universal 
approach which has the potential to reach a more optimal result at EU level. 

Despite  the  agreement  of  July  2008  on  an  EU  wide  MoU  setting  out  cross-border  crisis 
management  arrangements,  as  mentioned  above,  events  have  highlighted  the  limits  of  a 
framework  based  on  voluntary  cooperation  between  national  authorities.  There  has  been 
inadequate transmission of information to other interested parties in other Member States and 
the  agreement  to  open,  full,  constructive  and  timely  cooperation  is  weakened  by  a  legal 
framework that militates towards national approaches. In times of crisis, national interest has 
proved much stronger than the broader general interest.  

Different  insolvency  procedures  are  also  a  significant  obstacle  to  the  ability  of,  or  the 
incentives  for,  Member  States  to  adopt  resolution  measures  in  respect  of  a  cross-border 
banking group. Any reorganisation or liquidation will necessarily be carried out in accordance 
with  national  insolvency  procedures,  and  any  coordination  must  be  based  on  the  voluntary 
cooperation between different national insolvency authorities and officers. 

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

Financing of resolution 

Driver: Lack of arrangements for financing resolution from private sources in most Member 
States 

Problem: Use of public funds in crisis situation  

The  financial  crisis  was  of  such  severity  that  Member  States  needed  to  take  exceptional 
measures, such as capital injections and guarantees of banks' debt, to protect financial stability 
and  to  combat  the  economic  downturn.133  As  effective  arrangements  for  financing  crisis 
management were missing in almost all Member States, the massive use of taxpayers' money 
was unavoidable. In a number of countries,  this  has  notably increased government debt and 
sovereign risk. At the time of the crisis, no special fund existed in the EU or in Member States 
which would be tasked to finance the cost of bank resolution. 

133  Such measures have been assessed under the EU rules on state aid. 

- 106 - 

 
 
                                                 
Driver: Diverging national policies concerning financing of crisis situations (where available) 

Problem:  National  systems  not  calibrated  to  ensure  an  optimal  and  level  protection  of 
financial stability across Member States (cumulatively with other prudential measures) 

In  certain  Member  States,  funds  of  the  deposit  guarantee  scheme  (DGS)  could  and  can  be 
used  not  only  to  pay  out  depositors  when  a  bank  fails  but  also  to  finance  restructuring, 
reorganisation of an ailing bank. Currently, in 11 Member States DGS have varying powers 
beyond  the  mere  pay-out  of  depositors  ('pay  box'  function)  such  as  liquidity  support, 
restructuring  support  or  liquidation  role  Such  transactions  may  be  rational  if  the  cost  of 
financing - taking into account the probability of successful reorganisation - is smaller for the 
DGS than the total pay-out to all depositors of the same bank in the event of bankruptcy. The 
2010  Commission  proposal134  to  amend  the  DGS  Directive  proposes  to  allow,  at  the 
discretion of Member States, all DGS to also be able to finance resolution measures135. 

Recently  a  number  of  Member  States  have  introduced  bank  levies  (that  is  transferred  to  a 
special  fund)  or  bank  taxes  (ending  up  in  the  public  general  budget).  They  differ  across 
Member  States  in  many  aspects.  Some  of  them  use  the  raised  funds  for  general  budgetary 
expenditures (e.g. UK), while others set them aside in a special fund (e.g. Germany, Sweden), 
which  can  only  finance  specific  purposes.  There  are  also  important  differences  in  the 
calibration of the levies/taxes: the method of calculation, the rate and the base. A further key 
difference is the scope of the levy/taxes: some Member States impose the levy only on credit 
institutions  while  others  on  other  segments  of  the  financial  sector  too.  For  further  details 
please see the table below and Annex IX. However, it should be noted that any provision of 
financing  in  support  of  resolution  must  comply  with  the  EU  Treaty  in  particular,  with  the 
State aid framework where it involves the use of state resources and where an advantage that 
could  distort  competition  and  effect  intra  EU  trade  is  provided  to  an  economic  entity  that 
continues to operate in the market even in a limited way. 

134   On  12  July  2010,  the  Commission  adopted  a  legislative  proposal  for  a  thorough  revision  of  the  Directive  on  Deposit  Guarantee 
Schemes. It mainly deals with a harmonisation and simplification of protected deposits, a faster pay-out, and an improved financing of 
schemes. The proposal was under negotiation in the European Council and Parliament at the time of drafting this impact assessment. 
Further information can be found on the following website: 

http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm 

135  

It is possible under the safeguard that the use of DGS funds is permitted for bank resolution only up to the amount that would have been 
necessary to pay out covered deposits in the even of a bank failure. 

- 107 - 

 
 
 
                                                 
Scope of systems of levies and taxes across Member States136 

Scope 

Domestically 

Parent 

Foreign 
subsidia
ries 

Branches of 
foreign banks 
EU 
Non-EU 

Abroad 

Parent’s 

subsidi
aries 

branches 

BE
137 

DE 
FR 
CY 

AT
139 
PT 
DK 
HU 

SE 

UK 

All Banks 
Stock-broking firms 
Life insurance Companies 
All banks 
All banks138 
Banks 
CCI's 
All banks (above 1 bn of 
liabilities) 
Credit Institutions 
All banks 
Credit institutions, 
Insurers, Other financial 
organizations  
All banks, Other credit 
institutions 
Banks with aggregate 
liabilities above £20 bn  

X 
X 
X 
X 
X 
X 
X 
X 

X 
X 
X 

X 

X 

X 
X 
X 
X 
X 
X 
X 
X 

X 
X 
X 

X 

X 

X 

X 

X 
X 
X 

X 

X 

X 

X 

X 

X 

X 

X 
X 
X 
X 
X 
X 
X 
X 

X 
X 
X 

X 

X 

Destination 
of 
levies/taxes 

Treasury 

Banking fund 
Treasury 
Treasury 

Treasury 

Treasury 
Banking fund 
Treasury 

Banking 
fund140 
Treasury 

Levies/taxes that have been recently introduced by Member States, while suitable for national 
purposes, are unlikely to be calibrated in an optimal way for Europe as a whole. First of all, 
they  might  not  take  into  account  how  bank  regulatory  capital  requirements  reduce  residual 
risk in the financial system and in particular the effects of Basel III in that respect. Second, 
they are unlikely to have fully catered for the on-going review of DGS rules in the EU, and in 
particular of the synergies that can be obtained when both DGS and RF are jointly considered 
as  tools  of  the  banking  safety  net.  Third,  their  present  calibration  might  not  be  coordinated 
across Member States and therefore does not ensure an optimal and equal level of protection 
of financial stability across all Member States. 

Driver: Conflicting interests of Member States concerning financing of crisis situations 

Problem: National systems not calibrated to ensure an optimal and even level of protection of 
financial stability across Member States (cumulatively with other prudential measures) 

The existence of separate funds to finance bank resolution in certain Member States but the 
lack  of  them  in  others  renders  group  resolution  less  coordinated  and  effective.  This  can 
encourage resolution authorities to ring fence institutions located in their jurisdiction and not 
to participate in a group level resolution, in spite of this being beneficial for a wider range of 
stakeholders at EU level. 

136   Source:  Economic  and  Financial  Committee,  last  column  inserted  by  Commission  Services.  A  more  detailed  table  can  be  found  in 

Annex IX. 

137  

In  the  case  of  Belgium  contributions  levied  in  the  context  of  Deposit  Guarantee  Schemes  have  been  substantially  modified,  but  no 
system of financial levy, similar to what is currently being discussed in the EFC AHWG, has been introduced. 

138   Except the ones holding less than €500 mn in RWAs 

139   The  law  has  not  yet  introduced,  but  the  draft  law  of  the  financial  levy  is  now  in  consultation  with  stakeholder  and  will  then  be 

submitted by the Austrian Government to the Parliament  

140   The Swedish proposal is said to be bank fee, but from the description in http://www.sweden.gov.se/sb/d/574/a/147426 

 it 

behaves more as a tax.  

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Financing  a  resolution  of  a  cross-border  bank  raises  particular  challenges  compared  with 
domestic banks, and the first real experiences of cross-border bank failures (Fortis, Icelandic 
banks) have confirmed serious shortcomings in this area. While the general EU interest may 
entail maintaining different parts of a banking group together as a coherent whole, action by 
national authorities, who are accountable to their own national taxpayers, may be dictated by 
narrower domestic considerations.  

In  the  absence  of  cross  border  financing  and  aligned  incentives  to  cooperate,  the  likely 
outcome  to  a  cross-border  intervention  will  be  a  series  of  uncoordinated  and  potentially 
competitive  actions  taken  by  authorities  with  a  view  to  minimising  losses  for  their  own 
taxpayers, but with no – or at best limited – regard to the consequences for citizens outside 
their  jurisdiction.  This  may  raise  the  overall  cost  of  a  resolution,  and  limit  the  possible 
spectrum of stabilisation measures involving public financing as a result of ring fencing and 
national solutions. 

- 109 - 

 
 
ANNEX VII  CASES ILLUSTRATING PROBLEMS OF CRISIS MANAGEMENT IN THE EU 

Fortis 

In the case of Fortis, authorities from different Member States were unable to rapidly agree on 
a  rescue  plan  which  could  have  maintained  the  operation  of  the  group  structure.  As  a 
consequence  the  group  was  split  up  along  geographical  boundaries  and  not  along  a  more 
logical  and  cost  effective  division  between  business  lines.  The  situation  is  described  in  the 
Fortis  2008  Annual  Review141  as  follows:  The  global  financial  situation  continued  to 
deteriorate.  Alarmist  rumours  affected  Fortis’s  interbank  market  access,  while  it  had  to 
contend  with  an  extremely  substantial  liquidity  requirement.  During  the  weekends  of  27–28 
September and 4–5 October, Fortis had to conclude a number of transactions that ultimately 
led to the sale of its main banking and insurance activities to strong parties. On 29 September 
2008, Fortis announced that the Belgian government would invest EUR 4.7 billion in Fortis 
Bank  SA/NV,  that  the  Dutch  government  would  invest  EUR  4.0  billion  in  Fortis  Bank 
Nederland  (Holding)  N.V.,  and  that  the  Luxembourg  government  would  invest  EUR  2.5 
billion  in  Fortis  Banque  Luxembourg  SA.  These  investments  represented  49.9  %  of  the 
common equity of the respective entities. The parties concerned expected that a solution had 
been found and that matters would resume their normal course. In the days that followed, the 
parties  negotiated  the  implementation  of  these  agreements  with  both  the  Luxembourg 
government and the Dutch government. A term sheet was signed on 30 September 2008 with 
the Luxembourg government. The agreement with the Dutch state, by contrast, could not be 
implemented.  Despite  hopes  at  the  beginning  of  the  week,  the  situation  continued  to 
deteriorate,  due  to  tensions  in  the  interbank  market.  Fortis  found  it  extremely  difficult  to 
regain  the  confidence  of  the  market  and  its  share  continued  to  decline,  reaching  a  closing 
price on 29 September 2008 of EUR 3.97. In terms of liquidity,  the situation was  extremely 
uncertain and it was necessary to negotiate new conditions with the Belgian central bank and 
to  obtain  an  Emergency  Liquidity  Agreement  with  the  Dutch  central  bank.  Withdrawals  by 
institutional  clients  and  by  companies  had  increased  substantially.  This  situation  led  on  3 
October  to  the  sale  of  Fortis  Bank  Nederland  (Holding)  N.V.,  Fortis  Verzekeringen 
Nederland  N.V.  and  Fortis  Corporate  Insurance  N.V.  to  the  Dutch  state  for  a  total 
consideration of EUR 16.8 billion, which was allocated as follows : 

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

remained within Fortis Bank; 

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

company.  

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

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

bank;  

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

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

to a private investor" 

141 

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

- 110 - 

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

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

Iceland 

In the case of the Icelandic banks, the inability to deal with problems at an early stage in a 
cooperative manner led to the subsequent disorderly resolutions and disputes between national 
authorities,  in  particular  about  who  should  bear  the  costs  which  were  incurred.  "After  five 
years  of  brisk  expansion,  the  country’s  three  main  banks,  representing  85%  of  the  banking 
system, all collapsed during the same week in October 2008 […] Upon their failure, the three 
banks were put into receivership and new banks were formed to enable the domestic payment 
system to continue to function smoothly. Complex negotiations between the new banks and the 
creditors of the old banks were needed to reach a final settlement. With hindsight, it appears 
that  the  Icelandic  financial  supervisory  authorities  had  become  overwhelmed  by  the 
complexity of the national banking system, and had been unable to stop their expansion. […] 
An  important  cross-border  banking  issue  raised  by  the  financial  crisis  was  that  national 
deposit guarantee systems may not have enough resources to honour the minimum EU deposit 
guarantee  obligations.  The  government  was  obliged  to  stand  behind  Iceland’s  Depositors’ 
and Investors’ Guarantee Fund (DIGF) to enable it to meet these obligations, thus exposing 
Icelandic taxpayers to a large cost."142 

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

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

Lehman Brothers 

The chaotic way in which Lehman Brothers was placed into bankruptcy led to a significant 
loss of value for unsecured creditors, and highlighted the extreme market disruption caused by 
uncertainties about the location and return of client assets held by Lehman as prime broker, 
and  about  the  contractual  positions  of  Lehman's  counterparties  and  the  status  of  their 
outstanding  trades.  The  administrators  overseeing  the  winding  down  of  Lehman  Brothers, 
have described the complexity of the task they are faced with as follows143: "Lehman Brothers 
was a very significant and complex global organisation, operating in multiple territories and 
across  most  areas  of  financial  services.  Its  collapse  also  coincided  with  a  period  of 
unprecedented turmoil in financial markets. The US operations of Lehman Brothers, and the 

142  OECD Policy Brief, September 2009, Economic survey of Iceland 2009, http://www.oecd.org/dataoecd/29/8/43455728.pdf 

143  www.pwc.co.uk/eng/issues/lehman_faq_1008.html 

- 111 - 

 
 
                                                 
UK  and  European  Lehman  Brothers’  entities  in  administration,  are  now  being  dealt  with 
through separate legal procedures and it is as if they are no longer part of the same group. 
This has significant practical consequences for the Administrators in meeting their objectives. 
As with most global financial services organisations, on a day to day basis Lehman Brothers 
was  previously  managed  and  run  mainly  along  global  product  lines.  Following  Lehman 
Brothers’ bankruptcy in the US, and the UK and European Lehman Brothers' entities being 
placed into insolvency proceedings, a legal entity focus is now paramount and all information 
relating to the group’s activities now has to be captured and assessed on a legal entity basis 
instead. Funding, and other interdependencies, existed between the US and various UK and 
European  Lehman  Brothers’  entities  and  these  links  are  now  broken.  These  factors  add 
further complexity to the administration. The sale of the North American investment banking 
and capital markets business of Lehman Brothers to Barclays also complicates the situation 
faced by the Administrators." 

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

Lehman  was  an  internationally  active  bank,  with  a  highly  complex  organizational  structure 
and was supervised by a number of different authorities. The case is a good illustration of the 
failure  of  cooperation  and  information  sharing  at  a  critical  moment  prior  to  and  during 
insolvency.  It  also  illustrates  how  difficult  ring  fencing  of  assets  can  be  in  practice  –  as 
liquidity was moved rapidly around the organization it was impossible for authorities to keep 
track  of.    The  challenge  to  wind  up  the  organization  in  the  wake  of  a  disorderly  failure 
provides  evidence  of  the  inadequacies  of  the  current  territorial  approach  to  cross-border 
resolution  and  winding  up  rules.  Finally,  the  chaos  caused  by  the  collapse  of  Lehman  is  a 
strong  illustration  of  the  disruptive  impact  of  the  failure  of  a  highly  connected  financial 
institution and the potential damage disorderly resolutions can have on market confidence. 

Anglo Irish Bank 

Anglo  Irish  Bank  Corporation  is  currently  a  state-owned  bank  based  in  Ireland  with  its 
headquarters in Dublin. The company mainly deals in commercial property lending business 
and commercial banking. 

Anglo Irish Bank's heavy exposure to property lending, with most of its loan book being to 
builders and property developers, meant that it was badly affected by the downturn in the Irish 
property  market  in  2008.  In  January  2009,  the  Irish  government  nationalised  Anglo  Irish 
Bank. 

Between  June  and  September  2009,  the  Minister  for  Finance  provided  €4  billion  in  capital. 
On 31 March 2010, Anglo Irish Bank reported results for the 15 months to December 2009. 
Loss  for  the  period  were  €12.7  billion,  with  an  operating  profit  before  impairment  of  €2.4 
billion and an impairment charges of €15.1 billion driving the overall result. It is the largest 
loss in Irish corporate history. Total assets declined to €85.2 billion at the end of 2009 from 
€101.3 billion in September 2008. 

The European Commission allowed the Irish Government on 31 March 2010  to grant up to 
€10.44 billion into Anglo (of which €10.3 billion were effectively granted). ). On 10 August, 
The Commission allowed the Irish Government to temporarily grant €10.054 billion to Anglo 
Irish  Bank  (of  which  €8.58  billion  was  effectively  granted).  On  21  December  2010,  the 
Commission allowed the Irish Government to inject a further €4.964 billion into Anglo Irish 
Bank (at this time the remaining €1.474 billion of the capital injection approved on 10 August 
2010 were also injected). The bailout took government debt to around 100% of GDP. 

- 112 - 

 
 
In  his  statement  to  the  Irish  Parliament  on  30  March  2010,  the  Minister  of  Finance  stated: 
"Finding a long-term solution for Anglo Irish Bank is by far the biggest challenge in resolving 
the banking crisis. The sheer size of the bank means there are no easy or low cost options. In 
September 2010, the government announced that it would separate the bank into two entities, 
an  "asset  recovery  bank"  to  manage  existing  loans,  and  a  separate  "funding  bank"  holding 
deposits.  On  29  November,  an  agreement  was  reached  between  the  Irish  Government,  the 
IMF  and  the  EU  on  a  Programme  for  Support  for  Ireland.  In  the  Memorandum  of 
Understanding it is stated that "a specific plan for the resolution of Anglo Irish Bank will be 
established and submitted to the European Commission in line with EU competition rules. 

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

Systemically large financial institutions - if they fail - pose a special problem for authorities: 
they can drag down the whole country into severe debt and recession. While certain resolution 
tools  might  be  applied  with  great  effectiveness  for  mid-sized  or  small  bank  (assisted  sale), 
they might be inefficient for SIFIs. Such institutions however should also be resolved and not 
always bailed out by public funds. Solutions like debt write down (haircuts of creditors) seem 
to be a viable option for such large institutions. (See how bail-in could have been used in this 
case in Annex XIII) 

Restructuring of ING144 

Following repeated State support measures and as part of the restructuring plan approved by 
the  European  Commission,  ING  Group  has  been  working  on  separating  its  Banking  and 
Insurance/Investment Management (IM) operations. In preparation for the divestment of the 
Insurance/IM business by the end of 2013 at the latest, ING worked towards a self-imposed 
deadline of 1 January 2011 to achieve operational separation. As of that date, ING’s Bank and 
Insurance/IM  businesses  (circa  100  business  units  in  over  40  countries)  are  operationally 
separate. This means that all ties between Bank and Insurance/IM have been formalised and 
that  these  businesses  operate  at  arm’s  length  from  each  other.  In  2011,  ING  will  seek  to 
replace the interim solutions that enabled operational separation with permanent solutions to 
achieve physical separation. In 2010 ING Group spent 85 million euros after tax to achieve 
operational  separation,  while  the  implementation  of  the  full  separation  is  expected  to  cost 
around EUR 200 million after tax. In total, the separation project has involved around 1500 
employees worldwide (out of 105.000).” 

144   Although  the  restructuring  of  ING  served  a  different  purpose  (i.e.  to  prevent  distortion  of  competition  as  a  result  of  State  aid),  the 

following calculation shows the scale of the costs that a change in operation and business structure could entail. 

- 113 - 

 
 
                                                 
ANNEX VIII  CORPORATE STRUCTURE OF LEHMAN BROTHERS 

- 114 - 

 
 
 
ANNEX IX 

BANK LEVIES AND TAXES IN MEMBER STATES 

Country 

Intra-group 
exposures 

Single 
entity 
(S)/consoli
dated (C) 

Rate 

base 

Ceiling  

Rendez-vous clause 

1. 

BE 

N.R 

0.15  %  of  the  deposit  base  of  the 
preceding year 

deposits 

2 

DE 

S 

NOT deducted 

Progressive FEE for liabilities  

• 

• 
• 

0.02 percent for liabilities under 
€10bn 
0.03 percent over €10bn; and  
0.04 percent above €100bn  

Flat FEE for derivatives  

• 

0.00015 percent  

•  LIABILITIES excluding capital and 

deposits  

and 

•  Derivatives 

(nominal value) 

NO 

NO 

€ 1 bn p.a. 

NOT in law but poss. revision 
of base/rate 

in 

law  as 
NOT  needed 
revision  to  accommodate  for 
EU  developments 
is  both 
common practice and poss.  

credit 
Capped 
institution’s annual profit (after tax) 

15% 

at 

of 

3 

FR 

C 

Not specified. 

percent 

0.25 
requirements (based on RWA) 

the 

of 

capital 

Risk weighted assets (RWA) 

NO 

YES 

€500  mn  -  €1 
bn per year 

4 

CY 

S 

Not specified. 

0.05%  of  liabilities  as  defined  (see 
base) at year-end 

Liabilities,  excluding  covered  deposits  and 
capital 

NO 

YES 

- 115 - 

 
 
 
 
 
 
 
 
 
 
Country 

Intra-group 
exposures 

Single 
entity 
(S)/consoli
dated (C) 

Rate 

base 

Ceiling  

Rendez-vous clause 

5 

AT 145  S 

Not specified. 

NO LEVY < € 1 bn 

Unconsolidated balance sheet total  excluding  

NO 

YES 

0,055%  €  1  bn  <Base>  €  20  bn;  and 
0,085% Base > € 20 bn 

+ 

reserves,  secured 
subscribed  capital  and 
deposits  and  certain 
to  banks, 
provided  they  are  necessary  to  fulfil  liquidity 
provisions +  

liabilities 

0,015%  on  the  volume  of  all  financial 
derivatives 

add  on  for  financial  derivatives  on  trading 
book 

6 

PT 

S 

Not specified. 

Progressive  rates  depending  on  the 
base amount  

from 0,01% to 0,05% on liabilities 

liabilities  excluding  tier  1  and  tier  2  capital 
and  insured  deposits.  The  national  value  of 
off-balance-sheet  derivatives  will  also  be 
"levied"  

NO 

possibly 

Around  €  120 
mn p.a. 

DK 

N.R. 

from  0,0001%  to  0,0002%  on  off-
balance-sheet derivatives 

(the  thresholds  will  detailed  in  the 
secondary legislation) 

Ex  post  levy  depending  on  the  need 
but capped at 0.2% of covered deposits 
and securities 

Covered deposits and securities  

N.A. 

YES in the context of DGS 

HU 

S 

Not specified. 

0.15 % below  and 

BS corrected for interbank loans 

NO 

NO 

0.5% above HUF 50 bn 

HUF  200  bn 
p.a. 

7 

8 

145   The Austrian levy will be deductible as operating expense. 

- 116 - 

 
 
 
 
                                                 
Country 

Single 
entity 
(S)/consoli
dated (C) 

Intra-group 
exposures 

Rate 

9 

SE 

S 

(see base) 

0.036% after 2010 

0.018% for 2010-2011 

base 

Ceiling  

Rendez-vous clause 

Liabilities  excluding  equity  capital,  debt 
securities  included  in  the  capital  base,  group 
internal  debt 
those 
companies  paying  the  fee  and  debt  issued 
under the guarantee program  

transactions  between 

Stability  fund 
targeted 
to 
reach  2.5%  of 
GDP  over  the 
next 15 years. 

NO but revisions possible 

10  UK 

C 

Intra-group 
fall 
exposures 
for  UK 
out 
groups as well as  
intra-group 
liabilities 
relevant 
the 
levy  for  non-UK 
groups  

to 

In 2011: 0.04% 

Liabilities excluding 

NO 

No 
but 
effectiveness in 2013 

review 

of 

After 2011: 0.07% 

Reduced  rate  for  longer-maturity 
wholesale 
(>  1  year 
remaining  to maturity)  to be  set  at 
0.02% rising to 0.035% after 2011. 

funding 

Tier  1  capital,  insured  deposits,  policy 
holder liabilities and assets qualifying for 
FSA liquidity buffer 

£2 
bn 
annually,  but 
only  £1.5  bn 
for 2011 

Source: Economic and Financial Committee 

- 117 - 

 
 
ANNEX X 

CONDITION FOR INTRA GROUP FINANCIAL SUPPORT AGREEMENT 

Financial  support  may  only  be  provided  under  a  group  financial  support  agreement  if  the 
following conditions are met: 

there is a reasonable prospect that the support provided will redress the financial difficulties 

of the entity receiving the support;  

(a) 

(b) 

(c) 

(d) 

the  provision  of  financial  support  has  the  objective  of  preserving  or  restoring  the 
financial  stability  of  the  group  as  a  whole;  the  financial  support  is  provided  for 
consideration 

it is reasonably certain, on the basis of the information available to the management 
body at the time when the decision to grant financial support is taken, that the loan 
will  be  reimbursed  or  the  consideration  for  the  support  will  be  paid  by  the  entity 
receiving the support;  

the  financial  support  does  not  jeopardize  the  liquidity  or  solvency  of  the  entity 
providing the support;  

the entity providing the support complies at the time the support is provided, and will 
continue  to  comply  after  the  support  is  provided,  with  the  own  funds  requirements 
and any requirements imposed pursuant to Article 136(2) of Directive 2006/48/EC.  

- 118 - 

 
 
ANNEX XI 

RECOVERY AND RESOLUTION PLANS 

Recovery  plans  developed  and  maintained  by  banks  would  set  out  the  arrangements  that 
banks have in place or the measures that they would adopt to enable them to take early action 
to  restore  their  long  term  viability  in  the  event  of  a  material  deterioration  of  its  financial 
situation.  These  recovery  plans  (firm  specific  or  group  plans)  should  be  based  on  realistic 
assumptions, should not assume any access to public financial support, and, at least, include: 

(a)  A summary of the key elements of the plan, strategic analysis, and summary of 

overall recovery capacity;  

(b) 

(c) 

(d) 

a  summary  of  the  material  changes  to  the  institution  since  the  most  recently 
filed recovery plan; 

a communication and disclosure plan outlining how the firm intends to manage 
any potentially negative market reactions; 

a range of capital and liquidity actions required to maintain operations of, and 
funding for, the institution's critical functions and business lines; 

(e) 

an estimation of the timeframe for executing each material aspect of the plan; 

(f) 

a  detailed  description  of  any  material  impediment  to  the  effective  and  timely 
execution  of  the  plan,  including  consideration  of  impact  on  the  rest  of  the 
group, customers and counterparties; 

(g) 

identification of critical functions;  

(h) 

(i) 

a  detailed  description  of  the  processes  for  determining  the  value  and 
marketability of the core business lines, operations and assets of the institution; 

a detailed description of how recovery planning is integrated into the corporate 
governance  structure  of  the  institution  as  well  as  the  policies  and  procedures 
governing the approval of the recovery plan and identification of the persons in 
the organisation responsible for preparing and implementing the plan; 

(j) 

arrangements and measures to conserve or restore the institution's own funds;  

(k) 

arrangements and measures to ensure that the institution has adequate access to 
contingency  funding  sources, 
liquidity  sources,  an 
assessment  of  available  collateral  and  an  assessment  of  the  possibility  to 
transfer liquidity across group entities and business lines, to ensure that it can 
carry on its operations and meet its obligations as they fall due;  

including  potential 

(l) 

arrangements and measures to reduce risk and leverage;  

(m)  arrangements and measures to restructure liabilities; 

(n) 

arrangements and measures to restructure business lines;  

(o) 

arrangements  and  measures  necessary  to  maintain  continuous  access  to 
financial markets infrastructures;  

- 119 - 

 
 
(p) 

arrangements  and  measures  necessary  to  maintain  the  continuous  functioning 
of  the  institution's  operational  processes,  including  infrastructure  and  IT 
services;  

(q)  preparatory  arrangements  to  facilitate  the  sale  of  assets  or  business  lines  in  a 

timeframe appropriate for the restoration of financial soundness;  

(r) 

(s) 

other management actions or strategies to restore financial  soundness  and  the 
anticipated financial effect of those actions or strategies;  

preparatory measures that the institution has taken or plans to take in order to 
facilitate the implementation of the recovery plan, including those necessary to 
enable the timely recapitalisation of the institution.  

Credit  institutions  would  submit  the  recovery  plans  to  supervisors.  The  supervisors  would 
need to review those plans and assess the extent to which the plan satisfies certain criteria146. 
EU parent credit institutions or EU parent financial holding companies could draw up a group 
recovery plan, which could include recovery plans for each group entity, and submit it to the 
consolidating supervisor. 

Resolution  authorities,  in  consultation  with  supervisors,  would  be  required  to  draw  up  and 
maintain resolution plans for each credit institution for which they are resolution authority. A 
resolution plan would include: 

(a) 

a summary of the key elements of the plan;  

(b) 

(c) 

a  summary  of  the  material  changes  to  the  institution  since  the  most  recently 
filed resolution information; 

a  demonstration  of  how  critical  functions  and  core  business  lines  could  be 
legally  and  economically  separated,  to  the  extent  necessary,  from  other 
functions so as to ensure continuity on the failure of the institution; 

(d) 

an estimation of the timeframe for executing each material aspect of the plan; 

(e) 

(f) 

(g) 

(h) 

a  detailed  description  of  the  assessment  of  resolvability  carried  out  in 
accordance with Article 20; 

a  description  of  any  measures  required  pursuant  to  Article  21  to  address  or 
remove  impediments  to  resolvability  identified  as  a  result  of  the  assessment 
carried out in accordance with Article 20; 

a  description  of  the  processes  for  determining  the  value  and  marketability  of 
the critical operations, core business lines and assets of the institution; 

a  detailed  description  of  the  arrangements  for  ensuring  that  the  information 
required  pursuant  to  Article  17  is  up  to  date  and  at  the  disposal  of  the 
resolution authorities at all times; 

146  

(a)    whether the arrangements proposed in the plans are credible, realistic and sufficient to the extent that their implementation would 
be likely to restore the viability of the credit institution or prepare for an orderly winding-down of the problematic activities; and 

(b)   whether  the  plans  could  be  implemented  without  causing  systemic  disruption,  including  in  the  event  that  a  number  of  firms 
implemented recovery plans within the same period. 

- 120 - 

 
 
                                                 
(i) 

an  explanation  by  the  resolution  authority  about  how  the  resolution  options 
would be financed without the assumption of any extraordinary public financial 
support; 

(j) 

a detailed description of the different resolution strategies that could be applied 
according to the different possible scenarios; 

(k) 

a description of critical interdependencies; 

(l) 

an analysis of the impact of the plan on other institutions within the group; 

(m)  a  description  on  options  for  preserving  access  to  payments  and  clearing 

services and other infrastructures; 

(n) 

a plan for communicating with the media and the public. 

- 121 - 

 
 
ANNEX XII  RESOLUTION TOOLS 

The sale of business tool enables resolution authorities to effect a sale of the credit institution 
or  the  whole  or  part  of  its  assets  and  liabilities  to  one  or  more  purchasers  on  commercial 
terms,  without  requiring  the  consent  of  the  shareholders  or  complying  with  procedural 
requirements that would otherwise apply.  

The bridge bank tool is a tool that enables resolution authorities to transfer all or part of the 
business of the credit institution to a bridge bank. A "bridge bank" means a company or other 
legal person which is wholly owned by one or more public authorities (which may include the 
resolution authority.  

The purpose of the asset separation tool would be to enable resolution authorities to transfer 
certain  assets  of  a  credit  institution  to  an  asset  management  vehicle  for  the  purpose  of 
facilitating the use or ensuring the effectiveness of another resolution tool. In this context, an 
"asset  management  vehicle"  refers  to  a  legal  entity  which  is  wholly  owned  by  one  or  more 
public authorities (which may include the resolution authority).    

In  order  to  apply  the  resolution  tools,  resolution  authorities  would  need  the  following 
resolution powers: 

(a) 

(b) 

the power to take control of an institution under resolution and exercise all the 
rights conferred upon the shareholders or owners of the institution; 

the  power  to  transfer  shares  and  other  instruments  of  ownership  issued  by  an 
institution under resolution; 

(c) 

the power to transfer debt instruments issued by an institution under resolution; 

(d) 

(e) 

(f) 

(g) 

the power to transfer to another undertaking  or person specified rights, assets 
and liabilities of an institution under resolution; 

the power to transfer to another undertaking or person claims for the return of 
assets  (including  money)  belonging  to  clients  of  the  institution  under 
resolution; 

the  power  to  reduce,  including  to  reduce  to  zero,  the  principal  amount  of  or 
outstanding amount due in respect of eligible liabilities of an institution under 
resolution;  

the  power  to  convert  eligible  liabilities  of  such  an  institution  into  ordinary 
shares  or  other  instruments  of  ownership  of  that  institution,  a  relevant  parent 
institution  or  a  bridge  institution  to  which  liabilities  of  an  institution  under 
resolution are transferred; 

(h) 

the power to cancel debt instruments issued by an institution under resolution;  

(i) 

(j) 

the power to cancel shares or other instruments of ownership of an institution 
under resolution;  

the  power  to  require  an  institution  under  resolution  to  issue  new  shares  (or 
other instruments of ownership); 

- 122 - 

 
 
(k) 

(l) 

the  power  to  require  the  conversion  of  debt  instruments  which  contain  a 
contractual  term  for  conversion  on  an  official  action  or  decision  that  an 
institution is failing or that intervention by resolution authorities is or is likely 
to be necessary; 

the  power  to  amend  or  alter  the  maturity  of  debt  instruments  issued  by  an 
institution under resolution or amend the amount of interest payable under such 
instruments, including by suspending payment for a temporary period; 

(m) 

the power to remove or replace the senior management of an institution under 
resolution; 

(n) 

the power to require an institution under resolution to issue new shares or other 
capital  instruments  (including  preference  shares  and  contingent  convertible 
instruments). 

- 123 - 

 
 
ANNEX XIII  DEBT WRITE DOWN (BAIL-IN) AND EX-ANTE FUNDING 

This  Annex  presents  analysis  about  the  appropriate  joint  calibration  of  two  tools  that  can 
support bank resolution: ex-ante funding and debt write-down (bail-in). It shows the impact of 
these  two  tools  on  banks'  funding  costs.  The  analysis  also  presents  for  the  two  tools  their 
macroeconomic costs, benefits and net benefits. 

1. How big a crisis should the resolution framework be able to tackle? 

This section discusses the possible crisis scenarios the resolution framework could be required 
to  withstand.  Table  1  below  shows  three  possible  crisis  scenarios  obtained  by  means  of 
simulations generated with the SYMBOL model (under the new Basel III accord).147 

Table 1: Aggregated losses in EU banking sector simulated with the SYMBOL model under 
Basel  III  10.5%  RWA  Minimum  Capital  Requirements  (no  contagion)  and  aggregated  EU 
state  aid  (asset  relief  and  recapitalisation  only)  used  in  recent  crisis  between  2008-2010  (€ 
billion) 

Simulated 
Severe crisis 
(99.90%148) 

Simulated 
Very severe 
crisis  

(99.95%) 

State aid 
used in 
recent crisis 
(Data 2008-
2010) 

Simulated 
Extremely 
severe crisis 
(99.99%) 

36.2 

79.9 

121.2 

266.7 

295.6 

466.7 

409 

668.3 

Extra-Losses  (not  absorbed  by  regulatory 
capital) 

Extra-Losses  (not  absorbed  by  regulatory 
capital) + Recapitalisation funding needs to 
meet  Basel 
III  Minimum  Capital 
Requirements 

The  first  simulated  crisis  scenario  is  a  severe  crisis,  where  losses  would  exceed  the  total 
regulatory  capital  of  banks  by  around  €36  billion.  Considering  also  banks'  recapitalisation 
funding needs, the resolution framework would need to be able to cope with aggregated losses 
of around €296 billion;149 

The  second  simulated  crisis  scenario  is  a  very  severe  crisis  where  losses  would  exceed  the 
total  regulatory  capital  of  banks  by  around  €80  billion.  Considering  also  banks' 

147   The  SYMBOL  model,  (SYstemic  Model  of  Banking  Originated  Losses),  has  been  jointly  developed  by  the  JRC,  DG  MARKT,  and 
experts  of  banking  regulation.  For  technical  details  see:  De  Lisa  R,  Zedda  S.,  Vallascas  F.,  Campolongo  F.,  Marchesi  M.  (2011), 
Modeling Deposit Insurance Scheme Losses in a Basel 2 Framework, Journal of Financial Services Research, 40(3), 123-141. See also 
Appendix 4. 

148   The  three  SYMBOL-simulated  crises  can,  according  to  the  SYMBOL  model,  be  exceeded  but  with  a very  low  probability:  between 
0.1% (99.9% simulation) and 0.01% (99.99% simulation). Under the first simulation there is 0.1% chance that the crisis will be bigger 
than estimated and the resolution framework will not be able to cope with it. In the second and third case the chances are 0.05% and 
0.01% respectively. These probabilities are dependent on the SYMBOL model specifications, based on the Basel FIRB formula. Due to 
its calibration, SYMBOL tends to show large losses only for events in the tail of the distribution. 

149   When banks generate losses, they are absorbed by their regulatory capital first. If losses are higher than banks' regulatory capital, they 
can  spread  across  in  the  financial  system  and  create  contagion  and  financial  instability.  When  banks  are  systemic,  due  to  their 
interconnections with the rest of the financial system, their size, or any other relevant reason, they cannot be simply liquidated (as, in 
fact,  it  did  not  happen  in  the  recent  crisis  started  in  2008).  In  this  case,  not  only  losses  in  excess  of  regulatory  capital  need  to  be 
absorbed, but banks also need to be recapitalised so that their systemic functions can be preserved. It follows that the need to absorb 
excess losses materialises not only when banks' regulatory capital is fully wiped out by losses, but much before that, i.e. any time losses 
erode regulatory capital under a threshold considered of non-viability for banks. In the present analysis, this non-viability threshold is 
set equal to banks' Minimum Capital Requirements (8%) under Basel III. 

- 124 - 

 
 
 
                                                 
recapitalisation funding needs, the resolution framework would need to be able to cope with 
aggregated losses of around €467 billion. 

The  third  simulated  crisis  scenario  is  an  extremely  severe  crisis  where  the  resolution 
framework  would  need  to  cope  with  €267  billion  for  loss  absorption  and  €668  billion 
including banks' recapitalisation needs.150 

The recent crisis that started in 2008 falls between the very severe and the extremely severe 
crisis  scenario:  aggregated  used  state  aid  amounted  to  €121  billion  without  recapitalisation 
and €409 billion with funds needed for recapitalising banks151. 

2. What tools are available to absorb extra-losses and recapitalise banks? 

In order to absorb extra-losses and recapitalise banks, if taxpayers and public finances are to 
be protected, there are two main tools left that can be used. The first tool is to use (ex-ante) 
funded  schemes  such  as  Deposit  Guarantee  Schemes  or  Resolution  Funds  (DGS/RF)  to 
absorb extra-losses and recapitalise banks. The second tool is to have banks' creditors absorb 
extra-losses  and  provide  capital  so  as  to  preserve  the  systemic  operations  of  the  bank  and 
restore its viability: the bail-in tool (also referred sometimes as debt write-down and/or debt 
conversion152) tool. 

In the following, the analysis presents how these two tools perform in isolation or when used 
jointly. 

3. Resolution with ex-ante funds only 

In  this  section  a  methodology  for  evaluating  the  ex-ante  funding  needs  of  bank  resolution 
beside  banks'  Minimum  Capital  Requirements  is  presented.  The  focus  is  on  Deposit 
Guarantee Schemes (DGS), aimed at protecting depositors, and Resolution Funds (RF), aimed 
at  supporting  the  orderly  resolution  of  defaulted  banks  and  blocking  spill-over/contagion 
effects. The goal is to provide an estimate of the total funding needs for these tools to absorb, 
with a determined level of confidence, aggregated extra-losses hitting the banking sector due 
to banks failing/becoming non-viable. In this section, the possible use of the bail-in tool for 
resolution purposes is not (yet) taken into consideration. 

3.1 Arguments favouring ex-ante vs. ex-post financing 

Regarding the choice of ex-ante vs. ex-post financing of resolution, the arguments in favour 
of ex-ante vs. ex-post funding are the following. 

Ex-post financing is pro-cyclical, and raising resources from banks in the midst of a crisis can 
be expected to be especially difficult, as it would drain resources from the banking sector at a 
time where they are most needed. Accordingly, this might further accentuate a financial crisis. 

150  

In the current SYMBOL simulations, recapitalization funding needs refer only to situations where at least one bank fails (losses higher 
than  regulatory  capital)  and  they  are  obtained  as  the  total  funds  necessary  to  bring  all  undercapitalized  banks,  including  also  those 
which are failing, to their Minimum Capital Requirements. 

151   Source: DG COMP. See used state aid for asset relief and recapitalisation aid in Table: State aid approved (2008 – Oct 2011) and state 
aid  used  (2008  –  2010)  in  the  context  of  the  financial  and  economic  crisis  to  the  financial  sector  (2008  -  2010), 
http://ec.europa.eu/competition/state_aid/studies_reports/expenditure.html#II.  It  should  be  kept  in  mind  that  the  crisis  started  in  2008 
under Basel II capital adequacy rules, where regulatory capital of banks was lower than what will be the minimum regulatory capital 
required  under  Basel  III  rules.  It  should  be  also  noticed  that  part  of  used  state  aid,  i.e.  used  guarantees  that  possibly  triggered 
expenditures for Member States has not been considered as not available. 

152   By converting debt to capital, banks Minimum Capital Requirements can be re-established. 

- 125 - 

 
 
                                                 
Ex-post  financing  can  also  be  regarded  as  an  unfair  practice,  as  contributions  would 
exclusively  be  paid  by  other  banks,  and  not  by  the  failed/non-viable  bank.  This  would  also 
negatively  affect  incentives:  raising  funds  after  a  bank  default  has  occurred  is  too  late  to 
provide any incentives to the defaulted bank and would also create a free-rider/moral hazard 
problem on all other banks. 

Ex-ante  financing  would  have  all  the  advantages  listed  above  as  disadvantage  for  ex-post 
financing.  Its  disadvantage  is,  however,  that  depending  on  the  method  of  collection  it 
increases  banks'  costs  of  funding  and  it  therefore  can  negatively  affect  macroeconomic 
growth. 

On the basis of these considerations, in the following of this annex we will analyse DGS/RF 
as ex-ante fully financed funds. 

3.2. Estimation of ex-ante funding needs for bank resolution purposes 

It is assumed that when no other tools are available, including public finances and bail-in, the 
joint target funding size for DGS and RF is calibrated to only cover extra-losses and (possibly 
also) provide recapitalisation funding needs, as a sort of bail-out fund. It is in fact considered 
that it is in any case beyond the scope of DGS/RF to fully cover banks' liquidity needs.153 

Funding  needs  of  DGS/RF  can  then  be  obtained  from  the  distribution  of  losses  (losses  in 
excess  of  regulatory  capital  or  losses  in  excess  of  regulatory  capital  plus  banks' 
recapitalisation needs) of defaulted (failed or failed and non-viable) banks, estimated via the 
SYMBOL model according to various regulatory scenarios (see Table 2 below)154 

153   Liquidity provision is the prerogative of central banks and Commission services believe that it is not for the Commission to determine 

how liquidity should be provided to banks. 

154   For details on procedures followed to estimate capital ratios in the various regulatory scenarios, see Appendix 5 (third footnote). 

- 126 - 

 
 
                                                 
Table  2:  SYMBOL  scenarios  for  estimating  DGS/RF  funding  needs  when  resolution  is 
supported by funded schemes only 

Definition of 
regulatory capital 
and of RWA 

Minimum 
Capital Requirements 

Contagion 

Basel III 

Basel III 

Basel II 

Yes 

No 

8% 

10.5% 

Basel III 

X 

Basel III 

Basel III 

X 

X 

X 

X 

X 

Regulatory 
Scenarios155 

1. 
Basel II 

2. 
Basel III 10.5% 
Contagion 

2.bis 
Basel III 10.5% 
No Contagion 

In  the  worst  scenario  (Scenario  1,  Basel  II),  banks  are  assumed  to  satisfy  Minimum  Capital 
Requirements  according  to  the  rules  of  Basel  II.  However,  the  more  stringent  definition  of 
regulatory capital and RWA as of Basel III are applied when determining the effective level 
of  regulatory  capital  which  can  be  used  to  absorb  losses.  Contagion  between  banks  via  the 
interbank market can occur. 

In the intermediate scenario (Scenario 2., Basel III 10.5%, contagion), banks are assumed to 
satisfy Minimum Capital Requirements equal to 10.5% of RWA (representing the fact that a 
capital conservation buffer is introduced on top of the 8% Minimum Capital Requirements), 
with  regulatory  capital  and  RWA  considered  according  to  the  more  stringent  definition  of 
Basel III. Contagion via the interbank market can occur between banks. 

Finally,  the  best  scenario  (Scenario  2.bis,  Basel  III,  no  contagion)  is  like  the  intermediate 
scenario, but contagion between banks is assumed not to occur (due to the introduction of an 
effective legal framework that allows the prompt and ordered resolution of banks). 

The losses potentially hitting public finances that need to be absorbed by DGS/RF operating 
as a bail-out fund are presented in Table 3 for Scenario 1 to Scenario 2.bis and for the severe 
to  the  extremely  severe  crisis.  In  order  to  facilitate  the  readability  of  the  results,  DGS/RF 
funding needs are expressed as percentage of 2009 EU GDP.156 

155   Regulatory scenario numbering is chosen so as to be aligned as  much as possible with that of the Commission Staff Working Paper 

"Comprehensive Evaluation of Financial Market Regulatory Reforms". 

156  GDP  estimates  are  from  the  DG  ECFIN  AMECO  Database,  the  annual  macro-economic  database  of  the  European  Commission's 
Directorate 
at 
'http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm. EU GDP for 2009 is in particular 10.989 billion EUR for the 
19 MS considered in the SYMBOL simulations, and 11.751 billion EUR for the EU as a whole. 

Economic 

Financial 

available 

ECFIN), 

General 

Affairs 

(DG 

and 

for 

- 127 - 

 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Table 3: Potential losses for public finances, estimated with SYMBOL (% of GDP) 

No recapitalisation157 

Recapitalisation158 

Regulatory Scenarios 

Severe 
crisis 

Very 
severe 
crisis 

Extremely 
severe 
crisis 

Severe 
crisis 

Very 
severe 
crisis 

Extremely 
severe 
crisis 

Scenario 1 
Basel II 
Contagion 

Scenario 2. 
Basel III 10.5% 
Contagion 

Scenario 2.bis 
Basel III 10.5% 
No Contagion 

8.70% 

12.81% 

17.22% 

15.91% 

22.27% 

27.96% 

1.25% 

8.03% 

13.81% 

3.94% 

14.08% 

22.58% 

0.31% 

0.68% 

2.27% 

2.51% 

3.97% 

5.69% 

After  Basel  III  is  fully  implemented,  if  extra-losses  or  extra-losses  and  recapitalisation 
funding needs are to be covered only by ex-ante funded schemes, funding needs would mainly 
depend on the severity of the crisis that schemes would be asked to withstand. If the schemes 
need to finance loss absorption only, then funds equal to 0.31% to 2.27% of EU GDP would 
be  needed  to  protect  public  finances  (once  an  effective  legal  framework  that  allows  the 
prompt  and  ordered  resolution  of  banks  is  introduced).  If  the  schemes  need  also  to  provide 
new capital when needed to banks, the funding needs would be between 2.51% and 5.69% of 
EU GDP.159  

3.3 Macroeconomic costs of ex-ante funded schemes (no bail-in) 

The  macroeconomic  costs  of  introducing  a  DGS/RF  able  to  operate  as  bail-out  funds  and 
cover  extra-losses  and/or  recapitalise  banks,  and  funded  as  shown  in  Table  3  above  is  now 
analysed in this section on the basis of a simple and effective methodology first introduced by 
the Bank of England160. 

Table 4 reports the costs of introducing various levels of DGS/RF funding on top of Basel III 
Minimum Capital Requirements (i.e. 10.5% of RWA), so as to be able to cope with the three 
analysed types of simulated crisis. 

157  

158  

159  

In the banks' no recapitalisation scenario, only extra-losses (not absorbed by regulatory capital) must be absorbed by DGS/RF. 

In the banks' recapitalisation scenario, both extra-losses (not absorbed by regulatory capital) and banks' recapitalisation funding needs 
to meet Basel III Minimum Capital Requirements must be provided by DGS/RF. 

It  goes  without  saying,  however,  that  DGS/RF  funding  be  reduced  if  a  bail-in  tool  is  introduced  in  addition  to  the  funding  of  these 
schemes. 

160   Bank 

of 

England 

(2010), 

“Financial 

Stability 

Report”, 

(Issue 

27) 

Box7, 

http://www.bankofengland.co.uk/publications/fsr/2010/fsr27.htm , see Appendix 5 for details. 

- 128 - 

 
 
 
                                                 
Table 4: Macroeconomic costs of introducing DGS/RF as bail-out funds on top of Basel III 
10.5% RWA Minimum Capital Requirements without contagion (Scenario 2.bis). 

No recapitalisation 

Recapitalisation 

Severe 
crisis 

Very 
severe 
crisis 

Extreme
ly severe 
crisis 

Severe 
crisis 

Very 
severe 
crisis 

Extreme
ly severe 
crisis 

Δ1% 
Cov 
Dep 

0.47% 

1.03% 

3.43% 

3.80% 

6.00% 

8.59% 

1% 

0.6 

1.4 

4.7 

5.2 

8.2 

11.7 

1.4 

1.4 

3.0 

10.0 

11.1 

17.6 

25.1 

2.9 

0.5 

1.0 

3.4 

3.7 

5.9 

8.5 

1.0 

DGS/RF  Funding  needs 
(% of covered deposits)161 

Variation  in  banks'  funding 
costs (bps)162 

Variation in lending spreads 
(bps) 

Variation 
firms' cost of capital (bps) 

in  non-financial 

Yearly costs (%GDP) 

0.02% 

0.04% 

0.14% 

0.16% 

0.25% 

0.36% 

0.04% 

NPV of costs (%GDP) 

0.81% 

1.78% 

5.93% 

6.56% 

10.37% 

14.85% 

1.72% 

The  introduction  of  DGS/RF  as  bail-out  funds,  which  would  be  able  to  cope  with  an 
extremely severe crisis and to both cover losses in excess of regulatory capital and recapitalise 
banks  would  require  8.59%  of  covered  deposits,  and  it  would  cost  annually  0.36%  of  EU 
GDP. These costs are significant, especially when compared to those, for example, of Basel 
III  which  are  estimated  (by  means  of  the  same  methodology  –  see  Appendix  5)  equal  to 
0.16% of EU GDP annually.  

4. Resolution with bail-in only 

This  section  examines  how  the  bail-in  tool  could  absorb  losses  of  defaulted  banks  (failed 
banks in the no recapitalisation scenario or failed and non-viable banks in the recapitalisation 
scenario) and (only in the recapitalisation scenario) allow banks to re-establish their Minimum 
Capital Requirements without recurring neither to ex-ante funded schemes (DGS/RF) nor to 
taxpayers' money. 

4.1 What does bail-in mean? 

With bail-in resolution authorities can write-down (in full or in part) the principal amount of, 
or convert to capital, certain liabilities owed by a defaulted bank. Authorities could apply bail-
in in order to absorb losses, to recapitalise a defaulted bank which would thence be viable in 
the  long  run;  or  to  reduce  the  liabilities  transferred  to  a  'bridge  bank',  thus  effectively 
increasing the latter's capital ratio above the required minimum. 

Bail-in should be applicable to any bank which is systemically important, including to a bank 
which, while normally not systemically important, may have become so at the point of non-

161   DGS/RF funding needs previously presented in Table 3 have been expressed here as percentage of covered deposits, estimated for EU-

27 at 7.776 billion EUR in 2009. 

162   In this analysis, the costs of DGS/RF are evaluated on the basis of the opportunity cost of banks' return on capital. 

- 129 - 

 
 
 
 
 
                                                 
viability,  given  market  conditions  at  that  time.  Thus,  bail-in  is  potentially  applicable  to  any 
bank,  although  it  can  be  expected  to  be  applied  in  practice  only  to  a  subset  of  the  bank 
population. 

4.2 Rationale of bail-in 

First, bail-in provides a means for resolution authorities to address the challenges of resolving 
defaulted  banks  without  creating  financial  instability.  In  particular,  bail-in  prevents  forced 
asset sales and therefore, especially in a weak market, it reduces the scope of contagion across 
banks.  

Furthermore,  bail-in  can  prevent  exacerbating  losses  –  as  it  can  easily  happen  via  a  regular 
liquidation  procedure  -  as  it  occurred  with,  for  example,  the  failure  of  Lehman  Brothers. 
(presented in Appendix 1).  

Finally,  bail-in  enables  authorities  to  negate  the  current  market  assumption  that  defaulting 
systemically important banks will automatically be rescued using government funds (no bail-
out), as occurred in the recent crisis. This is desirable since the expectation of such automatic 
state support can reduce market and especially creditors' discipline, thus increasing banks' risk 
taking and moral hazard. Automatic state support can also reduce systemic banks borrowing 
costs relative to those of other banks, distorting competition between systemically important 
and other banks.  

4.3 What should be the scope of bail-in?  

As  regards  the  scope  of  liabilities  eligible  for  bail-in,  there  is  a  wide  number  of  alternative 
ways of defining the liabilities subject to bail-in. Two policy options have been considered for 
this analysis: 

•  Comprehensive  bail-in  in  which  unsecured  debt,  uncovered  deposits  and  unsecured 
interbank exposures with more than 1 month original maturity are eligible for bail-in; 
•  Restricted  bail-in,  in  which  only  unsecured  long  term  debt  and  uncovered  deposits 

(with more than 1 year original maturity) are eligible for bail-in. 

The  choice  between  these  two  options  should  be  made  by  ensuring  a  balance  between  the 
need to keep as stable as possible banks' short-term funding (and thus prevent liquidity crisis 
as  much  as  possible)163; the need to ensure that a bank has sufficient overall loss absorbing 
capacity for the authorities to be able to attain their resolution objectives164, and the need to 
contain as much as possible the increase on banks' funding costs due to bail-in. 

Table 5 below shows the estimated composition of liabilities for the average EU bank at end 
2009 and for of an average EU large banking group at the end of 2010.165 These estimates are 

163   Holders of those liabilities which are redeemable on demand (such as deposits) or within a short time period (such as short-term debt) 
might, in case they believe bail-in would be imminent, withdraw their funding. Such an action would possibly cause a banking failure 
which through 'contagion' might also damage other parts of the banking and more generally of the financial system. 

164   A large base of liabilities for bail-in purposes ensures in principle that liabilities can be written down when needed. On the other hand, 
certain categories of liabilities might be systemic or too complex to write down and could be considered for exclusion from the regime. 
Such exclusions may be justified where one or more of the following conditions apply: (i) the net value of the liabilities is unstable, 
uncertain  or  difficult  to  ascertain  in  a  timely  manner;  (ii)  they  are  transactional  counterparty  exposures  where  the  transaction  would 
need to continue following resolution (such as IT suppliers); (iii) they are essential for the franchise value or continued operation of the 
firm (e.g. employees, contractors, trade suppliers); and (iv) they are tied to specific assets as security. 

165   Separate estimates are presented for a stylized EU average bank and an average large consolidated banking group, as the balance sheet 

structures of large groups could be rather different than the structure of an average stand-alone bank. 

- 130 - 

 
 
                                                 
obtained combining balance sheet data from Bankscope with the breakdown of liabilities into 
relevant instruments and maturity classes from various sources as detailed in Appendix 3.166 

166  The balance sheet structure for the average EU bank is based on 2009 data for a sample of EU banks extracted from Bankscope (see 
Table 1 in Appendix 4 for details). This sample includes 2949 solo banks from 19 EU countries, representing on average 78% of total 
assets in those countries. The breakdown for 16 among the largest EU Groups is based on the data sample described in Appendix 2 and 
refers  to  2010  consolidated  balance  sheets  obtained  from  Bankscope.  .  As  banks'  balance  sheet  data  don't  provide  a  full  split  into 
categories  by  maturities,  splits  are  estimated  on  the  basis  of  data  from  the  ECB,  Moody’s  and  Fitch  Ratings.  Covered  deposits  are 
estimated based on updates to figures contained in past reports on Deposit Guarantee Schemes by Commission Services. 

- 131 - 

 
 
                                                 
Table 5: Estimated breakdown of liabilities for an average EU bank and for an average EU 
large banking group. 

Average EU bank 
(2009) 

Average EU large 
banking group 
(2010) 

Covered (by DGS)   

20.59% 

19.29% 

up to 1 month 

over 1 month up to 3 months 

Uncovered  

over 3 months up to 6 months 

over 6 months up to 1 year 

over 1 year 

7.60% 

3.36% 

0.21% 

2.74% 

4.84% 

7.92% 

3.50% 

0.22% 

2.85% 

5.05% 

s
t
i
s
o
p
e
D

t
b
e
D
k
n
a
b
r
e
t
n
I

t
b
e
D
e
l
a
s
e
l
o
h
W

Total Deposits 

Secured Interbank  

Unsecured 

Total Interbank  

Short-term 
Unsecured 

Long-term  

up to 1 month 

over 1 month up to 3 months 

over 3 months up to 6 months 

over 6 months 

up to 1 month 

over 1 month up to 3 months 

over 3 months up to 6 months 

over 6 months up to 1 year 

Unsecured 

Secured 

Total Wholesale Debt 

Total Central Bank Repos 

Total Other Liabilities167 

Total 

39.34% 

38.83% 

4.77% 

4.55% 

2.11% 

2.40% 

3.95% 

17.78% 

1.27% 

0.59% 

0.67% 

1.10% 

16.52% 

7.08% 

27.24% 

0.91% 

14.73% 

100% 

1.87% 

1.59% 

0.74% 

0.84% 

1.38% 

6.41% 

4.01% 

1.86% 

2.11% 

3.48% 

8.25% 

3.54% 

23.25% 

0.40% 

31.12% 

100% 

167   For the average EU large banking group the class “Other Liabilities” includes total non interest-bearing liabilities, other funding and a 

statistical residual. For the average EU bank the class “Other Liabilities” is a statistical residual. 

- 132 - 

 
 
  
 
 
 
 
 
 
 
 
  
  
  
                                                 
On the basis of the two options defined above and on the breakdowns shown in the previous 
table, shares of non bail-inable deposits, non bail-inable debt and bail-inable debt and deposits 
on total liabilities are obtained and presented in Table 6 below.168 

Table 6 Shares of bail-inable and non-bail-inable liabilities for an average EU bank and for 
an average EU large banking group. 

Average EU bank 

Average EU 

large banking group 

Non 
bail-inable 
Deposits 

Non 
bail-inable 
Debt 

Bail-inable 
Debt and 
Deposits 

Non 
bail-in-able 
Deposits 

Non 
bail-inable 
Debt 

Bail-inable 
Debt and 
Deposits 

28.19% 

33.32% 

38.49%169 

27.21% 

42.52% 

30.27%170 

34.50% 

44.13% 

21.36%171 

33.78% 

52.92% 

13.30%172 

Comprehensive 
Bail-in 

Restricted 
Bail-in 

Under the comprehensive bail-in, the share of bail-inable liabilities ranges between 30% and 
38%. Under the restricted bail-in, the share of bail-inable liabilities is obviously more limited, 
and it ranges between 13% and 21%. 

4.4. Estimation of bail-inable liabilities needs for bank resolution purposes 

SYMBOL  allows  estimating  (see  Table  7)  the  levels  of  bail-inable  liabilities,  as  a  share  of 
total liabilities, that would be needed to absorb losses and recapitalise banks according to the 
severity of the simulated crisis scenario. 

168   The share of bail-inable liabilities is needed to estimate the effect of bail-in on banks' funding costs. 

169   Of which 18.89% is unsecured debt, 8.45% are unsecured interbank exposures and 11.15% are uncovered customer deposits. 

170   Of which 15.70% is unsecured debt, 2.95% are unsecured interbank exposures and 11.62% are uncovered customer deposits. 

171   Of which 16.52% is unsecured debt and 4.84% are uncovered customer deposits 

172   Of which 8.25% is unsecured debt and 5.05% are uncovered customer deposits 

- 133 - 

 
 
 
                                                 
Table  7:  Share  of  total  liabilities  needed  to  absorb  extra-losses  and  provide  banks' 
recapitalisation funding needs173 in the three considered SYMBOL simulated crisis scenarios 

No recapitalisation 

Recapitalisation 

Regulatory Scenario 

Severe 
crisis 

Very 
severe 
crisis 

Extremely 
severe 
crisis 

Severe 
crisis 

Very 
severe 
crisis 

Extremely 
severe 
crisis 

Scenario 2.bis 
Basel III 10.5% 
No Contagion 

3% 

6% 

10% 

12% 

17% 

17% 

Comparing  results  from  Table  7  with  bail-inable  liabilities  of  Table  6,  it  is  possible  to 
calculate – as shown in Table 8– the implied Loss Given Default (LGD) ratio on bail-inable 
liabilities  for  the  three  different  simulated  crisis  scenarios,  within  the  Basel  III  10.5% 
regulatory scenario (Scenario 2.bis). 

Table  8:  Implied  LGD  on  bail-inable  liabilities  in  the  three  considered  SYMBOL  simulated 
crisis scenarios 

No recapitalisation 

Recapitalisation 

Severe 
crisis 

Very 
severe 
crisis 

Extremely 
severe 
crisis 

Severe 
crisis 

Very 
severe 
crisis 

Extremely 
severe 
crisis 

8% 

16% 

26% 

31% 

44% 

44% 

14% 

28% 

47% 

56% 

80% 

80% 

Scenario 2.bis 
Basel III 10.5% 
No Contagion 

Comprehensive Bail-in 

Average EU bank 

Restricted Bail-in 

Average EU bank 

Comprehensive Bail-in 

Average EU large 

10% 

20% 

33% 

40% 

56% 

56% 

Banking Group 

Restricted Bail-in 

Average EU large 

23% 

45% 

75% 

90% 

>100% 

>100% 

Banking group 

From these LGD, it can be concluded that both bail-in options would be effective (bail-inable 
liabilities could absorb all losses and provide adequate new capital) for the average EU bank, 
although the restricted bail-in would naturally imply a higher LGD. For the average EU large 

173  Extra-losses and recapitalization needs not absorbed/provided are less than 0.1% of EU GDP 

- 134 - 

 
 
 
                                                 
banking group, however, the restricted bail-in option would not be sufficient in the two most 
extreme crisis scenarios when banks need to be recapitalised. 

This confirms, generally speaking, that the restricted bail-in option presents a theoretical risk 
of not providing a sufficient amount of bail-inable liabilities, especially when large banking 
EU  groups  default  and  they  need  to  be  recapitalised  for  resolution  purposes.  In  such  cases, 
additional ways of absorbing losses and/or provide capital to banks would be needed. 

4.5 Macroeconomic costs of bail-in (without ex-ante DGS/RF funds) 

4.5.1 Impact of bail-in on banks' cost of funding 

This  section  analyses  the  consequences  on  banks'  funding  costs  of  introducing  bail-in. 
Presented results are to a large extent based on a JP Morgan survey174 that estimates a 87 basis 
point increase in funding costs of bail-inable liabilities due to the introduction of bail-in. This 
cost increase is largely consistent with the 80 basis points that constitute the central value in 
the  formula  used  by  the  European  Commission  when  establishing  the  minimum  guarantee 
fees  that  must  apply  when  State  guarantees  are granted  to  banks  in  the course  of  the  recent 
crisis.175 The consequences of greater and lesser increases (100, 200 and 55 basis points) are 
however also explored in this section. 

Based on the stylized balance sheets presented above in Table 5, and the share of bail-inbale 
liabilities shown in table 6, it is possible to compute the increase in banks' funding costs due 
to the introduction of bail-in, which is shown in Table 9 below. 

174  

JPMorgan survey (The Great Bank Downgrade, January 2011) estimates that the removal of implicit state support would entail for a 
group of 55 European banks a 3-4 notches rating downgrade on Moody's ratings scale. The impact on an individual bank is likely to 
vary depending on creditors' assessment of the risk for that bank of entering resolution and bail-in thence having to be applied. The 
JPMorgan survey also indicates that investors would demand an additional 87 basis points premium for a single A bank if bail-in were 
introduced, compared to a situation when bail-in does not apply. Respondents' estimates appear to relate to long-term bonds rather than 
total  senior  debt  including  shorter  maturities.  It  is  not  evident  from  the  survey  what  premium  creditors  in  the  1-12  month  maturity 
category might demand due to the introduction of bail-in. 

175   Communication from the Commission on the application, from 1 January 2012 , of State aid rules to support measures in favour of 

banks in the context of the financial crisis, Official Journal C 356, 6.12.2011, p. 7 

- 135 - 

 
 
                                                 
Table 9 Overall change in banks' costs of funding (in basis points) due to the introduction of 
bail-in under Basel III 10.5% RWA Minimum Capital Requirements 

Policy option 

Δ in cost of bail-
inable liabilities 

Average EU 
bank 

EU large 
banking group 

Δ in overall 
cost of 
funding 

Δ in overall 
cost of funding 

Comprehensive 

bail-in 

Restricted 

bail-in 

55 

87 

100 

200 

55 

87 

100 

200 

20.0 

31.6 

36.3 

72.7 

11.1 

17.6 

20.2 

40.4 

15.6 

24.7 

28.4 

56.9 

6.9 

10.9 

12.5 

25.0 

The  increase  in  the  costs  of  funding  of  the  bail-inable  liabilities  (in  basis  points)  can  be 
expected  to  be  realistically  higher  when  passing  from  the  comprehensive  to  the  restricted 
approach, as the haircut/LGD (Loss Given Default) that investors might expect on bail-inable 
liabilities increases when restricting the share of liabilities subject to bail-in.176 That is why it 
can be realistically expected that the increase in yields of bail-inable liabities would be more 
limited with the comprehensive approach (for instance 55-100 bp) and more significant with 
the restricted approach (for instance 87-200 bp). 177 

On  the  basis  of  this  consideration,  for  the  case  of  the  comprehensive  bail-in,  the  overall 
change in banks' costs of funding can be expected to realistically range between 15 and 36 bp. 
For the case of the restricted bail-in, instead, the overall change in banks' costs of funding can 
be realistically expected to range between 10 and 40bp. 

4.5.2 Macroeconomic costs of bail-in 

The  macroeconomic  costs  of  introducing  bail-in  are  now  investigated  using  a  simple 
methodology first used by the Bank of England. Table 10 reports the costs of introducing bail-
in according to various options on top of Basel III Minimum Capital Requirements, i.e. 10.5% 
of RWA, for an average EU bank.  

176   As seen above in Table 8, on the basis of the extremely severe crisis scenario with recapitalisation, the implied LGD for an average EU 
bank  in  case  of  comprehensive  bail-in  is  17/38.49  =  44%,  and  17/21.36=80%  in  case  of  restricted  bail-in.  These  LGD  are  loosely 
compatible with the presently assumed by the market average LGD on senior unsecured bonds and CDS of 60%. 

177   The analysis on macroeconomic costs of bail-in in this and in the following sections is obviously built upon the implicit assumption that 
banks can finance themselves after the introduction of bail-in, even though with an increase costs of funding for bail-inable liabilities as 
specified in the analysis. Should not be the case, macroeconomic costs could be higher than those of the analysis. 

- 136 - 

 
 
 
 
                                                 
Table  10:  Costs  of  introducing  bail-in  on  top  of  Basel  III  10.5%  RWA  Minimum  Capital 
Requirements for an average EU bank, considering various increases on costs of bail-inable 
liabilities 

Policy option 

Δ in cost 
of bail-
inable 
liabilities 

Variation 
in banks' 
funding 
costs 
(bps) 

Variation in 
lending 
spreads 
(bps) 

Variation 
in non-
financial 
firms cost 
of capital 
(bps) 

Yearly 
Macroeconomic 
costs (%GDP) 

NPV of 
Macroeconomic 
costs (%GDP) 

Comprehensive 

bail-in 

Restricted 

bail-in 

55 

87 

100 

200 

55 

87 

100 

200 

20.0 

31.6 

36.3 

72.7 

11.1 

17.6 

20.2 

40.4 

41.7 

65.9 

75.7 

151.6 

23.1 

36.7 

42.1 

84.2 

14.0 

22.1 

25.4 

50.9 

7.8 

12.3 

14.1 

28.3 

0.60% 

0.95% 

1.09% 

2.18% 

0.33% 

0.53% 

0.61% 

1.21% 

24.58% 

38.84% 

44.62% 

89.36% 

13.64% 

21.63% 

24.83% 

49.66% 

Yearly macroeconomic costs tend to be significant with both approaches, and not presenting 
importance differences, with annual costs ranging between 0.6% and 1.1% of GDP per annum 
for  the  comprehensive  approach  and  between  0.5%  and  1.2%  of  GDP  per  annum  for  the 
restricted approach. 

Since  cost  ranges  result  to  be  similar,  but  the  comprehensive  approach  is  more  effective  in 
absorbing losses as shown above in Section 4.4, a preference for the comprehensive approach 
should be given. 

4.6  Factors  leading  to  more  limited  increases  in  both  banks'  funding  costs  and 
macroeconomic costs due to bail-in 

There are a few important considerations that mitigate the above preliminary conclusion that 
bail-in  could  generate  significant  increases  in  banks'  funding  costs  and  therefore  significant 
costs on the economy. In this paragraph we look at the most important of them. 

4.6.1 The "no creditor worse-off" clause: bail-in as a creditors' value enhancing tool 

The no creditor worse-off clause is a principle that states that if bail-in is applied to a class of 
liabilities,  the  haircut  suffered  by  creditors  due  to  the  intervention  of  authorities  cannot  be 
higher than what would be the loss ratio on their exposure (LGD ratio) in a normal insolvency 
procedure. This principle is extremely important, as it acts as a reassurance for creditors that 
the bail-in will not penalise them compared to the outcome of a normal insolvency procedure. 

A fortiori, investors might even perceive that the haircut/LGD authorities will apply to them 
under the no creditor worse-off clause will not be as high as they would expect in a normal 

- 137 - 

 
 
 
insolvency procedure as some important costs linked to it will be saved (lawyers, receivership 
and  other  legal  expenditures,  etc).  Therefore,  thanks  to  the  introduction  of  the  no  creditor 
worse off principle, the market might price in a much more limited way the increase in banks' 
funding costs linked to the introduction of bail-in. 

The LGD normally assumed by markets when pricing loans, bonds and CDS in case of bank 
defaults normally is, as confirmed by economic research, around 60%. If the LGD assumed 
by markets in case of bail-in under a no creditor worse-off clause were less than this reference 
value, the result would be a (loosely) proportional reduction in the ex-ante increase in banks' 
costs of funding (and therefore on macro-economic costs) shown in Table 10 in the previous 
section. 

In  a  recent  article  published  on  Risk  Magazine178,  the  possibility  is  discussed  that  markets' 
expected LGD might decrease down from 60% even to 20%. This would be consistent with 
the final LGD (15.6% and 26%) applied by Danish authorities when resolving Amagerbanken 
and  Fjordbank  Mors  in  2011.179  On  the  basis  of  this  important,  even  if  limited  evidence,  a 
reduction by 50% of the results presented in Table 10 could be prudentially assumed.180 

4.6.2 Proportionality principle: limited application of bail-in only to systemic banks 

Bail-in is one of the tools that authorities have at their disposal to deal with distressed banks 
and to resolve them. These tools have in general to be applied respecting the proportionality 
of actions taken with problems/issues to be tackled and solved. 

When banks are not systemic, it is rather improbable that authorities will choose to use bail-in 
due to the absence of consequences for financial stability the use of other resolution measures 
might  have.  In  the  case  of  defaulted  small  banks,  the  possibility  that  they  are  merged  with 
other  banks  or  simply  subject  to  an  ordered  wind-down  process  are,  as  a  conclusion,  both 
more realistic and probable options than the use of bail-in by resolution authorities. 

The markets could anticipate these considerations and believe that as bail-in is probable only 
for  systemic  banks,  pricing  should  fully  incorporate  bail-in  only  for  these  institutions. 
Although  it  is  difficult  to  judge  what  regulators  and  the  market  will  consider  as  systemic 
banks, a first indication might come from the following. 

A  first  possible  methodology  for  deciding  whether  banks  qualify  as  systemically  important 
can be based on SYMBOL model-based losses and size criteria, as detailed in the following. 
First,  the  top  30  banks  across  the  EU  with  the  largest  individual  contribution  to  SYMBOL 
simulated  loan  losses  that  hit  public  finances181  have  been  considered  to  be  systemically 
important. The list of these banks has then been enlarged in order to include all top 30 largest 
EU  banks  in  terms  of  total  assets  if  not  already  included.  The  final  list  of  systemically 
important banks obtained in this way includes 43 banks, that approximately represent 57.5% 
of the EU banking sector total assets (in the considered sample). 

178   "Resolution regimes rule, OK?", published on Risk Magazine (June 2011), Vol. 24, N. 6. 

179   See Appendix 1 for details. 

180   Further LGD reductions could result from the intervention of DGS/RF. See discussion in section 5. Higher LGD reductions have also 
been advocated by the FDIC that estimates that in case bail-in had been available in the Lehman default case, LGD would have been as 
low as 3% instead of the 21% LGD estimated for bankruptcy. See http://www.fdic.gov/news/news/press/2011/pr11076.html and for the 
full report http://www.fdic.gov/bank/analytical/quarterly/2011_vol5_2/lehman.pdf. 

181   Individual bank's contributions are defined as the expected average yearly losses of individual banks (over the whole set of SYMBOL 

simulations within a given scenario). 

- 138 - 

 
 
                                                 
A second possible methodology for deciding whether banks qualify as systemically important 
is based on the FSB/BIS definition of Group 1 and Group 2 banks. Group 1 banks are defined 
by  the  BIS  as  those  that  are  active  internationally  and  with  a  Tier  1  above  €3  billion  (with 
Basel II definitions of capital) on a consolidated basis. Notwithstanding the difficulty that the 
Bankscope database used for our analyses is on a solo basis and that it is not possible to track 
in  it  whether  banks  are  internationally  active,  it  is  at  least  possible  to  identify  banks  with  a 
Tier 1 higher than €3 bn. They are 73 banks and they approximately represent 70% of the EU 
banking sector total assets (in the considered sample). 

On the basis of these considerations, it could be concluded that the results presented in Table 
10 in the previous section might be reduced by some 35%. 

4.6.3 Macroeconomic costs of bail-in when cost reduction factors are considered 

On  the  basis  of  the  above  considerations,  the  results  presented  in  Table  10  for  the 
comprehensive scenario are modified as shown in the following Table 11. 

Table  11:  Costs  of  introducing  bail-in  on  top  of  Basel  III  10.5%  RWA  Minimum  Capital 
Requirements  for  an  average  EU  bank,  considering  a  87bp  cost  increase  on  bail-inable 
liabilities and various cost reduction factors 

Comprehensive 
bail-in 

Δ in cost 
of bail-
inable 
liabilities 

Variation 
in banks' 
funding 
costs 
(bps) 

Variation in 
lending 
spreads 
(bps) 

Variation 
in non-
financial 
firms cost 
of capital 
(bps) 

Yearly 
Macroeconomic 
costs (%GDP) 

NPV of 
Macroeconomic 
costs (%GDP) 

Full effect 

87 

31.6 

65.9 

22.1 

0.95% 

38.84% 

Reduced LGD 
50% Reduction 

Proportional 
bail-in 
application 

35% reduction 

43.5 

15.8 

32.9 

11.1 

0.48% 

19.42% 

56.5 

20.5 

42.8 

14.4 

0.62% 

25.25% 

Both reductions 

28.3 

10.3 

21.4 

7.2 

0.31% 

12.62% 

The increase in banks' cost of funding is reduced from 32 bp down even to 10 bp when costs 
reduction  factors  are  considered.  The  macroeconomic  costs  per  year  decrease  instead  from 
0.95% even to 0.31% when cost reduction factors are considered. 

- 139 - 

 
 
 
4.7 Reactions and adjustments by banks and regulators to bail-in 

The  above  results  do  not  consider  the  possibility  that  banks  and  regulator  modify  their 
behaviour due to the introduction of bail-in. Behavioural changes might modify results. In this 
section  we  consider  therefore  how  in  particular  results  presented  so  far  on  bail-in  could  be 
modified by reactions and adjustments of banks and regulators. 

4.7.1 Banks' incentive to modify their funding structure to reduce their cost of funding 
by means of issuing additional subordinated instruments 

After  the  introduction  of  bail-in,  banks  will  have  an  incentive  to  modify  their  funding 
structure in order to limit as much as they can the increase in their cost of funding due to the 
introduction of bail-in. 

Banks could, in particular, see that it is convenient for them to issue more Additional Tier 1, 
or  more  Tier  2,  or  more  of  other  types  of  subordinated  debt  in  order  to  protect  fully  /  to  a 
larger extent their unsecured senior funding from losses in case of distress and of authorities 
applying bail-in, as this might decrease their overall cost of funding. 

Should  banks  decide to increase Additional  Tier  1,  or  Tier 2 or  other types  of subordinated 
debt,  this  would  create  a  sort  of  sequential  bail-in,  for  which  additionally  introduced 
subordinated instruments are bailed-in "first", i.e. before the need to proceed to bail-in more 
senior unsecured debt. 

Because of this possibility banks have, funding costs for banks cannot be expected to increase 
after the introduction of bail-in more than what it would cost them the issuance of additional 
subordinated instruments to a level that the market considers as providing a sufficient cushion 
for absorbing losses and recapitalisation funding needs so that when bail-in will be exercised 
it will not affect senior unsecured debt and other pari passu bail-inable liabilities. 

An analysis is then required on what a minimum loss absorbing capacity might be necessary 
to reassure markets that the bail-in, if applied, will not materially affect senior unsecured debt 
and other pari pasu bail-inable liabilties. 

4.7.2 Banks' incentive to modify their funding structure to reduce their costs of funding 
by means of issuing non bail-inable liabilities 

As mentioned above, after the introduction of bail-in, banks will have an incentive to modify 
their  funding  structure  in  order  to  limit  as  much  as  they  can  the  increase  in  their  cost  of 
funding. 

It is possible that that does not happen via the issuance of additional subordinated instruments, 
but  rather  through  the  reduction  of  the  share  of  liabilities  subject  to  bail-in  (for  example 
increasing  the  share  of  secured  funding,  or  of  liabilities  that  could  create  systemic 
consequences when bailed-in and that would therefore be prudentially excluded from bail-in 
by authorities). This represents a potential moral hazard problem for banks, with detrimental 
consequences for financial stability as bail-in might become ineffective should banks behave 
like this. 

An analysis is then required on what minimum loss absorbing capacity might be needed to be 
maintained  by  regulators  in  order  to  avoid  that  bail-in  becomes  ineffective  due  to  the 
substitution by banks of bail-inable liabilities with non-bail-inable liabilities. 

- 140 - 

 
 
4.8 Loss Absorbing Capacity Analysis 

On the basis of the considerations of the previous section, we now proceed to an analysis of 
banks' Loss Absorbing Capacity. This analysis is in fact needed both for understanding: (i) the 
additional cushion of subordinated instruments banks might want to issue as bail-inable "first" 
liabilities to limit as much as possible the impact of bail-in on their funding costs, and (ii) for 
understanding  the  minimum  level  of  bail-inable  liabilities  authorities  will  want  to  ensure  is 
always available to guarantee that bail-in is effective. 

For this (double) analysis, we define banks' Loss Absorbing Capacity (LAC) as follows: 

LAC  =  (Total  Regulatory  Capital  +  bail-in-able182/  bail-inable  "first"  liabilities183)  /  total 
liabilities184 

The percentage of bail in-able liabilities (or of bail-inable "first" liabilities, according to the 
type  of  analysis  being  performed)  banks  will  need  to  have  /  meet  a  certain  loss  absorbing 
capacity clearly changes depending on the LAC threshold considered, as detailed in Table 12 
below. 

Table 12 Average minimum bail in-able ("first") liabilities, as percentage of total liabilities, 
necessary  to  meet  various  LAC  thresholds  (banks'  regulatory  capital  set  according  to 
Scenario Basel III 10.5% RWA Minimum Capital Requirements) 

Scenario Basel III 10.5% 

LAC threshold 

Average EU 
bank 

Average EU 
large banking 
group 

10.0% 

12.5% 

15.0% 

17.5% 

20.0% 

4.67% 

7.04% 

9.50% 

3.93% 

6.43% 

8.93% 

11.98% 

11.43% 

14.47% 

13.93% 

The  corresponding  changes  in  funding  costs  for  selected  LAC  thresholds  are  presented  in 
Table 13 when an increase in cost of 350 bp for bail-inable ("first") liabilities is considered. 
Such  increase  in  the  cost  of  bail-inable  liabilities  represent  a  worst  case  scenario  and  is 
compatible with an LGD of 100% on bail-inable ("first") liabilities, as presently assumed by 
markets on Tier 2 and subordinated debt. 

182   When looking at the minimum LAC authorities should ensure to guarantee that bail-in is effective. 

183   When looking at the incentive for banks to issue additional subordinated instrument so as to create a minimum LAC that ensures that in 

case of bail-in senior unsecured creditors would not be affected.  

184   Total Liabilities = Total Assets – Total Regulatory Capital 

- 141 - 

 
 
 
                                                 
Table  13  Overall  change  in  banks'  cost  of  funding  (in  basis  points)  for  various  LAC 
thresholds with a 350 bp increase in the cost of bail-inable ("first")  liabilities, under Basel III 10.5%RWA 
Minimum Capital Scenario 

Change in 
overall cost of funding 
(in bp) 

LAC threshold 

Average EU 
bank  

Average EU 
large banking 
group 

10.0% 

15.0% 

20.0% 

15.4 

31.5 

48.7 

13.0 

35.4 

60.6 

When comparing the overall increase in costs of funding emerging from Table 13 in the full 
effect case with those emerging from Table 9 in the case of a comprehensive approach (87bp), 
it  appears  that  both  an  average  EU  bank  and  a  large  banking  group  would  have  a  clear 
incentive  to  issue  subordinated  instruments  up  to  a  10%  LAC,  while  they  would  be 
approximately indifferent (in the case of an average EU bank) or worse off (in the case of a 
large banking group) with a 15% LAC. 

Table 14 reports the costs for an average EU bank of introducing bail-in according to the 10% 
and the 15% LAC thresholds for a 350bp increase in cost of bail-inable ("first") liabilities. 

Table  14:  Costs  for  an  average  EU  bank  of  introducing  bail-in  with  10%  and  15%  LAC 
thresholds on top of Basel III 10.5% RWA Minimum Capital Requirements 

10% 
LAC 

15% 
LAC 

Variation 
in 
funding costs 

bail-inable 

liabilities 

350bp 

350bp 

Variation in banks' funding costs (bps) 

Variation in lending spreads (bps) 

15.4 

32.3 

31.5 

66.2 

Variation  in  non-financial  firms  cost  of 
capital (bps) 

10.8 

22.1 

Yearly costs (%GDP) 

0.46% 

0.95% 

NPV of costs (%GDP) 

18.94% 

38.75% 

From these results it emerges that both the increase in the cost of funding for an average EU 
bank and the corresponding macroeconomic costs generated by bail-in could be substantially 
reduced should banks issue subordinated instruments up to a 10% LAC, compared to the case 
(see  Table  10)  of  comprehensive  approach  with  87bp.  With  a  15%  LAC,  instead,  results 
would be equivalent. 

- 142 - 

 
 
 
 
It follows that if the market is convinced that a 10% LAC is sufficient to isolate from bail-in 
unsecured  more  senior  liabilities,  the  incentive  for  banks  to  issue  bail-inable  subordinated 
debt could substantially reduce (from 31 to 15 bp) the increase in banks' costs of funding due 
to the introduction of bail-in. 

4.9  Bail-inable  /  Bail-inable  "first"  liabilities:  what  LGD  could  market  expect  on  bail-
inable ("first") liabilities with a 10% LAC on the basis of the recent crisis? 

Losses that took place in the recent crisis can be used to estimate the LGD that would have 
applied  on bail-inable / bail-inable "first" liabilities with a 10% LAC should bail-in have been 
in place. 

Various sources have been used to estimate the losses that took place during the recent crisis: 

(cid:131)  The report from the Independent Commission on Banking, where losses cumulated by 
these 23 banks and banking groups in years 2007-2010 are reported as a percentage of 
their 2006 RWA.185 

(cid:131)  A  proprietary  study  from  Credit  Swiss  on  bail-in  which  reports  losses  cumulated  by 

banks in 2008-2009.186 

(cid:131)  Data from European Commission on public interventions in support to banks occurred 

between 2008 and 2010.187  

(cid:131)  Bloomberg WDCI database 
(cid:131)  Data from Bankscope on profits and losses between 2007 and 2010.188 

Combining  data  from  all  these  sources,  an  estimate  of  the  losses  for  each  bank  has  been 
prudentially  obtained  as  the  maximum  value  for  that  specific  bank  among  all  available 
sources. 

The estimated losses and recapitalisation funding needs can be compared with the amount of 
banks' Minimum Capital Requirements under Basel III, as shown in Table 15. 

185   http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf 

186   Of the 23 considered banks, this study covers 7 banks and banking groups. 

187   This data cover recapitalisation, guarantees on bank liabilities, asset relief interventions and liquidity support. For the purpose of the 
present exercise we have considered only recapitalisation and asset relief interventions. Of the 23 considered banks, ECFIN database 
covers 11 banks and banking groups. 

188   Data on banks’ balance sheets are 2010 consolidated data from Bankscope. 

- 143 - 

 
 
                                                 
Table  15:  Comparison  between  historical  losses  in  recent  crisis  (suffered  by  23  banks 
between 2008 and 2010) with Basel III Minimum Capital Requirements 

Average  Median  Maximum  Minimum 

First 
quartile 

Third 
quartile 

Total losses/ total liabilities 

2.5% 

3.2% 

46.4% 

0.2% 

1.3% 

6.3% 

losses 

Total 
+ 
funding 
recapitalisation 
needs  (8%  RWA)  /  total 
liabilities 

Capital 
Minimum 
Requirements  under  Basel 
III 10.5% 

– 

Losses 

(Extra 
Recapitalisation 
needs)/ total liabilities  

+ 
funding 

5.9% 

6.4% 

50.7% 

2.6% 

4.6% 

9.7% 

4.4% 

4.0% 

6.2% 

7.2% 

4.3% 

5.0% 

1.5% 

2.4% 

44.5% 

0% 

0.3% 

4.7% 

A 

B 

C 

=  

D 
B-C 

On  the  basis  of  results  shown  in  row  D,  the  implied  LGD  on  bail-inable  liabilities  can  be 
calculated, for the 10% LAC threshold, as shown in Table 16 below. 

Table  16:  Implied  LGD  on  bail-inable  ("first")  liabilities  with  a  10%  LAC  threshold  with 
historical losses in recent crisis (suffered by 23 banks between 2008 and 2010) 

LAC 

Average 

Median 

Maximum 

Minimum 

First 
quartile 

Third 
quartile 

10% 

27% 

40% 

>100% 

0% 

5% 

94% 

From the above table, it can be concluded that only in less than 25% of cases, with defaults 
happened during the last crisis and being bail-in available, the LGD would have been equal to 
100% on bail-inable ("first") liabilities, should just a 10% LAC thresholds had been in place 
for all banks.  In  the median  case,  the LGD would have been much lower: 40%. And in the 
average case, the LGD would have been even lower: 27%. 

The conclusion can therefore be drawn that on the basis of average and median extra-losses 
and recapitalisation needs occurred in the recent crisis, markets might consider a 10% LAC 
sufficient to isolate from bail-in unsecured more senior liabilities. Even more, markets might 
even expect substantially reduced LGD (down at least to 50%) on bail-inable "first" liabilities 
compared  to  presently  expected  LGD  (100%)  in  case  of  normal  insolvency  procedures  for 
Tier2  and  other  subordinated  debt,  should  a  10%  LAC  threshold  be  in  place  for  all  banks 
subject to bail-in. 

On  this  basis,  it  is  possible  to  conclude  that  both  banks  and  regulators  might  consider  a 
minimum  10%  LAC  threshold  as  appropriate  to  absorb  losses  and  recapitalise  banks  in  a 
crisis  comparable  to  the  recent  one.189.  Furthermore,  it  can  be  concluded  that  as  important 
factors leading to a reduction of the increase in banks' cost of funding and therefore also of 

189   For  an  analysis  based  on  SYMBOL  simulated  crisis  scenarios,  and  that  also  consider  the  interaction  between  bail-in  and  DGS/RF 

funds, see section 6. 

- 144 - 

 
 
 
  
                                                 
the macroeconomic costs of bail-in would be applicable, the results shown in Table 14 for a 
10% LAC would be modified as shown in Table 17 

Table 17: Costs of introducing bail-in with a 10% LAC threshold on top of Basel III 10.5% 
RWA Minimum Capital Requirements, considering various cost reduction factors 

10%LAC 

Full Effect 

50% LGD 
Reduction 

35% SIFIs 
reduction 

Both reductions 

350bp 

350bp 

350bp 

350bp 

Variation 
inable 
funding costs 

bail-
in 
liabilities 

Variation 
funding costs (bps) 

in  banks' 

Variation  in  lending 
spreads (bps) 

in 

Variation 
non-
financial firms cost of 
capital (bps) 

15.4 

32.3 

10.8 

Yearly costs (%GDP) 

0.46% 

NPV 
(%GDP) 

of 

costs 

18.94% 

7.7 

16.2 

5.4 

0.23% 

9.47% 

10.0 

21.0 

7.02 

0.30% 

12.31% 

5.0 

10.5 

3.51 

0.15% 

6.16% 

On the basis of this analysis and results we conclude that there is the possibility to consider an 
upper limit for the effect of bail-in on banks' cost of funding equal to 15 bp, with an annual 
macroeconomic cost around 0.46% of EU GDP, which is substantially in line with the annual 
costs (0.36% of EU GDP as shown in Table 4) of introducing DGS/RF operating as bail-out 
funds. But banks' increase in costs of funding could be lower than 15bp, and as low as 5bp, 
with an annual macroeconomic cost around just 0.15% of EU GDP190 

4.10 Conclusion on applying bail-in only 

On the basis of the whole discussion in section 4, it can be concluded that the comprehensive 
approach to bail-in has the advantage that it is able to absorb in principle almost any losses 
banks potentially could occur during  a systemic  crisis.  The restricted approach risks instead 
not being always sufficient to absorb losses for all types of banks. On this higher effectiveness 
basis, the comprehensive approach is to be preferred. 

The comprehensive approach has the disadvantage that it can significantly increases the cost 
of  funding  for  banks  even  with  the  lower  expected  increases  in  yields  for  bail-inable 
liabilities.  Since  the  expected  increase  in  yields  can  be  quite  high  even  with  the  restricted 
approach, the increase in overall cost of funding for banks can be very significant also in this 
case. Both approaches can therefore produce significant annual macroeconomic costs. 

There  are,  however,  important  factors  to  be  considered  that  modify  substantially  this 
conclusion. The most important of these factors are: 

190   These costs are substantially in line with the costs of considering for a 10% LAC an increase in the cost of bail-inable ("first") liabilities 
of  100bp  without  any  inclusion  of  cost  reduction  factors:  an  increase  of  100  bp  for  bail-inable  ("first")  liabilities  might  then  be 
considered to be already inclusive of the various effects introduced by the possible cost reduction factors. 

- 145 - 

 
 
                                                 
• 

• 

• 

• 

that  markets  might  consider  bail-in  as  a  value  enhancer  tool  for  creditors,  as  LGDs 
might  be  substantially  reduced  compared  to  those  presently  assumed  by  markets  in 
case of insolvency procedures; 
that  regulators  will  apply  bail-in  proportionally,  and  therefore  normally  only  to 
systemic banks; 
that  banks  will  have  an  incentive  to  substitute  bail-inable  liabilitites  with  non  bail-
inable liabilitites ot reduce their costs of funding; 
that banks will have an incentive to issue Tier 2 and other subordinated instruments in 
order to reduce their funding costs. 

These factors can substantially reduce the costs of introducing bail-in compared to the results 
presented in Table10, as shown in Table 17. Banks costs of funding can therefore be expected 
to rise due to the introduction of bail-in (with no ex-ante funded schemes) between 5 and 15 
bp, with an annual macroeconomic cost comprised between 0.15% and 0.46% of EU GDP.191 

5. Combination of ex-ante funding schemes with bail-in 

In order to increase the effectiveness of the resolution framework and in order to reduce its 
impact on banks' cost of funding and on the macro-economy compared to what analysed so 
far, this and the following sections analyse the possibility of applying both bail-in and the ex-
ante schemes to absorb banks' losses and provide funds to recapitalise them during resolution. 

In  Figure  1  below,  it  is  shown  how  between  the  two  situations  described  so  far  (i.e.  on  the 
right of the figure a situation where resolution is 100% supported by bail-in only, and on the 
left of the figure a situation where resolution is 100% supported only by DGS/RF (that act as 
bail-out funds), two other intermediate situations can be considered. 

In both, DGS is assumed to cover a percentage of losses equal to the share of insured deposit 
on  total  liabilities.  This  percentage,  as  shown  in  Table  5  above,  is  around  20%  of  total 
liabilities for an average EU bank. In only the first intermediate situation, a RF is funded in 
addition  to  DGS  to  assist  the  resolution  of  failing  banks,  avoiding  that  their  failure  creates 
contagion  effects.  To  achieve  this  goal,  it  is  assumed  that  RF  will  need  to  absorb  a  pre-
determined percentage of losses equal to the share of systemic exposures (here approximated 
with interbank exposures) on total liabilities. This percentage, as shown in Table 5, is around 
18% of total liabilities for an average EU bank. In the first intermediate situation, then, bail-in 
only  needs  to  absorb/provide  62%  of  losses/recapitalisation  funding  needs.  In  the  second 
intermediate  situation,  RF  is  not  funded  (as  only  DGS  and  bail-in  play  a  role)  and  bail-in 
needs to absorb 80% of losses / recapitalisation needs. 

191   This statement depend on the assumptions that supervisors will impose a minimum LAC threshold for banks of 10% or that banks can 
issue Tier 2 or other subordinated debt to reduce their cost of funding, and that the market considers a 10% LAC sufficient to isolate in 
case of bail-in more senior unsecured creditors. For the analysis of the conditions under which this assumption can be considered to be 
justified, see section 4.9 for data from the recent crisis and section 6 for the SYMBOL simulated crisis scenarios. 

- 146 - 

 
 
                                                 
Figure  1:  Possible  splits  of  losses  and  recapitalisation  needs  in  various  operational 
combinations of DGS/RF funding and bail-in 

Bail-out

DGS/RF+
Bail-in

DGS+Bail-in

Bail-in only

BAIL-OUT 

by 

DGS/RF

100%

DGS

20%

RF

18%

BAIL-IN

62%

DGS

20%

BAIL-IN

80%

BAIL-IN

100%

LOSSES

NEW 
CAPITAL

5.1 Ex-ante resolution funding needs if bail-in is introduced 

On the basis of the assumptions about how losses and recapitalisation needs will be split in 
resolution specified above, it is possible to calculate the funding needs of DGS/RF if the bail-
in tool is also available at the same time, as shown in Table 18 below. 

Table 18: DGS/RF funding (as % of covered deposits) when combining ex-ante funding and 
bail-in to cover extra-losses and recapitalise banks 

Bail Out by DGS/RF 

Very Severe Crisis 

Severe Crisis 

Extremely Severe Crisis 

Severe Crisis 

DGS/RF+Bail-in 

Very Severe Crisis 

Extremely Severe Crisis 

Severe Crisis 

DGS+Bail-in 

Very Severe Crisis 

Extremely Severe Crisis 

Extra-losses 

Extra-losses and 
Recapitalisation 

0.47% 

1.03% 

3.43% 

0.18% 

0.39% 

1.30% 

0.10% 

0.22% 

0.72% 

3.80% 

6.00% 

8.59% 

1.45% 

2.28% 

3.26% 

0.76% 

1.20% 

1.72% 

From Table 19, it is immediate to see how the amount of funding needed for ex-ante funded 
schemes is substantially decreased if bail-in is introduced to operate at the same time. 

- 147 - 

 
 
 
 
 
5.2 Reduced LGD with bail-in when ex-ante funding is introduced. 

If  part  of  the  losses  and  of  the  recapitalisation  needs  are  provided  for  by  DGS/RF  ex-ante 
funds, the minimum level of bail-inable liabilities needed to absorb losses decreases, as shown 
in Table 19 for the case where bail-in must absorb 62% of the losses). 
Table 19: Share of total liabilities needed to absorb extra-losses and recapitalisation needs192 
in the three considered SYMBOL simulated crises 

No recapitalisation 

Recapitalisation 

Regulatory Scenario 

Scenario 2.bis 
Basel III 10.5% 
No Contagion 

Severe crisis 

Very severe 
crisis 

Extremely 
severe crisis 

Severe crisis 

Very severe 
crisis 

Extremely 
severe crisis 

2% 

4% 

6% 

7% 

11% 

11% 

It  follows  that  the  potential  haircut/LGD  on  bail-inable  liabilities  can  be  expected  to 
decrease.193 This means that the cost of bail-in can be expected to be reduced compared to the 
case where no ex-ante funds are available to support resolution. 

5.3 Macroeconomic costs of combining ex ante funding with bail-in 

This  section  presents  results  concerning  the  macroeconomic  impacts  of  the  bail-in  tool 
(absorbing 62% of the losses) and of the DGS/RF ex-ante funds (absorbing 38% of the losses) 
when  they  operate  at  the  same  time.  In  the  no  recapitalisation  scenario,  an  ex-ante  fund  of 
1.30% of covered deposits is assumed, as that is needed in addition to the bail-in tool in order 
to absorb all losses in an extremely severe crisis.194 In the recapitalisation scenario, instead, an 
ex-ante fund of 3.26% of covered deposits is assumed, as that is needed in addition to the bail-
in  tool  in  order  to  absorb  all  losses  and  recapitalise  defaulted  banks  in  an  extremely  severe 
crisis. The effects on banks' costs of funding are presented in Table 20 for the case in which 
the increase in the cost of bail-inable liabilities is 55 bp under a comprehensive bail-in, and it 
is  87  bp  under  a  restricted  bail-in.  These  two  values  are  considered  coherent  with  the 
assumption  that  a  restricted  bail-in  will  in  general  impact  more  the  costs  of  bail-inable 
liabilities, and that the costs of bail-in can be moderated by the introduction of DGS/RF funds 
as these reduce the LGD investors expect in case of use of the bail-in powers by resolution 
authorities. 

192   Extra-losses and recapitalization needs not absorbed/provided are less than 0.1% of EU GDP. 

193   On  the  basis  of  the  extremely  severe  crisis  scenario  with  recapitalisation,  the  implied  LGD  for  an  average  EU  bank  in  case  of 
comprehensive bail-in decreases for example from 17/38.49 = 44% to 11/38.49=29%, and from 17/21.36=80%  to 11/21.36=51% in 
case of restricted bail-in. 

194   When DGS/RF are ex-ante funded up to 1.30% of covered deposits, DGSRF can absorb all losses in an extremely severe crisis in an 
average EU MS. When applied member State by Member States, DGS/RF ex-ante funding needs to increase to be able to cope with 
those member States that present losses higher than the average. The corresponding value that absorbs all losses in an extremely severe 
crisis  in  all  Member  States  is  obtained  by  means  of  a  so-called  "simple  rule",  according  to  which  DGS/RF  funding  is  equal  in  each 
member  States  to  the  higher  between  1.5%  of  covered  deposits  and  0.3%  of  total  liabilities.  See  Appendix  6  for  how  this  funding 
"simple rule" is derived. 

- 148 - 

 
 
 
                                                 
Table 20: Costs of introducing bail-in and DGS/RF funding on top of Basel III 10.5% RWA 
Minimum  Capital  Requirements  for  an  average  EU  bank,  considering  various  increases  on 
costs of bail-inable liabilities 

No recapitalisation 
Extremely Severe Crisis 

Recapitalisation 
Extremely Severe Crisis 

Comp. 
Bail-in 

Rest. 
Bail-in 

Comp. Bail-
in 

Rest. 
Bail-in 

DGS/RF Funding  needs (% of covered deposits) 

1.30% 

3.26% 

Increase  in  cost  of  bail-inable  liabilities  (that 
absorb 62% of losses) 

55 bp 

87 bp 

55 bp 

87 bp 

Variation in banks' funding costs (bps) 

Variation in lending spreads (bps) 

21.8 

45.5 

19.4 

40.5 

24.5 

51.2 

22.1 

46.2 

Variation  in  non-financial  firms  cost  of  capital 
(bps) 

15.3 

13.6 

17.2 

15.5 

Yearly costs (%GDP) 

0.65% 

0.58% 

0.74% 

0.67% 

NPV of costs (%GDP) 

26.83% 

23.88% 

30.22% 

27.27% 

Even  when  sided  by  ex-ante  funding,  if  it  affects  simultaneously  a  very  large  pool  of  bank 
liabilities  (comprehensive  bail-in),  bail-in  can  turn  out  to  be  costly  both  for  banks  and  the 
economy.  A  bail-in  affecting  a  more  restricted  set  of  liabilities  (restricted  bail-in)  can  in 
principle produce more limited costs. It can however happen that if the haircut/LGD expected 
by  investors  is  higher  with  the  restricted  bail-in,  the  costs  of  the  bailable-in  instrument  will 
also be higher as in the case presented, so that the overall effect on banks' funding costs might 
turn out not to be materially different from the case of the comprehensive bail-in. 

Both  bail-in  approaches  can  therefore  produce,  even  if  coupled  by  DGS/RF  ex-ante  funds, 
significant annual macroeconomic costs. However, costs can be expected to be slightly lower 
than in the case where only bail-in is used, as in appears from a comparison between results in 
Table 20 and in Table 10. Furthermore, these costs can be expected to be substantially lower 
as  those  presented  in  Table  20,  as  the  cost  reducing  factors  considered  in  section  4  (50% 
reduction for lower LGD expected by the market and 35% reduction for application only to 
SIFIs) can also expected to apply when bail-in is coupled by DGS/RF ex-ante funds. 

6.  Loss  Absorbing  Capacity  analysis  when  bail-in  and  DGS/RF  funds  sequentially 
interact  

In this section we now explore the effects of combining bail-in LAC thresholds (to consider 
banks and regulators reaction/adjustments to bail-in) and ex-ante funded DGS/RF in various 
different  sequential  ways,  to  check  whether  there  are  any  advantages  in  sequencing  in  one 
way  or  another  the  intervention  of  bail-in  and  of  DGS/RF  ex-ante  funds.195  We  also 

195  

In this section, losses are considered to be absorbed by ex-ante funded DGS/RF and by bail-inable ("first") liabilities. Other liabilities 
are  not  normally  considered,  as  the  purpose  of  the  analysis  if  the  calibration  of  bail-inable  ("first")  liabilities  in  various  possible 
sequenced interactions with DGS/RF. 

- 149 - 

 
 
  
  
                                                 
investigate  on  the  basis  of  the  SYMBOL  model  what  a  correct  calibration  of  the  LAC 
threshold might be (after the analysis shown above on the basis of the losses banks had in the 
recent crisis). 

6.1 Five considered options 

There  are  various  ways  in  which  bail-inable  ("first")  liabilities  and  funded  schemes  can 
interact  in  absorbing  losses  (and  recapitalising  banks).  Their  interaction  determines  when/in 
which  order  (sequencing)  bail-inable  ("first")  liabilities,  DGS  and  RF  absorb  losses  and 
participate  to  banks'  recapitalisation,  and  therefore  which  part  of  losses  (and  of  banks' 
recapitalisation costs) they assume. 

Five options have been analysed: 

1.  The bail-in tool is used first to absorb losses and if needed DGS and RF assumes the 

rest of the losses; 

2.  All  three  tools  absorb  losses  at  the  same  time  (DGS:  losses  falling  on  covered 
deposits;  RF:  losses  falling  on  systemic  liabilities,  here  assumed  to  be  interbank 
liabilities; bail-in: losses falling on the rest of the liabilities); 

3.  DGS and bail-in absorb losses first. If losses are higher than what bail-in can absorb, 

RF absorbs the rest of the losses (as suggested by the Financial Stability Board); 

4.  DGS/RF  absorb  losses  first.  If  losses  are  higher  than  what  DGS/RF  can  absorb,  the 

bail-in tool is activated to assume the rest of the losses; 

5.  DGS and bail-in absorb losses at the same time and RF does not exist. 

6.2  What  amount  of  bail-in-able  ("first")  liabilities  and  DGS/RF  funding  should  be 

available? 

The need of how many bail-in-able ("first") liabilities and of how much funding for DGS/RF 
depend  on  the  decision  of  how  severe  a  crisis  the  resolution  framework  should  withstand. 
Furthermore,  and  in  general  terms,  it  can  be  expected  that  the  more  ex-ante  funds  are 
available to schemes, the fewer bail-in-able ("first") liabilities banks need to hold to cope with 
a given type of crisis, and vice versa. 

Calibration under the extremely severe crisis scenario 

The  following  Figure  2  and  Figure  3  present,  for  the  five  analysed  options,  how  in  the 
extremely  severe  crisis  scenario  the  interaction  between  bail-in-able  ("first")  liabilities  and 
funding available to the DGS/RF schemes creates a safety net that avoids material impacts on 
public finances.196 

Figure 2 shows, in particular, all combinations of DGS/RF funding and banks LAC that can 
absorb  all  material  losses  in  excess  of  bank  capital  (no  recapitalisation  scenario)  in  an 
extremely severe crisis. 

196   Losses on public finances are lower than 0.1% of the GDP. 

- 150 - 

 
 
                                                 
Figure 2: Combinations of banks LAC and DGS/RF funds ensuring a loss for public finances 
smaller than 0.1% of GDP, extremely severe crisis scenario, only loss absorption (no banks 
recapitalization)  

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

For the resolution framework to be able to absorb any material losses in an extremely severe 
crisis scenario, banks should have a LAC of around 11-16% of total liabilities, depending on 
the considered option and on the level of ex-ante funding available to DGS/RF. 

Figure 3 shows instead all combinations of DGS/RF funding and banks LAC that can absorb 
losses  in  excess  of  bank  capital  and  also  recapitalise  banks  (recapitalisation  scenario)  in  an 
extremely severe crisis scenario. 

Figure 3: Combinations of banks LAC and DGS/RF funds assuring a loss for public finances 
smaller  than  0.1%  of  GDP,  extremely  severe  crisis  scenario,  loss  absorption  plus  banks 
recapitalization 

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

- 151 - 

 
 
 
 
 
 
If  the  resolution  framework  is  to  cater  also  for  banks'  recapitalization,  banks  should  have  a 
LAC  of  at  least  13-25%  of  total  liabilities,  depending  on  the  considered  option  and  on  the 
level of ex-ante funding available to DGS/RF. 

From these two graphs and comparing Option 2 and Option 5 with the other options, it is in 
general  possible  to  see  that  introducing  appropriate  sequencing  between  bail-inable  ("first") 
liabilities and ex-ante funds allows to absorb losses and provide recapitalisation funding needs 
either reducing ex-ante funding, banks' LAC being kept equal, or reducing banks' LAC, ex-
ante funding being kept equal. 

There  is  therefore  the  possibility  to  maintain  the  effectiveness  of  the  resolution  framework, 
while  reducing  its  requirements  thanks  to  an  appropriate  sequencing  between  the  various 
instruments of the financial safety net.  

The  macroeconomic  cost  of  a  resolution  framework  that  could  tackle  an  extremely  severe 
crisis scenario without any material recourse to public finances would be comprised between 
0.2% and 0.6% of EU GDP annually (as it can be inferred from Figure 4) when the resolution 
framework  is  calibrated  only  to  absorb  losses.  The  macroeconomic  costs  could  instead  be 
comprised between 0.3% and more than 1% of EU GDP annually (as it can be inferred from 
Figure  5)  should  the  resolution  framework  be  calibrated  to  absorb  all  material  losses  and 
recapitalise banks.197 

Figure 4: Macroeconomic costs (in NPV) as a % of EU GDP for combinations of banks LAC 
and DGS/RF funds assuring a loss for public finances smaller than 0.1% of GDP, extremely 
severe crisis scenario, only loss absorption (no banks recapitalization) 

NPV of macroeconomic costs due to resolution funding needs of all options 
with equivalent risk in the extremely-severe scenario, banks as gone concern.
Threshold 0.1%  GDP

40

30

20

)

P
D
G
%

(
s
t
s
o
c
c
i
m
o
n
o
c
e
o
r
c
a
m

10

f
o
V
P
N

0

16

16

16

0

14

15

14

0.5

12

15

12

13

1.0

Opt1

Opt2

Opt3

Opt4

Opt5

11

14
11
13

12

SR

11

13

11

14

12

1.5

DGS/RF funding level (% of covered deposits)

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

197   Figure 4 and Figure 5 show  macroeconomic costs in  Net present Value terms  (NPV). Annual costs can be obtained simply dividing 

NPV values by 41. For details on how annual and NPV macroeconomic costs are calculated, see section 8.2.1 and Appendix 5. 

- 152 - 

 
 
 
 
 
 
 
 
 
 
                                                 
Figure 5: Macroeconomic costs (in NPV) as a % of EU GDP for combinations of banks LAC 
and DGS/RF funds assuring a loss for public finances smaller than 0.1% of GDP, extremely 
severe crisis scenario, loss absorption and banks recapitalization 

NPV of macroeconomic costs due to resolution funding needs of all options 
with equivalent risk in the extremely-severe scenario, banks as going concern.
Threshold 0.1%  GDP

40

30

20

25

25

)

P
D
G
%

i

(
s
t
s
o
c
c
m
o
n
o
c
e
o
r
c
a
m

10

f
o
V
P
N

0

16

18

20

14
18

16

20

13

18

19

13

17

Opt1

Opt2

Opt3

Opt4

Opt5

13

18
19

13

17

0

0.5

1.0

1.5

SR

DGS/RF funding level (% of covered deposits)

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

On the basis of these results, and in  order to  reduce  macroeconomic  costs  coming  from  the 
resolution  framework,  Commission  Services  believe  that  it  is  appropriate  to  calibrate  the 
resolution framework on the very severe crisis scenario (SYMBOL 99.95% simulation). The 
outcomes  of  this  scenario  are  in  fact  very  similar  to  those  of  the  past  crisis  and  should 
therefore guarantee a sufficient level of confidence in the real effectiveness of the framework, 
should a new crisis occur. 

Calibration under a very severe crisis scenario 

If  the  resolution  framework  is  to  be  able  to  absorb  losses  in  a  very  severe  crisis  scenario, 
which can be considered similar to the recent crisis, as shown in Figure 6 banks need to have 
a  LAC  of  0-12%  of  total  liabilities  depending  on  the  considered  option  and  on  the  level  of 
available DGS/RF funds. 

- 153 - 

 
 
 
 
 
 
 
 
 
Figure 6: Combinations of banks LAC and DGS/RF funds assuring a loss for public finances 
smaller  than  0.1%  GDP,  Very  severe  crisis  scenario,  only  loss  absorption  (no  banks 
recapitalisation) 

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

If the resolution framework is to be able to recapitalise banks as well, as shown in Figure 7 
banks need  to have a LAC  of 7-25% of total liabilities,  depending on the level  of available 
DGS/RF funds. 

Figure  7:  Combinations  of  banks  LAC  requirements  and  DGS/RF  funds  assuring  a  loss  for 
public  finances  smaller  than  0.1%  GDP,  Very  severe  crisis  scenario,  loss  absorption  plus 
banks recapitalisation 

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

- 154 - 

 
 
 
 
 
7. Analysis of the proposed bail-in and ex-ante funding calibration 

The  calibration  of  the  resolution  framework  for  Impact  Assessment  purposes  is 
proposed  as  follows:  a  10%  minimum  Loss  Absorbing  Capacity  (regulatory  capital  + 
bail-in-able  ("first")  liabilities  /  total  liabilities)  under  Option  3  with  a  1%  of  covered 
deposits funding of DGS/RF.198 

According  to  this  option,  resolution  authorities  shall  ensure  that  banks  always  have  an 
adequate  amount  of  bail-inable  liabilities.  At  the  very  minimum,  the  sum  of  (i)  each  bank's 
regulatory  capital  and  (ii)  its  bail-inable  liabilities  must  be  10%  of  its  liabilities  (the  '10% 
minimum LAC rule'). 

The  10%  minimum  LAC  rule  is  to  be  applied  at  the  level  of  each  bank  as  the  analysis  has 
been performed  at  solo level. However, and consistent with the principle  of proportionality, 
the 10% minimum LAC rule could be waived by resolution authorities where there is minimal 
likelihood  of  bail-in  having  to  be  applied  in  order  to  maintain  financial  stability.  Specific 
conditions could be met for waivers to be given, to minimise the risk of financial instability 
when banks default and to ensure a level playing field for banks. 

Within this framework, banks may decide to issue additional subordinated instruments so as 
to  meet  the  10%  minimum  LAC  requirement,  so  as  to  ensure  a  sequential  bail-in  within  an 
otherwise (by default) comprehensive bail-in, should this be convenient for them and reduce 
their funding costs, creating in this way bail-inable "first" liabilities. 

When the bail-in tool is applied, authorities first write down equity, then subordinated debt, 
then  bail-inable  "first"  liabilities  if  relevant,  then  all  other  bail-inable  liabilities,  if  any  is 
available. 

7.1  How  effective  would  the  proposed  calibration  be  in  an  extremely  severe  crisis 
scenario? 

The proposed calibration allows for public finances to cover some costs in the most extreme 
crisis  scenario.  The  possible  fiscal  burden  needs,  however,  to  be  consistent  with  the 
provisions of the new stability and growth pact in all cases, i.e. even under a extremely severe 
crisis Two conditions have been, in particular, analysed to be complied with: 

1  –  should  banks  not  need  to  be  recapitalised  (no  recapitalisation  scenario),  public  finances 
should  not  substantially  deviate  (0.5%  of  GDP)  from  the  required  0%  deficit  in  the  new 
stability and growth pact; 

2  –  should  banks  need  to  be  recapitalised  (recapitalisation  scenario),  public  finances  would 
have  to  participate  in  that,  but  at  least  without  entering  into  an  excessive  deficit  procedure 
(3% of GDP). 

Figures 8 and 9 present the combinations of banks LAC and DGS/RF funding that can fulfil 
the two criteria above. 

198   This  calibration  of  the  resolution  framework  proposed  for  Impact  Assessment  purposes  must  be  intended  as  in  addition  to  the 
implementation of Basel III, including its more stringent definitions of capital and  minimum capital requirements equal to 10.5% of 
Risk-Weighted Assets (RWA)). 

- 155 - 

 
 
                                                 
Figure  8:  Combinations  of  banks  minimum  LAC  requirements  and  DGS/RF  ex-ante  funds 
assuring a loss for public finances smaller than 0.5% GDP, extremely severe crisis scenario, 
only loss absorption (no banks recapitalisation 

Indifference curves assuring a loss for PF smaller than 0.5% GDP, as 
banks gone concern, extremely-severe scenario

Opt1

Opt 2

Opt 3

Opt 4

Opt 5

20

18

16

14

12

10

8

6

)
L
T
%

(

s
e
i
t
i
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i

b
a
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"
t
s
r
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"

e
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a

n

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a
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s
u

l

p

l
a
t
i

p
a
C

0

0.5

1

1.5

SR

DGS/RF funding level (% of covered deposits)

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

Figure  9:  Combinations  of  banks  minimum  LAC  requirements  and  DGS/RF  ex-ante  funds 
assuring  a  loss  for  public  finances  smaller  than  3%  GDP,  extremely  severe  crisis  scenario, 
loss absorption and banks recapitalisation 

Indifference curves assuring a loss for PF smaller than 3% GDP, as 
banks going concern, extremely-severe scenario

Opt1

Opt 2

Opt 3

Opt 4

Opt 5

)
L
T
%

(

s
e
i
t
i
l
i

b
a
i
l

"
t
s
r
i
f
"

e
l

b
a

n
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p

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t
i

p
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20

18

16

14

12

10

8

6

0

0.5

1

1.5

SR

DGS/RF funding level (% of covered deposits)

* SR = 'Simple Rule' = max (1.5% covered deposits, 0.3% total liabilities) 

As figures above show, the proposed calibration is able to respect the two above criteria, and 
it  can  be  therefore  considered  to  be  consistent  with  the  new  stability  and  growth  pact  in  all 
relevant crisis scenarios. 

- 156 - 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7.2.  Macroeconomic  cost/benefit  analysis  of  the  proposed  bail-in  and  DGS/RF  funding 
calibration 

7.2.1 Macroeconomic Costs 

The  macroeconomic  costs  of  introducing  sequenced  bail  in  and  DGS/RF  ex-ante  funding 
according to the proposed calibration is now investigated. 

The  five  different  options  can  be  considered  to  increase  differently  the  cost  of  bail-in-able 
("first") liabilities. This is due to the differences in seniority of bail-in-able ("first") liabilities 
vis-à-vis other liabilities such as deposits covered by DGS and other systemic liabilities (such 
as very short term or interbank liabilities) covered by the RF. Table 21 presents the increase in 
the yields on bail-in-able "first" long term liabilities which have been assumed in the analysis. 

Table  21  Assumed  increase  in  the  yields  of  bail-in-able  "first"  liabilities  in  the  various 
considered options. 

Option 1 

200bp 

Option 2 

87bp 

Option 3 

100bp 

Option 4 

55bp 

Option 5 

100bp 

On  the  basis  of  these  assumptions,  calculations  have  been  undertaken  relating  to  banks' 
funding cost increases (see Table 22). 

Table 22: Impact of different levels of minimum LAC on banks cost of funding (Scenario Basel 
III 10.5%) in basis points 

Minimum LAC 

(% of total liabilities) 

Option 1 

Option 2 

Option 3 

Option 4 

Option 5 

4 

6 

8 

10 

12 

15 

20 

1.1 

2.9 

5.8 

9.3 

13.1 

19.2 

30.6 

0.3 

0.8 

1.6 

2.6 

3.6 

5.4 

9.6 

0.5 

1.4 

2.9 

4.7 

6.6 

9.7 

16.1 

0.5 

1.3 

2.5 

4.1 

5.7 

8.4 

0.5 

1.4 

2.9 

4.7 

6.6 

9.7 

14.2 

16.1 

- 157 - 

 
 
 
 
The  effect  on  macroeconomic  costs  and  other  macroeconomic  variables  due  to  how  bail-in 
affect banks' costs of funding can be obtained on the basis of the following Table 23, simply 
multiplying  its  values  times  the  bp  increase  in banks'  cost  of  funding  as  shown  in  Table  22 
above.  

Table  23:  Macroeconomic  impact  of  introducing  bail-in  per  unit  increase  in  banks  cost  of 
funding. 

Variation  in  banks'  funding 
costs (bps) 

Variation in lending spreads 
(bps) 

Variation 
firms cost of capital (bps) 

in  non-financial 

1bp 

2.1 

0.7 

Yearly costs (%GDP) 

0.03% 

NPV of costs (%GDP) 

1.23% 

The macroeconomic costs of bail-in must be considered always jointly with those of DGS/RF 
funding  introduced  at  the  same  time.  Table  24  below  presents  the  macroeconomic  costs  of 
bail-in, in addition to macroeconomic costs of funding DGS/RF for 1% of covered deposits. 
For completeness sake, macroeconomic costs of introducing Basel III are also shown. Costs 
are presented both in NPV and annual terms. 

- 158 - 

 
 
 
Table  24:  Macroeconomic  costs  of  Basel  III  10.5%,  funding  DGS/RF  for  1%  of  covered 
deposits, and bail-in (provisionally proposed according to option 3 and 10% Minimum LAC), 
as % of 2009 GDP. 

Basel III 

10.5% 

DGS-RF 
funding 
(1% of 
covered 
deposits) 

6% 
Minimum 
LAC 

8% 
Minimum 
LAC 

10% 
Minimum 
LAC 

12% 
Minimum 
LAC 

20% 
Minimum 
LAC 

Option 1 - NPV 

Option 2 - NPV 

3.56% 

7.13% 

11.43% 

16.10% 

37.61% 

1.60% 

3.07% 

5.04% 

7.01% 

17.45% 

Option 3 - NPV 

6.72% 

1.72% 

1.72% 

3.56% 

5.78% 

8.11% 

19.79% 

Option 4 - NPV 

Option 5 - NPV 

Option 1 - Annual 

Option 2 – Annual 

0.98% 

1.97% 

3.20% 

4.42% 

11.80% 

1.72% 

3.56% 

5.78% 

8.11% 

19.79% 

0.09% 

0.17% 

0.28% 

0.39% 

0.92% 

0.04% 

0.07% 

0.12% 

0.17% 

0.43% 

Option 3 – Annual 

0.16% 

0.04% 

0.04% 

0.09% 

0.14% 

0.20% 

0.48% 

Option 4 – Annual 

Option 5 - Annual 

0.02% 

0.05% 

0.08% 

0.11% 

0.29% 

0.04% 

0.09% 

0.14% 

0.20% 

0.48% 

7.2.2 Sensitivity Analysis on Macroeconomic Costs 

In  this  section,  we  consider  alternative  effects  on  the  costs  of  bank  liabilities  that  could 
determine higher increases in banks' costs of funding. Considered situations shown in Table 
25 present an effect on banks costs of funding in the worst cases close to 15 bp, which has 
therefore been chosen as a prudential three times bigger effect than what estimated as central 
scenario.. 

- 159 - 

 
 
  
 
Table 25: Macroeconomic costs of funding DGS/RF for 1% of covered deposits, and bail-in. 

DGS/RF Recapitalization needs (% of covered 
deposits)  

1% 

1% 

1% 

1% 

Δ in cost of bail-inable "first" liabilities 

100bp 

100bp 

200bp 

350bp 

Δ in cost of bail-inable "second" liabilities 

Δ in banks' funding costs due to RF req (bps) 

Δin banks' funding costs due to Bail-inable bonds 
(bps) 

Δ in banks' funding costs – total (bps) 

Δ in lending spreads, total (bps) 

Δ in non-financial firms cost of capital (bps) 

0bp 

1.4 

4.7 

6.1 

12.1 

4.1 

35bp 

20bp 

1.4 

1.4 

0bp 

1.4 

15.6 

15.2 

15.4 

17.0 

32.5 

11.9 

16.6 

31.7 

11.6 

16.8 

32.1 

11.8 

Yearly costs (%GDP) 

NPV of costs (%GDP) 

0.18% 

0.51% 

0.50% 

0.50% 

7.5% 

20.90% 

20.41% 

20.66% 

7.3 Benefits 

7.3.1 Benefits for public finances 

Different scenarios are built with the aim of investigating the effects on public finances of the 
various regulatory measures aimed at strengthening the financial safety net (See Table 26). 

In the worst scenario (Scenario 1), banks are assumed to satisfy at least capital requirements 
according  to  the  rules  of  Basel  II  but  the  more  stringent  definitions  of  capital  and  RWA  of 
Basel III are applied when determining the level of capital which can be effectively used to 
absorb  losses.  Ex-ante  funded  DGS/RF  are  considered  not  to  be  in  place,  contagion  occurs 
and no bail-in is considered. 

After two intermediate ones, in the best scenario (Scenario 4), banks are assumed to satisfy a 
minimum  capital  requirement  of  10.5%  (representing  the  fact  that  a  capital  conservation 
buffer is introduced on top of the 8% capital requirement), with capital and RWA considered 
according to the more stringent definitions of Basel III, DGS/RF are assumed to be funded for 
1%  of  covered  deposits  (according  to  the  proposed  provisional  calibration  of  the  resolution 
framework),  the  legal  framework  for  resolution  is  able  to  block  contagion  effects  between 
banks;  part  of  the  losses  is  absorbed  by  bail-in  according  to  Option  3,  the  Loss  Absorbing 
Capacity of banks is equal to 10% of their total liabilities. 

- 160 - 

 
 
 
Table 26: SYMBOL scenarios for benefits on public finances 

Definition of 
capital and 
of RWA 

Capital 
Requirements 

DGS/RF 
1% of Cov. Dep. 

Bail in Option 3 
10% min LAC 

Contagion 

Regulatory 
Scenarios199 

Basel 
II 

Basel 
III 

10.5% 

Yes 

No 

Yes 

No 

Yes 

No 

1 

2 

3 

4 

Basel III 

X 

Basel III 

Basel III 

Basel III 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

X 

Scenario  1  represents  the  situation  at  the  beginning  of  the  financial  crisis;  Scenario  2 
represents  a  situation  with  banks  that  satisfy  Basel  III  more  stringent  requirements,  but 
without a functioning resolution framework that can stop contagion. Scenario 3 represents the 
situation  in  which  an  effective  resolution  framework  is  introduced  and  contagion  between 
banks  is  effectively  stopped.  Scenario  4  is  like  Scenario  3,  but  bail-in  is  implemented 
according to the proposed calibration. 

All scenarios are then also evaluated for both the “no recapitalisation” and “recapitalisation” 
cases. These can be thought of as representing the polar cases where no undercapitalized (but 
not failed) banks produce any systemic  consequences, and where all undercapitalized banks 
produce instead systemic consequences. 

Losses  potentially  hitting  public  finances  are  presented  in  Table  27  for  two  SYMBOL 
simulations:  the  very  severe  and  the  extremely  severe  crisis  scenarios.  Both  the  no 
recapitalisation and the recapitalisation scenarios have been considered. In order to facilitate 
the reading of the results, costs for public finances have been expressed as percentage of 2009 
GDP. 

199   Regulatory  scenario  numbering  is  chosen  so  as  to  be  aligned  with  that  of  the  Commission  Staff  Working  Paper  "Comprehensive 

Evaluation of Financial Market Regulatory Reforms" 

- 161 - 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Table 27: Losses for public finances in different crisis scenarios, as % of 2009 GDP 

No recapitalisation 

Recapitalisation 

Regulatory Scenario 

Very 

Severe 
crisis 

Scenario 1 

12.81% 

Scenario 2 

Scenario 3 

Scenario 4 

8.03% 

0.22% 

0.00% 

Extremely 
severe 
crisis 

17.22% 

13.81% 

1.58% 

0.25% 

Very 
severe 
crisis 

22.27% 

14.08% 

2.32% 

0.18% 

Extremely 
severe 
crisis 

27.96% 

2258% 

5.45% 

1.76% 

The  benefits  of  the  improved  bank  regulatory  framework  can  be  measured  in  terms  of  a 
decrease  in  potential  costs  to  public  finances  from  defaulted  (failed  or  failed  and 
undercapitalised)  banks.  The  introduction  of  Basel  III  reduces  in  an  extremely  severe  crisis 
scenario  the  losses  for  public  finances  from  17.22%  to  13.81%  of  GDP  in  the  no 
recapitalisation scenario and from 27.96% to 22.58% of GDP when banks recapitalisation is 
considered.  The  introduction  of  the  resolution  framework  further  decreases  these  losses  to 
1.58%  in  the  no  recapitalisation  scenario  and  to  5.45%  of  EU  GDP  if  recapitalisation  is 
considered.  The  introduction  of  bail-in  as  calibrated  further  reduces  these  losses  down  to 
0.25% of EU GDP in the no recapitalisation scenario and to 1.76% of EU GDP when banks 
recapitalisation is considered. 

7.3.2 Macroeconomic benefits 

Macroeconomic  benefits  arise  from  the  fact  that  individual  banks'  increased  capital,  higher 
DGS/RF  funding  and  increased  LAC  due  to  the  introduction  of  bail-in  are  able  to  absorb 
losses  originated  by  banks  to  a  higher  extent;  and  this  determines  a  reduction  in  the 
probability of a systemic banking crisis (SystemicPD henceforth).200  

In  particular,  macro-economic  benefits  are  calculated  by  multiplying  the  reduction  in  the 
SystemicPD obtained under any given regulatory scenario times the total (avoided) costs of a 
systemic banking crisis, and then computing the net present value. 

Total  (avoided)  costs  of  a  systemic  banking  crisis  are  in  particular  estimated  on  the 
assumption that the banking crisis is going to cause an initial reduction in GDP, which can be 
split  between  a  part  which  has  a  temporary  effect  and  a  part  whose  effect  is  permanent.  In 
particular in this analysis, 67% of the initial GDP reduction due to the crisis is assumed to be 
reabsorbed in 5 years , while the remaining 33% is assumed to be a permanent loss.201, Total 

200   A  systemic  banking  crisis  is  defined  as  a  situation  where  aggregate  liquidity  shortfalls  due  to  defaulted  banks  exceed  a  certain 
threshold, beyond which public authorities find it difficult to intervene by injecting liquidity and therefore would have a hard time in 
trying and avoiding that the crisis spreads further. The threshold for a systemic banking crisis in any country is assumed to be equal to 
3% of its GDP. The SystemicPD under any regulatory scenario is obtained using the SYMBOL model. See infra and Appendix 4 for 
details. 

201 

In other words, a systemic banking crisis is assumed to induce a permanent level shift in the growth path of GDP. The split (67% and 
33%) between temporary and permanent effects is in line with the median result of the models analysed by the Basel Committee on 

- 162 - 

 
 
 
                                                 
(avoided) costs of the crisis are defined as the net present value of the sum of the of these two 
components. The real interest rate used for the discount factor to calculate this present value is 
 i = 2.5%.202 

The initial reduction in GDP due to a systemic banking crisis is estimated on the basis of the 
observed shortfalls on trend GDP in the countries considered in the analysis.203 Results of the 
estimates of total (avoided) costs of a crisis are presented in Table 28. 

Table28: GDP change in 2009, estimated initial (avoided) cost of a systemic banking crisis, 
and estimated total (avoided) cost of a systemic banking crisis. 

Country 

2009 GDP change 

Initial cost of a  
systemic banking crisis 
(% GDP) 

Total (avoided) cost of a 
systemic banking crisis 
(% GDP) 

GDP weighted 
average 

-4.26% 

-5.49% 

91.88% 

The  SYMBOL  model  is  employed  to  calculate  how  the  probability  of  a  systemic  banking 
crisis  in  19  European  countries  would  change  as  a  result  of  the  new  regulation.  SYMBOL 
simulates aggregate loan loss distributions for the banking sector in each country. 

Banks in default are those where simulated loan losses are higher than the amount of actual 
capital,  in  the  no  recapitalisation  scenario.  Banks  in  default  are  instead  those  where  losses 
reduce capital under minimum capital requirements in the recapitalisation scenario. 

On  the  bases  of  this  information,  it  is  possible  to  derive  the  distribution  of  the  amount  of 
deposits  held  by  failed  banks  (in  the  no  recapitalisation  scenario)  or  by  banks  with  capital 
under  minimum  capital  requirements  (in  the  recapitalisation  scenario)  and  covered  by  the 
DGS  in  each  country  (“liquidity  shortfalls”).  Given  this  distribution,  a  systemic  financial 
crisis is defined as one in which a country specific liquidity shortfall (the total amount of 
insured deposits of failed or undercapitalised banks in each country) exceeds 3% of the 
country's GDP. 

The  SYMBOL  model  can  therefore  be  used  to  estimate  how  the  probability  of  a  systemic 
banking crisis is reduced by changes in the regulatory scenario, as shown in Table 29 below. 
204 

Banking  Supervision  (2010),  An  assessment  of  the  long-term  economic  impact  of  stronger  capital  and  liquidity  requirements, 
http://www.bis.org/publ/bcbs173.pdf). The split used by the Bank of England is, instead, 75% and 25%.. 

202 

It is important to note that the present analysis assumes that the reduction in GDP and its shortfall on trend GDP are solely due to the 
systemic  banking  crisis.  The  GDP  variation  at  2000  market  prices  (2009  versus  2008)  is  taken  from  AMECO,  the  annual  macro-
economic database of the European Commission's Directorate General for Economic and Financial Affairs (DG ECFIN), available at  
http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm 

203  The initial cost of a systemic banking crisis is considered as the 2009 shortfall on trend GDP. Trend GDP is the GDP that would have 
been observed in 2009 if economies would have grown at their potential growth rate for this period. This rate is currently estimated at 
an average equal to 1.2% for western European countries (for more details on the estimation procedure, see D'Auria F., Denis C., Havik 
K.,  Mc  Morrow  K.,  Planas  C.,  Raciborski  R.,  Röger  W.  and  Rossi  A.  (2010),  The  production  function  methodology  for  calculating 
potential growth rates and output gaps, Economic Papers 420, European Commission Directorate General for Economic and Financial 
Affairs). 

204  

It  is  worth  noticing  how,  although  obtained  with  a  different  methodology,  these  changes  in  the  probability  of  a  systemic  crisis  are 
compatible with those obtained by the Basel LEI Group. See Table 8 on page 29, http://www.bis.org/publ/bcbs173.pdf. 

- 163 - 

 
 
 
                                                                                                                                                         
Table  29:  Probabilities  of  a  systemic  banking  crisis  (Systemic  PD)  and  its  variation  across 
three Scenarios estimated via SYMBOL (weighted averages over the considered countries) 

Scenario 1 

Scenario 2 

Scenario 3 

Scenario 4 

Basel II 

Basel III, 10.5% 

Basel III, 10.5% 

Basel III, 10.5% 

no DGS/RF 

no DGS/RF 

Contagion 

Contagion 

No Bail-in 

No Bail-in 

DGS/RF 
1% Cov. Dep 

DGS/RF 
1% Cov. Dep 

No Contagion 

No Contagion 

No Bail-in 

Bail-in 

SystemicPD 
RECAP 

–  NO 

0.49% 

SystemicPD – RECAP 

5.20% 

0.16% 

1.66% 

0.12% 

1.31% 

0.03% 

0.48% 

Absolute  decrease  in 
the  SystemicPD    from 
previous  Scenario  – 
NO RECAP 

Absolute  decrease  in 
the  SystemicPD    from 
previous  Scenario  – 
RECAP 

-0.33% 

-0.04% 

-0.09% 

-3.54% 

-0.35% 

-0.83% 

Macro-economic benefits coming from the reduction in the probability of a systemic banking 
crisis are therefore as shown in Table 30. 

- 164 - 

 
 
 
 
 
 
 
Table30 Macroeconomic benefits of different regulatory scenarios, % of 2009 GDP 

Basel III 
10.5% RWA205 

DGS/RF 
1% Cov. Dep. 

Bail-in 

Sum 

Scenario 2 

Scenario 3 

Scenario 4 

Scenario 4 

vs 

vs 

vs 

vs 

Scenario 1 

Scenario 2 

Scenario 3 

Scenario 1 

No recapitalisation – NPV 

12.45% 

1.51% 

3.39% 

17.35% 

Recapitalisation - NPV 

133.53% 

13.20% 

31.31% 

178.04% 

No recapitalisation – Annual 

Recapitalisation - Annual 

0.30% 

3.26% 

0.04% 

0.32% 

0.08% 

0.76% 

0.42% 

4.34% 

7.3.3 Net benefits 

Net benefits are obtained as the difference between benefits and costs. Table 31 below shows 
the separate and joint net benefits of imposing Basel III, introducing DGS/RF ex-ante funded 
for  1%  of  covered  deposits  and  bail-in  introduced  according  to  Option  3  and  with  the 
requirement  for  all  banks  to  have  a  10%  Minimum  LAC.  The  effect  is  clearly  positive  for 
Basel III when banks do not need to be recapitalised and can be liquidated (no recapitalisation 
scenario).  In  this  situation,  the  macroeconomic  effect  of  funding  DGS/RF  and  introducing 
bail-in  is  substantially  neutral.  Funding  of  DGS/RF  and  introducing  bail-in  show  instead 
important benefits when the recapitalisation scenario is considered. 

205   NPV of net benefits of imposing different levels of minimum capital requirements are presented in Appendix V. 

- 165 - 

 
 
 
 
 
                                                 
Table  31  Cumulative  and  marginal  net  benefits  of  introducing  higher  minimum  capital 
requirements  for  banks,  DGS/RF  and  bail-in  (weighted  average  of  the  PV  of  costs  and  net 
benefits as %GDP). 

Basel III 
10.5% RWA206 

DGS/RF 
1% Cov. Dep. 

Bail-in 

Sum 

No recapitalisation NPV 

5.73% 

-0.21% 

-2.39% 

3.13% 

Recapitalisation - NPV 

126.81% 

11.48% 

25.53% 

163.82% 

No recapitalisation - Annual 

Recapitalisation - Annual  

0.14% 

3.09% 

-0.01% 

-0.06% 

0.28% 

0.62% 

0.08% 

4.00% 

Benefits from Basel III can be prudentially considered only limited to what they emerge in the 
no-recapitalisation scenario. This, due to the fact that Basel III is a prudential tool aimed at 
avoiding that bank fail, and not that bank become undercapitalised. 

Benefits  from  ex-ante  scheme  funding  and  bail-in  can  instead  be  considered  in  the 
recapitalisation scenario as these instruments can be expected to be particularly used during a 
systemic banking crisis, where (possibly all) banks become systemic and they need to be kept 
as going concerns, i.e. in a situation comparable to what happened during the recent crisis that 
started in 2008. 

On  this  basis,  the  net  cumulative  benefits  of  Basel  III,  DGS/RF  ex-ante  funded  for  1%  of 
covered  deposits  and  bail-in  (according  to  option  3  with  10%  minimum  LAC)  can  be 
expected to be around 1% of GDP annually. 

7.3.4 Sensitivity analysis on net benefits 

If  costs  from  bail-in  turn  out  to  be  higher,  analysis  shows  that  banks  funding  costs  might 
increase not only 5 bp, but up to 15 bp due to bail-in. In this case macroeconomic annual costs 
and benefits become higher as presented in Table 32. Net benefits decrease but they are still 
positive and equal to 0.76%. 

Table32: Cumulative and marginal net benefits of introducing Basel III, DGS/RF and bail-in 
(as % of 2009 GDP). 

Basel III 
10.5% RWA 

DGS/RF 
1% Cov. Dep. 

Bail-in 

Sum 

Costs – Annual 

Benefits – Annual 

0.16% 

0.30% 

Net Benefits - Annual 

0.14% 

0.04% 

0.32% 

0.28% 

0.14%-0.42% 

0.34%-0.62% 

0.76% 

1.38% 

0.34%-0.62% 

0.76%-1.04% 

206   NPV of net benefits of imposing different capital requirements are presented in Appendix V. 

- 166 - 

 
 
 
 
 
 
                                                 
8. How does 10% LAC compares to the Vicker's rule? 

The  minimum  level  of  bail-in-able  liabilities  (regulatory  capital  and  bail-inable  ("first") 
liabilities)  is  set  in  the  analysis  as  a  percentage  of  total  liabilities  (excluding  regulatory 
capital).  Another  option  would  be  to  define  this  minimum  level  in  terms  of  Risk  Weighted 
Assets (RWA) instead, as proposed by the UK Independent Banking Commission report207.  

Regarding  the  choice  of  total  liabilities  or  of  RWA,  it  should  be  noted  the  following. 
Although RWA provide a measure of risks, they may underestimate the risks associated with 
particular  assets  (e.g.  sovereign  bonds).  Risk  weighted  assets  also  tend  to  differ  across 
Member States, banks and banking groups. 

Table 33 presents average data for an average EU bank and EU large banking group. After the 
implementation of Basel III, average RWA will be around 50%. 

Table  33.Risk  Weighted  Assets  compared  to  Total  assets  of  EU  banks  under  Basel  II  and 
Basel III 

Average EU large banking 
group 
consolidated data, 2010 
Average EU banks 
non consolidated data, 2009 

RWA/TA 
 under Basel II rules 

RWA/TA 
under Basel III rules 

44% 

37% 

56% 

47% 

Table 34 presents how much more or less bail-in-able liabilities EU banks would need to hold 
if the level used by the UK Independent Banking Commission (the so-colled Vicker's rule, set 
at  17-20%  of  banks'  RWA)  rather  than  the  minimum  LAC  rule  (10-15%  of  total  liabilities) 
were used. 

In the case of average banks with RWA to total assets of 50%, the 10% minimum LAC rule 
would demand 11% more bail-in-able liabilities than if the Vicker's rule were set at 17% of 
RWA. The 10% minimum LAC rule would instead demand 5% less bail-inable liabilities if 
the Vickers rule were set at 20% of RWA. A 10% minimum LAC rule is  therefore  slightly 
more onerous on average than the Vicker's rule, but would help reduce the risk of shortfalls in 
eligible liabilities or capital arising on account of overly low risk weights. 

207   http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf 

- 167 - 

 
 
 
 
                                                 
Table  34  Comparison  between  the  effects  of  setting  a  minimum  amount  of  'bail-in-able  ' 
"first" liabilities on Total Liabilities compared to setting it on Risk Weighted Assets. 

Total liability 
coefficient 
(Minimum 
LAC rule, L) 

RWA 
coefficient 
(Vicker's rule, 
V) 

Bank 
RWA/TA 

Difference in 
the amount of 
bail-in-able  
liabilities  

(L/V -1) 

Total liability 
coeff. 
(Minimum 
LAC rule, L) 

RWA coeff. 
(Vicker's rule, 
V) 

Difference in 
the amount of 
bail-in-able  
liabilities 
(L/V -1) 

20% 

30% 

40% 

50% 

60% 

70% 

20% 

30% 

40% 

50% 

60% 

70% 

20% 

30% 

40% 

50% 

60% 

70% 

15% 

15% 

15% 

15% 

15% 

15% 

12.5% 

12.5% 

12.5% 

12.5% 

12.5% 

12.5% 

10% 

10% 

10% 

10% 

10% 

10% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

17% 

15% 

15% 

15% 

15% 

15% 

15% 

12.5% 

12.5% 

12.5% 

12.5% 

12.5% 

12.5% 

10% 

10% 

10% 

10% 

10% 

10% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

20% 

267% 

142% 

80% 

42% 

17% 

-1% 

206% 

102% 

50% 

18% 

-2% 

-17% 

145% 

61% 

20% 

-5% 

-22% 

-34% 

332% 

185% 

111% 

67% 

38% 

17% 

260% 

137% 

76% 

39% 

15% 

-3% 

188% 

90% 

41% 

11% 

-8% 

-22% 

- 168 - 

 
 
9.  Comparison  of  DGS/RF  funding  with  the  existing  taxes  (levies)  applied  in  various 
Member States 

In the following we consider eight known proposals on taxes (levies) from BE, CY, DE, FR, 
AT, PT, SE and UK, which we apply to the bank structures of 19 Member States. Most taxes 
(levies) are based primarily on total balance sheets subtracting customer (or covered) deposits 
and  some  parts  of  bank's  capital.  Only  the  Belgian  tax  is  based  on  customers'  deposits,  the 
French on risk weighted assets.208  

Estimations are based on 2009 unconsolidated data from Bankscope, on the same sample of 
banks that have been used to estimate the needs of DGS/RF funds via the SYMBOL model 
(see Table 1 in Appendix 4). 

Table  35  shows  the  present  values  of  the  amount  of  collected  funds  when  applying  for  10 
consecutive years the proposed taxes (levies).209 Each column refers to a different tax (levy), 
while in the rows one can read the present value of the amount of cumulated funds for each of 
the 19 MS. The estimates are extrapolated for the full banking sector assuming that all banks 
have  the  same  balance  sheet  structure  as  that  of  the  banks  in  the  sample  for  the  respective 
country.  Tax  revenues  are  discounted  at  2.5%  interest  rate  per  annum.  Table  36  shows  the 
same amounts as a percentage of each country 2009 GDP, highlighting that the present value 
of  cumulated  funds  would  range  on  average  between  0.2%  (FR  levy)  to  around  1.7%  (AT 
levies) of the GDP. 

Tables 37 and 38 compare the estimated taxes (levies) with the amount of DGS/RF funding 
needs  (1%  of  covered  deposits)  obtained  using  the  SYMBOL  model  as  described  in  the 
previous  sections.  Table  37  presents  the  ratio  between  the  estimated  taxes  (levies)  and  the 
amount of funds for DGS+RF purposes. Table 38 shows the same ratio considering funds for 
resolution purposes only.210 

In  Table  37  colours  are  used  to  emphasize  which  levies  are  in  line  with  DGS+RF  needs 
(yellow  cells),  which  are  below  (red  cells)  and  which  levies  over-perform  compared  to  the 

208   A detailed description of the taxes (levies) is provided in Annex IX. 

209   The analysis assumes a constant revenue for each year, equal to the one collected for 2009. 

210  

It is assumed that the amount of funds for resolution purposes is 1/2 of the total amount of DGS+RF funds, which is loosely in line with 
the  relative  weight  of  covered  deposits  and  interbank  exposures  shown  in  Table  5  for  an  average  EU  bank.  As  rules  on  the 
determination of the total amounts of DGS funds in each MS are still under negotiation in the Council and the European Parliament and 
the amount of RF funds is part of the present proposal, any rule adopted in this study cannot reflect the final form of the rule as it will 
eventually be implemented. 

- 169 - 

 
 
                                                 
funding  needs  (green  cells).  The  same  criterion  has  been  applied  to  Table  38  in  order  to 
highlight how levies perform compared to RF funding needs only. 

- 170 - 

 
 
Table 35: Present value of collected tax (levies) revenues over a time period of 10 years (mill. €). 

BANK LEVIES/TAXES (See Annex IX for definition) 

Country 

BE 

DE 

FR 

CY 

AT 

PT 

SE 

UK 

BE 
BG 
DK 
DE 
IE 
GR 
ES 
FR 
IT 
CY 
LV 
LU 
MT 
NL 
AT 
PT 
FI 
SE 
UK 
Total 

6,266 
270 
3,943 
40,211 
3,401 
3,139 
20,092 
28,414 
13,091 
615 
148 
3,094 
285 
8,593 
5,151 
2,577 
1,067 
3,403 
20,630 
164,387 

1,560  
28  
2,144  
11,277  
2,726  
489  
4,121  
13,705  
6,510  
234  
35  
1,246  
43  
4,280  
1,645  
746  
842  
1,690  
12,232  
65,552  

570 
71 
669 
3,912 
867 
470 
3,128 
4,781 
2,384 
121 
31 
336 
35 
1,203 
982 
533 
204 
629 
3,012 
23,939 

2,830 
69 
3,364 
21,059 
4,027 
910 
9,161 
20,768 
10,462 
383 
74 
1,992 
86 
6,675 
2,922 
1,331 
1,162 
2,732 
19,936 
109,946 

4,827 
111 
5,769 
35,678 
6,825 
1,575 
15,467 
34,909 
17,407 
646 
126 
3,387 
142 
11,333 
4,888 
2,258 
1,966 
4,711 
33,915 
185,940 

1,662 
39 
1,997 
12,431 
2,378 
538 
5,347 
12,332 
6,105 
231 
43 
1,190 
51 
3,961 
1,696 
775 
695 
1,601 
11,785 
64,858 

2,908 
90 
2,876 
19,830 
3,269 
1,193 
8,531 
19,154 
9,007 
358 
68 
1,864 
107 
5,914 
2,724 
1,289 
1,014 
2,339 
15,960 
98,497 

2,264  
55  
2,691  
16,847  
3,221  
728  
7,329  
16,615  
8,370  
307  
59  
1,594  
69  
5,340  
2,337  
1,065  
930  
2,186  
15,949  
87,957  

DGS + RF 
Funding 
needs 

2,039 
157 
2,035 
20,872 
2,282 
1,411 
7,098 
14,849 
6,369 
443 
53 
1,289 
88 
4,350 
1,918 
1,125 
871 
1,673 
11,097 
80,017 

RF 
Funding 
needs 
(1/2 of 
DGS+RF) 
         1,020 
              79 
         1,017 
       10,436 
         1,141 
            705 
         3,549 
         7,424 
         3,185 
            221 
              27 
            644 
              44 
         2,175 
            959 
            562 
            436 
            837 
         5,549 
       40,009 

- 171 - 

 
 
 
Table 36: Present value of collected tax (levies) revenues over a time period of 10 years (% 
2009 GDP). 

Country 

BE 

DE 

FR 

CY 

AT 

PT 

SE 

UK 

BANK LEVIES/TAXES  

BE 

BG 

DK 

DE 

IE 

GR 

ES 

FR 

IT 

CY 

LV 

LU 

MT 

NL 

AT 

PT 

FI 

SE 

UK 

1.85% 

0.46% 

0.17% 

0.83% 

1.42% 

0.49% 

0.86% 

0.67% 

0.77% 

0.08% 

0.20% 

0.20% 

0.32% 

0.11% 

0.26% 

0.16% 

1.77% 

0.96% 

0.30% 

1.51% 

2.59% 

0.90% 

1.29% 

1.21% 

1.68% 

0.47% 

0.16% 

0.88% 

1.49% 

0.52% 

0.83% 

0.70% 

2.13% 

1.71% 

0.54% 

2.52% 

4.28% 

1.49% 

2.05% 

2.02% 

1.34% 

0.21% 

0.20% 

0.39% 

0.67% 

0.23% 

0.51% 

0.31% 

1.91% 

0.39% 

0.30% 

0.87% 

1.47% 

0.51% 

0.81% 

0.70% 

1.49% 

0.72% 

0.25% 

1.09% 

1.83% 

0.65% 

1.00% 

0.87% 

0.86% 

0.43% 

0.16% 

0.69% 

1.15% 

0.40% 

0.59% 

0.55% 

3.63% 

1.38% 

0.71% 

2.26% 

3.81% 

1.36% 

2.11% 

1.81% 

0.80% 

0.19% 

0.17% 

0.40% 

0.68% 

0.23% 

0.36% 

0.32% 

8.13% 

3.27% 

0.88% 

5.23% 

8.90% 

3.12% 

4.90% 

4.19% 

4.86% 

0.73% 

0.59% 

1.47% 

2.43% 

0.87% 

1.82% 

1.18% 

1.50% 

0.75% 

0.21% 

1.17% 

1.98% 

0.69% 

1.03% 

0.93% 

1.88% 

0.60% 

0.36% 

1.07% 

1.78% 

0.62% 

0.99% 

0.85% 

1.53% 

0.44% 

0.32% 

0.79% 

1.34% 

0.46% 

0.76% 

0.63% 

0.62% 

0.49% 

0.12% 

0.68% 

1.15% 

0.41% 

0.59% 

0.54% 

1.17% 

0.58% 

0.22% 

0.94% 

1.62% 

0.55% 

0.80% 

0.75% 

1.32% 

0.78% 

0.19% 

1.27% 

2.17% 

0.75% 

1.02% 

1.02% 

Average 

1.50% 

0.60% 

0.22% 

1.00% 

1.69% 

0.59% 

0.90% 

0.80% 

- 172 - 

 
 
 
 
Table 37: Ratio between estimated taxes (levies) - present value of revenues collected in 10 
years – and funding needs for DGS+RF purposes. 

Country 

BE 

DE 

FR 

CY 

AT 

PT 

SE 

UK 

BANK LEVIES/TAXES 

BE 

BG 

DK 

DE 

IE 

GR 

ES 

FR 

IT 

CY 

LV 

LU 

MT 

NL 

AT 

PT 

FI 

SE 

UK 

308% 

77% 

29% 

140% 

237% 

81% 

143% 

111% 

171% 

18% 

45% 

44% 

71% 

26% 

57% 

36% 

194% 

105% 

33% 

165% 

284% 

98% 

141% 

132% 

192% 

54% 

18% 

101% 

171% 

60% 

95% 

81% 

149% 

120% 

38% 

177% 

299% 

104% 

144% 

141% 

222% 

35% 

33% 

65% 

111% 

38% 

84% 

51% 

284% 

59% 

44% 

129% 

218% 

75% 

120% 

104% 

192% 

93% 

32% 

140% 

236% 

83% 

129% 

113% 

206% 

102% 

38% 

165% 

273% 

96% 

141% 

132% 

140% 

53% 

27% 

87% 

146% 

53% 

81% 

69% 

278% 

66% 

59% 

140% 

236% 

81% 

128% 

111% 

240% 

96% 

26% 

155% 

263% 

93% 

144% 

123% 

324% 

48% 

39% 

98% 

162% 

59% 

122% 

78% 

198% 

99% 

27% 

153% 

261% 

92% 

137% 

123% 

269% 

86% 

51% 

153% 

255% 

89% 

143% 

122% 

230% 

66% 

48% 

119% 

201% 

69% 

114% 

95% 

123% 

96% 

24% 

134% 

225% 

80% 

117% 

107% 

204% 

101% 

38% 

164% 

282% 

96% 

140% 

131% 

186% 

110% 

27% 

180% 

306% 

107% 

144% 

144% 

Average 

206% 

83% 

30% 

138% 

233% 

81% 

123% 

110% 

St Dev 

56% 

27% 

12% 

38% 

63% 

23% 

26% 

30% 

- 173 - 

 
 
 
Table 38: Ratio between estimated taxes (levies) - present value of revenues collected in 10 
years – and funding needs for RF purposes. 

Country 

BE 

DE 

FR 

CY 

AT 

PT 

SE 

UK 

BANK LEVIES/TAXES 

BE 

BG 

DK 

DE 

IE 

GR 

ES 

FR 

IT 

CY 

LV 

LU 

MT 

NL 

AT 

PT 

FI 

SE 

UK 

615% 

153% 

56% 

278% 

473% 

163% 

285% 

222% 

343% 

36% 

90% 

88% 

142% 

50% 

115% 

71% 

388% 

211% 

66% 

331% 

567% 

196% 

283% 

265% 

385% 

108% 

37% 

202% 

342% 

119% 

190% 

161% 

298% 

239% 

76% 

353% 

598% 

208% 

287% 

282% 

445% 

69% 

67% 

129% 

223% 

76% 

169% 

103% 

566% 

116% 

88% 

258% 

436% 

151% 

240% 

207% 

383% 

185% 

64% 

280% 

470% 

166% 

258% 

224% 

411% 

204% 

75% 

329% 

547% 

192% 

283% 

263% 

278% 

106% 

55% 

173% 

292% 

104% 

162% 

138% 

554% 

132% 

117% 

278% 

471% 

162% 

254% 

223% 

480% 

193% 

52% 

309% 

526% 

185% 

289% 

247% 

647% 

97% 

79% 

196% 

323% 

116% 

243% 

157% 

395% 

197% 

55% 

307% 

521% 

182% 

272% 

246% 

537% 

172% 

102% 

305% 

510% 

177% 

284% 

244% 

458% 

133% 

95% 

237% 

402% 

138% 

229% 

189% 

245% 

193% 

47% 

267% 

451% 

159% 

233% 

213% 

407% 

202% 

75% 

327% 

563% 

191% 

280% 

261% 

372% 

220% 

54% 

359% 

611% 

212% 

288% 

287% 

Average 

411% 

164% 

60% 

275% 

465% 

162% 

246% 

220% 

St Dev 

111% 

55% 

23% 

74% 

127% 

44% 

50% 

59% 

The following conclusions can be drawn. In the countries where tax (levies) are already set, 
they fulfil apparently different scopes: the DE, FR and  PT taxes (levies)  cover  the  needs of 
financing resolution, whereas the CY, SE and UK taxes (levies) cover both DGS+RF needs. 

- 174 - 

 
 
 
 
The revenues raised with the Belgian and Austrian taxes (levies) are much higher (more than 
the double) than those required to finance DGS and RF combined. 

Assuming to extend each already existing levy (tax) in all MS, it can be seen that values are 
quite volatile, as it is summarized by standard deviation values in Table 39 and 40.  

- 175 - 

 
 
Appendix 1: Case studies 

(1) 

Lehman's case under bail-in211 

According to market estimates, Lehman's balance sheet was under pressure from perhaps $25 
bn unrealised losses on illiquid assets. But bankruptcy expanded that shortfall in practice, to 
roughly $150 bn of shareholder and creditor losses. 

With  bail-in,  officials  could  have  proceeded  as  follows.  First,  the  concerns  over  valuation 
could have been addressed by writing assets down by $25 billion, roughly wiping out existing 
shareholders.  Second,  to  recapitalise  the  bank,  preferred-stock  and  subordinated-debt 
investors would have converted their approximately $25 billion of existing holdings in return 
for  50%  of  the  equity  in  the  new  Lehman.  Holders  of  Lehman’s  $120  billion  of  senior 
unsecured debt would have converted 15% of their positions, and received the other 50% of 
the new equity.  

The  remaining  85%  of  senior  unsecured  debt  would  have  been  unaffected,  as  would  the 
bank’s  secured  creditors  and  its  customers  and  counterparties.  The  bank’s  previous 
shareholders  would  have received warrants that would have  value  only  if the  new company 
rebounded. Existing management would have been replaced after a brief transition period. 

The equity of this reinforced Lehman would have been $43 billion, roughly double the size of 
its old capital base. To shore up liquidity and confidence further, a consortium of big banks 
would  have  been  asked  to  provide  a  voluntary,  multi-billion-dollar  funding  facility  for 
Lehman,  ranking  ahead  of  existing  senior  debt.  The  capital  and  liquidity  ratios  of  the  new 
Lehman would have been solid. A bail-in like this would have allowed Lehman to open for 
business on Monday. 

(2) 

Application of bail-in in Denmark 

In the autumn of 2008 the Danish parliament passed a legislative package which included a 
two-year  government  guarantee  of  all  unsecured,  senior  liabilities  issued  by  (almost)  all 
Danish  banks.  The  total  amount  guaranteed  was  approximately  double  Danish  GDP.  when 
this general guarantee expired, a new set of rules for winding up defaulted banks came into 
force on 1 October 2010, with a view to ensuring that failing Danish banks would no longer 
receive  state  financial  aid.  Under  this  new  winding-up  scheme,  unsecured  creditors  are 
therefore no longer guaranteed full coverage of their claims.  

Two failures of Danish banks have been handled under the scheme, each leading to significant 
haircuts on senior creditors: 

1.  Amagerbanken  on  6  February  2011  -  the  initial  haircut  for  subordinated  creditors 
whose  claims  were  not  covered  by  the  DGS  was  set  at  41%,  but  after  a  subsequent 
assessment the final payout was increased from 59% to 84.4%. 

2.  Fjordbank  Mors  on  26  June  2011—holders  of  senior  unsecured  claims  reportedly 

faced a 26% loss. 

(3) 

Application of winding-up scheme: Amerbanken failure 

211   See 

article 

"From 

bail-out 

to 

bail-in" 

published 

on 

the 

Economist 

of 

28/01/10, 

http://www.economist.com/node/15392186?story_id=E1_TVPJNTRG 

- 176 - 

 
 
                                                 
The  bank  failed  to  meet  the  solvency  requirement  set  by  the  Danish  FSA.  During  the 
weekend, the bank entered into an agreement with the financial stability company (FSC), the 
public  body  in  charge  of  winding-up,  under  which  it  transferred  all  of  its  assets  to  a  newly 
formed subsidiary bank under the FSC. Customers' normal banking business (e.g. use of credit 
and debit cards) was not affected during the weekend. The bank opened as usual on Monday 
morning with no apparent difference for the customers, since the bank continued to provide 
services critical to the wider economy. 

However, shareholders and subordinated creditors were wiped out. The bank's unsubordinated 
creditors were paid a preliminary amount of DKK 15.2 billion (€2bn), corresponding to about 
59% of their prior claims. Payment was effected by the new bank taking over liabilities of the 
same  amount.  Unsubordinated  creditors  (including  depositors  whose  net  deposits  exceeded 
€100,000)  thus  had  to  anticipate  losses  of  about  41%.  The  final  valuation  was  made  within 
three months of resolution and resulted in a supplementary dividend of 25.6%, thus 84.4% in 
total. 

The FSC injected capital (and liquidity) into the newly formed subsidiary bank, which earns a 
market return. The risk is borne by the new winding-up section of the depositor and investor 
guarantee  fund,  which  is  funded  by  the  members  of  the  fund  (i.e.  Danish  banks).  Thus,  the 
fund provides a loss guarantee to the FSC, such that there is no immediate financial risk to the 
Danish state. 

(4) 

Aims and effects 

While it was recognised that weaker banks could be confronted by increased financing costs, 
the  introduction  of  the  bail-in  framework  affected  a  wider  group  of  Danish  banks,  which 
experienced  credit  ratings  downgrades  to  reflect  the  reduction  in  the  'systemic  state  support 
uplift' to their stand-alone ratings. Some Danish banks lost such  support  altogether,  while  it 
was  reduced  to  one  notch  for  the  largest  of  them.  This  rating  impact  has  affected  and 
increased their cost of funding. 

(5) 

Subsequent measures 

Partly  in  response  to  the  unintended  consequences  of  the  bail-in  framework  in  the  form  of 
funding  problems  for  Danish  banks,  on  25  august  2011,  Denmark  introduced  the 
'consolidation  package'.  among  other  measures,  the  package  aims  to  incentivise  healthy 
institutions to take over defaulted financial institutions, thereby reducing the likelihood of a 
winding  down  taking  place  which  entails  debt-write  down  for  senior  creditors.  The  new 
regime was tested recently in the case of a small Danish bank. This tool can only be applied if 
the compensation from the FSC does not exceed the loss to the FSC were it to apply the bail-
in  framework  instead.  The  bail-in  framework  remains  in  operation,  thus  providing  a  'last 
resort' option. it may be applied when it is estimated to be more expensive to take over a bank 
with compensation, than wind it up through debt write-down and a bridge bank. 

(6) 

Conclusions 

First,  on  both  occasions  when  it  was  applied,  the  bail-in  framework  facilitated  the  rapid 
resolution  of  the  failing  bank,  without  triggering  financial  stability  or  requiring  actual  or 
contingent financial support from the state. However, neither bank could be viewed as a major 
systemically  important  bank,  so  their  experience  cannot  necessarily  be  extrapolated  to  all 
other banks.  

- 177 - 

 
 
Second, the 'prudent' valuation of the failing bank's assets, such that the initial haircut erred on 
the high side with creditors reimbursed the excess later, ensured that the counterparties of the 
bridge bank could be confident that it would remain solvent even after thorough subsequent 
valuations had been undertaken. This too contributed to financial stability. 

Third, creditors may face lower costs when their liabilities are written down under the bail-in 
framework, than under liquidation. 

Fourth, it is important to ensure that liquidity issues are addressed where necessary, when debt 
write-down is applied. 

Fifth, the funding of bank resolution needs to be arranged. in the Danish scheme, funding is 
provided by an extension of the (largely industry-funded) DGS that provides a loss guarantee 
to the FSC. 

- 178 - 

 
 
Appendix 2: Description of the sample of the 16 large EU banking groups  

Data on balance sheets of 16 large banking groups are presented in the Table below and refers 
to end 2010.212 

Description  of  the  Bankscope  sample  for  the  16  large  EU  banking  groups  used  in  the 
analysis 

Bank Name 

Total Assets 

(m€) 

Total 
Liabilities 
(m€) 

Total 
Interbank 
Debt (m€) 

Total 
Interbank 
Credit (m€) 

Total 
Covered 
Deposits (+) 

Total 
Capital 

RWA 

(m€) 

(m€) 

(m€) 

Banco Bilbao  

552,738 

517,810 

40,856 

15,815 

108,375 

34,928 

334,633 

Banco 
Santander SA 

1,217,501 

1,152,993 

53,386 

43,135 

250,190 

64,508 

646,017 

BNP Paribas 

1,998,158 

1,932,786 

170,108 

62,718 

353,526 

65,372 

795,123 

Commerzbank 

754,299 

720,378 

93,610 

41,916 

124,570 

33,921 

298,340 

Crédit Agricole 

1,593,529 

1,558,446 

155,338 

363,843 

320,295 

35,083 

491,759 

Deutsche  Bank 
AG 

Dexia 

HSBC 

1,905,630 

1,865,208 

92,377 

92,377 

271,807 

40,422 

387,402 

566,735 

554,924 

98,490 

53,379 

63,833 

11,811 

168,437 

1,837,089 

1,742,708 

87,748 

160,414 

339,229 

94,381 

1,141,763 

ING Bank 

933,073 

888,818 

72,852 

51,828 

292,190 

44,255 

441,928 

Intesa Sanpaolo 

658,757 

639,465 

35,181 

36,012 

118,248 

19,292 

385,968 

Lloyds Group  

1,161,700 

1,107,191 

59,004 

35,466 

169,362 

54,509 

658,438 

Nordea Bank  

580,839 

562,398 

40,736 

7,963 

90,172 

18,441 

242,464 

Rabobank 
Group 

Royal  Bank  of 
Scotland  

Société 
Générale 

652,536 

620,357 

23,476 

33,511 

168,100 

32,179 

259,969 

1,702,968 

1,645,397 

115,740 

67,847 

219,728 

57,571 

754,242 

1,132,072 

1,102,092 

64,492 

42,391 

198,450 

29,980 

455,005 

UniCredit 

929,488 

904,094 

91,789 

56,656 

215,164 

25,393 

528,535 

Source: Bankscope 

212   For the analysis referred to average banks, the sample used is the one presented in Appendix 4 and refers to 2009. 

- 179 - 

 
 
                                                 
Appendix  3:  Breakdown  of  liabilities  categories  into  relevant  security  and  maturity 
classes 

Split of Uncovered Deposits (as percentage of total non-equity liabilities).  

Uncovered Deposits 

up to 1 
month 

over 1 
month and 
up to 3 

over 3 
months and 
up to 6 

over 6 
months and 
up to 1 year 

over 1 year 

%  of  Total  Uncovered  Deposits 
(Source ECB213) 

41% 

18% 

1% 

15% 

26% 

Split of Interbank Liabilities (as percentage of total non-equity liabilities).  

Secured 
Interbank 

Interbank Debt 

Unsecured Interbank 

up to 1 
month 

over 1 month 
and up to 3 

over 3 
months and 
up to 6 

over 6 
months 

% of Interbank Debt  

(Source Moody's214) 

26.8% 

73.2% 

%  of  Total  Unsecured  Interbank 
(Source ECB) 

- 

35% 

16% 

18% 

30% 

Split of Other Liabilities (as percentage of total non-equity liabilities).  

Wholesale Debt 

Unsecured Short-term Debt 

Long-term Debt  

up to 1 
 month 

over 1 
month up to 
3 months 

over 3 
months up 
to 6 months 

over 6 
months up 
to 1 year 

Unsecured 

Secured 

13.4% 

86.6% 

35% 

16% 

18% 

30% 

- 

- 

- 

- 

- 

- 

30% 

70% 

%  of  Total  Wholesale 
Debt  

(Source: Moody's) 

% of Total Short term 
(Source: ECB) 

% of Total Long term 
(source 
FitchRatings215) 

213   ECB MFI statistics 

214   Moody's "Bank Debt liability and Maturity Profiles -2011 Update"16 June 2011. 

215   FitchRatings “Banks` use of Covered Bonds Funding on the Rise" 10 march 2011 

- 180 - 

 
 
 
  
 
  
                                                 
Appendix 4: The SYMBOL Model 

1 Introduction 

The SYMBOL model (Systemic Model of Banking Originated Losses) has been developed by 
the Commission's Joint Research Centre (JRC), the Directorate General Internal Market and 
Services, and experts on banking regulation216. 

The  model  estimates  the  aggregated  losses  deriving  from  bank  defaults,  explicitly  linking 
Basel  capital  requirements  to  the  other  key  tools  of  the  banking  safety  net,  i.e.  Deposit 
Guarantee Schemes (DGS), bank Resolution Funds (RF). 

SYMBOL estimates the benefits of the new bank regulatory framework both as a decrease in 
costs to public finances in case of bank defaults, and as a decrease in probabilities that bank 
defaults generate costs to public finances.217 

The  model  operates  in  two  steps:  the  first  step  is  the  estimation  of  an  average  default 
probability  for  the  assets  of  any  individual  bank,218  by  means  of  the  features  of  the  Basel 
FIRB  (Foundation  Internal  Ratings  Based)  loss  distribution  function;  the  second  step  is  the 
estimation – via a Monte Carlo simulation - of the distribution of aggregate (systemic) losses 
by country on the basis of individual banks' asset default probabilities. 

The aggregate country-level distributions of bank losses are estimated according to different 
regulatory scenarios, covering the introduction of Basel III, the setting up of DGS/RF and of 
bail-in. It is thus possible to provide an assessment of the relevance of potential bank losses 
on public finances in the various scenarios. 

1.1 Estimation of individual bank assets' default probability 

The  first  running  step  of  SYMBOL  is  the  estimation  of  the  distribution  of  individual  bank 
losses mainly on the basis of two inputs: i) publicly available bank financial statements; and 
ii)  publicly  available  regulatory  capital  requirements  imposed  by  regulators,  from  which  a 
probability of default of the bank asset/loan portfolio is estimated. 

The  main  data  source  is  Bankscope,  a  proprietary  database  of  banks'  financial  statements 
produced  by  Bureau  van  Djik.  The  dataset  covers  a  representative  sample  of  banks  in  most 
EU  countries.  When  needed  and  when  possible,  Bankscope  data  have  been  integrated  with 
public  information  on  bank  financial  statements  released  by  Supervisory  Authorities  and/or 
Central  Banks.219  European  Central  Bank  (ECB)  data  have  also  been  used  to  complete  or 
correct the dataset.220 Table 1 presents aggregated information about the variables relevant for 
SYMBOL simulations for the considered samples of banks. 

216   For technical details see: De Lisa R, Zedda S., Vallascas F., Campolongo F., Marchesi M. (2011), Modeling Deposit Insurance Scheme 

Losses in a Basel 2 Framework, Journal of Financial Services Research, 40(3), 123-141.  

217   The methodology used in this section has also been applied in the Commission’s Public finances in EMU - 2011, European Economy 
Series,  Vol  3,  2011,  Directorate  General  Economic  and  Financial  Affairs.  Public  Finances  Report  2011.  In  Chapter  5  of  this  report 
SYMBOL is also used in the estimation of the macro-economic benefits by estimating “liquidity shortfalls” originated by bank defaults.  

218   The current version of SYMBOL considers banks at unconsolidated level. 

219   The European Commission asked for data to the Member States Supervisory Authorities and/or Central Banks. Among the considered 

Member States, only Bulgaria, Cyprus, Ireland and Latvia provided the requested information. 

220   Data from ECB have been used for various purposes. For instance, in the Bankscope sample some values of key variables were missing 
for  some  banks.  In  some  cases  missing  values  have  been  filled  in  using  estimations  obtained  starting  from  ECB  aggregated  data  on 
banks’ ratio such as the minimum capital ratio, the solvency ratio or the Tier I ratio. Moreover ECB data have been applied to estimate 

- 181 - 

 
 
 
                                                 
Banks  operate  within  the  Basel  regulatory  framework,  which  imposes  that  banks  satisfy 
minimum  capital  requirements  for  credit  risk.  In  particular,  these  minimum  capital 
requirements are expected to allow banks to cover losses with capital in at least 99.9% of the 
cases. 

The  distribution  of  losses  is  computed  by  loan  category  according  to  a  regulatory  statistical 
model  of  credit  risk.  The  assessment  made  by  banks  of  the  default  probability  of  each  loan 
class is not publicly available. 

The regulatory model is known221, as well as all relevant parameters used for the calculation, 
except  for  the  default  probabilities  of  the  banks'  assets/obligors  which  are  assessed  by  the 
banks themselves and validated by the regulators. 

SYMBOL estimates the average implied default probability of the obligors as assessed by the 
banks - based on the assumption that banks' assets are entirely made of loans222 - consistently 
with  the  publicly  available  data  on  capital  requirements  and  on  the  values  for  the  other 
parameters of the credit risk model set by the regulator.223 

the size of the Bankscope sample and to rescale SYMBOL result on the entire population of banks in each country. Finally, ECB data 
have been employed to check the reliability of interbank data in Bankscope. 

221   For the purposes of the SYMBOL model, unexpected losses are computed according to the Basel FIRB formula, which is a specifically 
calibrated version of the Vasicek model for portfolio losses. Basel III has modified some of the parameters of the FIRB formula and 
raised  the  standards  banks'  capital  must  satisfy  in  order  to  meet  minimum  capital  requirements.  On  the  Vasicek  model:  see  Vasicek 
(1991).  On  the  Basel  FIRB  approach,  see  Basel  Committee  on  Banking  Supervision  (2006).  On  the  Basel  III  Accord,  see  Basel 
Committee on Banking Supervision (2010). 

222   Banks must comply with capital requirements not only for their lending activity and credit risk component. Banks assets are in fact not 
only made of loans, and there are capital requirements that derive from for market risk, counterparty risk, and operational risk, etc. The 
main assumption currently behind SYMBOL is that banks assets consist entirely of loans, so that all capital requirements are considered 
are for credit risk. However, except for very large banks with extensive and complex trading activities, this simplifying assumption that 
banks  assets  are  made  only  of  loans  and,  as  a  consequence,  that  capital  requirements  only  derive  from  these,  is  not  excessively 
distortive as the credit risk usually accounts for a very large share of banks' total capital requirements. 

223   The other parameters, set at their default values, are: Loss Given Default (LGD), correlation between banks' assets, maturity and other 

correction parameters. 

- 182 - 

 
 
                                                                                                                                                         
Table 1: Description of the Bankscope samples used in SYMBOL simulations, data as of end 2009224. 

Number 
Group 1 
Banks 

Number 
Group 2 
Banks 

Sample % 
Population225 

Total 
Assets 
(m€) 

Total 
Liabilities 
(m€) 

Total 
Interbank 
Debt226 
(m€) 

Total 
Interbank 
Credit227 
(m€) 

Total 
Covered 
Deposits (+) 
(m€) 

Total Capital 
Requirements 
(8% RWA) 
(m€) 

Total 
Capital 
(m€) 

BE 

BG(*) 

DK 

DE 

GR 

ES 

FR 

IE(*) 

IT 

CY (*) 

LV(*) 

3 

0 

3 

6 

3 

8 

17 

5 

8 

0 

0 

20 

24 

96 

82.26% 

878,336 

829,934 

184,888 

160,678 

260,890 

23,413 

48,401 

92.68% 

33,624 

28,960 

6,377 

6,377 

13,763 

2,190 

4,664 

71.05% 

756,678 

708,878 

143,362 

92,279 

118,179 

23,749 

47,800 

1476 

64.19% 

4,648,331 

4,415,620 

1,086,016 

790,975 

1,093,841 

125,452 

232,711 

13 

135 

178 

19 

465 

15 

21 

71.42% 

322,714 

295,667 

43,441 

20,313 

135,758 

16,781 

27,047 

73.95% 

2,370,807 

2,188,636 

348,780 

226,113 

542,332 

115,565 

182,171 

102.59% 

7,191,608 

6,817,107 

842,666 

779,727 

1,550,504 

245,024 

374,500 

101.91% 

1,221,181 

1,155,789 

276,738 

148,729 

147,145 

44,121 

65,392 

81.81% 

2,827,051 

2,556,174 

188,375 

195,958 

476,963 

97,416 

270,876 

80.80% 

107,446 

100,436 

53,067 

53,067 

22,661 

72.65% 

19,088 

17,037 

5,943 

2,609 

3,995 

4,883 

1,127 

7,011 

2,050 

224   Year 2009 is the latest year available in Bankscope and, even more importantly, 2009 is the year on which the Basel and the CEBS committee have based their Quantitative Impact Study exercises for the foreseen 

change on banks' capital and RWA when moving from Basel II to Basel III.  

225   The  sample  of  banks  covered  in  each  Member  States  represents  the  indicated  percentage  of  total  assets  for  any  Member  State  as  shown  for  2009  in  the  2010  ECB  EU  banking  structures  publication, 
structures, 

abroad.  European  Central  Bank 

(2010),  EU  banking 

assets  of  branches 

all  banks  minus 

amount  of 

assets 

from 

total 

total 

the 

for 

as 

computed 
http://www.ecb.int/pub/pdf/other/eubankingstructures201009en.pdf 

226   A correction factor for the volume of the interbank debt/credit has been applied to the following MS, to correct for the inclusion of some classes of debts certificates: GR (56.5%), FR (39.1%), IT (26.9%), 

LU (79.8%), and AT (48.4%). The correction factors employed have been estimated using the 2010 ECB Banking Sector Stability, Table 11a. 

227   Data on interbank credits was not available for BG and CY so equality of interbank debits and credits has been assumed. 

- 183 - 

 
 
 
                                                 
LU 

MT 

NL 

AT 

PT 

FI 

SE 

UK 

1 

0 

4 

1 

3 

1 

3 

7 

55 

10 

17 

172 

11 

8 

63 

78 

68.35% 

465,539 

441,916 

169,984 

161,827 

103,441 

11,485 

23,622 

43.83% 

18,076 

16,225 

5,222 

2,689 

6,893 

760 

1,851 

78.02% 

1,680,455 

1,600,687 

319,699 

398,659 

314,059 

46,903 

79,768 

29.88% 

306,457 

282,380 

66.49% 

323,762 

297,421 

78.36% 

290,500 

275,621 

52.37% 

455,355 

422,301 

50,382 

43,561 

54,361 

97,604 

39,692 

71,381 

14,656 

24,077 

34,505 

82,952 

17,704 

26,342 

79,820 

48,998 

7,968 

14,879 

122,872 

75,383 

16,356 

33,054 

73.97% 

4,278,074 

4,074,946 

743,978 

691,049 

464,241 

110,757 

203,129 

- 184 - 

 
 
1.2 Computation of aggregate bank losses across different regulatory scenarios 

Individual banks’ losses can be simulated on the basis of the estimated average implied 
probability of default of each bank's obligors and the shape of the distribution of losses 
assumed in the Basel FIRB approach. 

In  particular,  SYMBOL  generates 
losses  via  a  Monte  Carlo 
simulation,228  taking  into  account  the  correlation  between  the  assets  of  different  banks 
due to the presence of common shocks in the economy. Banks simulated losses are then 
compared with the banks' capital: whenever losses exceed capital, banks are considered 
to fail.229 

individual  bank 

Losses  are  also  compared  with  Excess  Capital  (i.e.  total  capital  minus  the  Minimum 
Capital  Requirements)  to  determine  if  a  bank,  even  if  not  failed,  would  need  to  be 
recapitalised  in  order  to  continue  its  operations.  In  the  first  case,  a  “no  recapitalisation 
scenario”  distribution  of  losses  is  obtained  (i.e.  only  losses  in  excess  of  capital  are 
considered  in  need  of  being  covered  by  the  safety  net),  in  the  second  case  a 
“recapitalisation scenario” distribution is obtained, representing a case where the safety 
net should also provide the capital necessary to avoid that undercapitalized banks go out 
of operations (i.e. because of a credit market freeze or due to the systemic importance of 
defaulted banks).230 

Figure  1  shows  for  the  "no  recapitalisation  scenario"  a  density  function  of  bank  loan 
losses as an example of the Basel treatment of credit risk.  

228   A test on the stability of results has been conducted, see footnote 86 for details. 

229   Although related, the probability of individual bank default is different from the probability of default of its obligors, because 
the former also depends on, among other things,  i) the possibility that other banks fail and transmit their losses to the bank via 
the interbank market and ii) the functioning and the capacity of intervention of the regulatory system at large. 

230 In the current SYMBOL simulations, recapitalization funding needs refer only to situations where at least one bank fails (losses 
higher than regulatory capital) and they are obtained as the total funds necessary to bring all undercapitalized banks, including 
also those which are failing, to their Minimum Capital Requirements. 

- 185 - 

 
 
 
                                                 
Figure 1: Individual bank loss distribution (no recapitalisation scenario) 

Bank Loan Loss Distribution

Bank is solvent

Bank is 
insolvent

Expected Loss 

Basel VaR

Portfolio Losses

Provisions  

        Capital Requirements 

Excess Capital 

The  function  plots  the  probability  of  occurrence  of  bank  loan  losses,  measured  on  the 
vertical axis against the size of the losses, measured on the horizontal axis. Note that the 
distribution is skewed to the right; there is a much smaller probability of extremely large 
losses and a higher probability of losses that are closer to the mean and median loss. 

Figure 2 sketches the various steps of the methodology. SYMBOL estimates losses not 
covered by bank's capital (the red tail of the individual bank' loss distribution in Figure 
1), as illustrated in the top panel of the figure, and the losses that could be covered or not 
by the other financial safety net tools - Deposit Guarantee Scheme and Resolution Funds 
– as illustrated in the bottom panel on Figure 2. 

- 186 - 

 
 
 
 
 
 
  
 
Figure  2:  Steps  of  the  methodology.  Estimation  of  the  loss  distribution  of  individual 
banks;  estimation  of  the  tail  risk  above  available  capital;  estimation  of  the  aggregated 
systemic risk; inclusion of DGS/RF effect. 

0 . 0 0 0 1 2

0 . 0 0 0 1

0 . 0 0 0 0 8

0 . 0 0 0 0 6

0 . 0 0 0 0 4

0 . 0 0 0 0 2

0 . 0 0 0 1 2

0 . 0 0 0 1

0 . 0 0 0 0 8

0 . 0 0 0 0 6

0 . 0 0 0 0 4

0 . 0 0 0 0 2

…

0 . 0 0 0 1 2

0 . 0 0 0 1

0 . 0 0 0 0 8

0 . 0 0 0 0 6

0 . 0 0 0 0 4

0 . 0 0 0 0 2

4 . 2

4 . 4

4 . 6

4 . 8

5

4 . 2

4 . 4

4 . 6

4 . 8

5

4 . 2

4 . 4

4 . 6

4 . 8

5

Bank 1

Bank 2

Bank n

DGS / RF

The  probability  distribution  of  aggregate  losses  is  computed  under  two  cases.  The  first 
case is named "no-contagion": banks are considered to default orderly without possibly 
creating  contagion  with  the  other  banks  to  which  they  are  connected  via  the  interbank 
market. The second case is named "contagion": banks are considered to default with the 
possibility of creating contagion effects on the other banks to which they are connected 
via the interbank market, in order to capture systemic linkages between banks besides the 
fact that their assets are correlated.231 

In the "contagion" case, whenever a bank defaults, it is assumed that 40% of the amounts 
of  its  interbank  debts  are  passed  on  as  losses  to  creditor  banks  and  distributed  among 
them. Losses are distributed following a criterion of proportionality: the  portion of  loss 
absorbed  by  each  bank  is  proportional  to  the  share  of  its  creditor  exposure  in  the 
interbank  market232.  A  default  driven  by  contagion  effects  takes  place  whenever  this 
additional loss results in any new bank defaulting. The contagion process is considered 
until no new additional bank defaults.233 

231   Only contagion via the domestic market is modelled in the current version of SYMBOL. 

232   Also creditor banks that are already defaulted continue accumulating further losses until contagion stops. 

233   The magnitude of contagion effects partially depends on the two assumptions made: first the 40% percentage of interbank debits 
that are passed on as losses to creditor banks in case of failure, and, second, the criterion of proportionality used to distribute 
these losses across banks, which derives from the fact that a bank-to-bank interbank lending matrix is not yet available to the 
Commission services. A loss of 40% on the interbank exposure is coherent with the upper bound of economic research on this 
issue.  See  e.g.:  James  C.  (1991),  Mistrulli  P.E.  (2007),  Upper  C.,  Worms  A.  (2004).  Concerning  the  fact  that  the  model 
distributes extra losses according to a criterion of proportionality, a sensitivity test has been developed which demonstrated that 
results of SYMBOL are not relevantly affected by this assumption. 

- 187 - 

 
 
 
 
 
                                                 
Aggregate  (systemic)  losses  with  and  without  contagion  are  finally  obtained  and  are 
computed as the sum of the losses in excess of banks' capital over the entire bank sample. 
Losses are then divided by the sample size to obtain the aggregated loss distribution for 
the entire bank population of a country. 

1.3 The impact of aggregate bank losses on public finances 

SYMBOL  can  be  used  to  analyse  how  losses  produced  by  the  banking  system  can 
potentially  impact  the  conditions  of  a  country’s  public  finances.  The  methodology 
proceeds as follows.  Losses generated in the banking system are first covered by banks' 
capital  and,  when  this  is  insufficient,  by  the  various  tools  present  in  the  regulatory 
financial safety net, which act progressively as barriers to absorb bank losses (see Figure 
3).  It  is  then  assumed  that  the  losses  that  cannot  be  absorbed  or  prevented  with 
instruments such as DGS and RF (and bail-in, where available) hit government finances, 
as it happened during the last financial crisis.234 

Figure 3: Banking system safety net tools. 

Given simulated losses hitting individual banks and data on banks' capital and the funds 
available to safety net tools, the model estimates the probability that public finances are 
hit  by  bank  losses.  It  also  estimates  the  amount  of  funds  that  should  be  injected  in  the 
banking system by public interventions when the protection given by all existing tools of 
the financial safety net have been exhausted. 

234   DGS and RF are assumed to cover all or part of the excess losses (i.e. losses in excess of banks' capital) deriving from banks 
defaults in order to protect depositors and block spill-over/contagion effects respectively. Liquidity effects deriving from banks 
defaults are assumed to be neutralized by the intervention of a third party liquidity provider such as a central bank. 

- 188 - 

 
 
 
 
                                                 
Appendix  5:  A  simple  methodology  to  compute  macroeconomic  costs  and  benefits 
applied to the Basel III framework 

A  simple  methodology  first  proposed  by  the  Bank  of  England235  has  been  used,  after 
adapting  it  to  multiple  safety  net  tools  and  to  an  EU  setting,  to  estimate  the  macro-
economic costs of: 

•  setting banks minimum capital at 10.5% of the Risk-Weighted Assets (RWA), 

under the Basel III definition of capital; 
introducing a Deposit Guarantee Scheme / Resolution Fund (DGS/RF) on top of 
MCR set at various levels of funding 
introducing bail-in according to one of the five considered options ; 

• 

• 

The methodology employed allows estimating macro-economic costs and benefits on the 
basis of - essentially – four pieces of information: 

• 

first, the level of recapitalization implied by the introduction of the new Basel III 
definition of capital and RWA, and the application of increased levels of MCR; 

•  second, the level of funding of DGS/RF; 
• 

third, the minimum level of bail-inable bonds required by regulation, that depends 
on  the  level  of  capital  banks  would  have  in  a  fully  implemented  Basel  III 
scenario; 
fourth, how different levels of capitalization modify the probability of a systemic 
banking crisis (SystemicPD).236  

• 

The  first  three  pieces  of  information  are  needed  to  obtain  the  macroeconomic  costs  of 
regulation.  The  fourth  piece  of  information  is  needed  to  obtain  the  macroeconomic 
benefits of regulation. 

Recapitalization  estimates  are  obtained  combining  information  on  the  2009  levels  of 
capital from publicly available banks’ balance sheets with information on the impact of 
introducing  Basel  III  contained  in  the  Quantitative  Impact  Study  conducted  by  CEBS 
(now EBA) and the Basel Committee.237 As far as minimum capital requirements (MCR) 
are concerned: banks are considered as obliged to meet Basel II MCR, which are satisfied 
by their 2009 capital without any need for recapitalization,238 or they can be considered as 
obliged to recapitalize in order to meet 10.5% Risk Weighted Assets (RWA) MCR based 
on new and stricter definitions of RWA and eligible capital as set under Basel III.  

The level of funding of GDSRF is assumed to be 1% of covered deposits. 

235  Bank 

of 

England 

(2010), 

“Financial 

Stability 

Report”, 

(Issue 

27) 

Box7, 

http://www.bankofengland.co.uk/publications/fsr/2010/fsr27.htm  

236   See section 4.1 for the definition of SystemicPD used in the analysis. 

237  We estimate banks' capital ratios under Basel III stricter definitions of eligible capital and RWA by using official balance sheet 
data for each bank and applying some corrective factors representing the average changes in RWA and capital for each country 
and  banks’  group.  The  Basel  Committee  and  CEBS  have  published  average  variations  in  bank  capital  ratios  due  to  the 
implementation of Basel III. In this report, we have used the country-level confidential data on the estimated variation in banks' 
capital  ratios  which  underlie  published  figures.  See  Basel  Committee  of  Banking  Supervision  (2010),  Results  of  the 
comprehensive  quantitative  impact  study,  http://www.bis.org/publ/bcbs186.pdf  and  Committee  of  European  Banking 
Supervisors 
study, 
quantitative 
http://www.eba.europa.eu/cebs/media/Publications/Other%20Publications/QIS/EU-QIS-report-2.pdf  

comprehensive 

(2010), 

Results 

impact 

the 

of 

238  

In this case banks' capital is calculated based on the 2009 publicly reported capital by banks and on the basis of an estimate of 
the effects of applying the new Basel III definitions of capital and Risk Weighted Assets (RWA), without any recapitalization by 
banks. 

- 189 - 

 
 
                                                 
On  the  basis  of  the  level  of  capital  banks  reach  in  a  Basel  III  10.5%  scenario,  the 
minimum level of bail-inable bonds to comply with a minimum loss absorbing capacity 
is simply obtained by difference. 

The analysis has been developed for 7 EU Member States239 using 2009 data for a large 
sample  of  banks  contained  in  Bankscope  and  augmented  by  further  analysis  of 
Commission Services, as well as integrations from Supervisory Authorities.240 Moreover, 
ECB data has been used to complete or adjust the dataset.241 

Macroeconomic Costs 

The methodology adopted to compute the costs from banks' recapitalisation is composed 
of the following steps and assumptions: 

1) 

Total  recapitalization  needs  are  estimated.  In  particular,  first  the  level  of  capital 
under  the  new  Basel  III  definitions  of  eligible  capital  and  of  RWA  is  estimated. 
Then,  it  is  assumed  that  only  banks  that,  under  the  new  definitions,  possess  a 
capital  ratio  lower  than  the  minimum  required  need  to  recapitalize,  and  that  they 
raise  just  enough  capital  to  reach  the  MCR.  For  each  level  of  MCR  considered, 
aggregate  required  recapitalisation  per  country  is  calculated  as  the  sum  of  all 
additional capital required by those banks that need to recapitalize in the country.242 

2)  When banks need to raise additional capital to meet newly introduced higher MCR, 
they are assumed to substitute debt with equity. Costs generated by this change in 
the  composition  of  banks'  liabilities  are  obtained  by  multiplying  the  increase  in 
capital  due  to  the  need  to  recapitalise  times  the  difference  between  the  cost  of 
equity and the average cost of debt for banks.243 

3)  Banks pass on to non-financial firms the newly generated costs they have to face on 

their funding. This is achieved by increasing lending spreads. 

4) 

5) 

The  increase  in  the  cost  of  capital  for  non-financial  firms  face  can  be  estimated 
based on their current levels of leverage and corporate taxation. 

The increase in the cost of funding for non-financial firms results, in a decrease in 
their investments and thus into a permanent reduction in GDP. A calibrated Cobb-
Douglas production function is used to transform increased funding costs for non-
financial firms into a decline in GDP.244 

239  Analyzed countries are Germany, Ireland, Spain, France, Italy, Portugal and the United Kingdom. Results are presented on an 

aggregate basis using weighted averages on GDP. 

240  The  EC  requested  data  to  Supervisory  Authories  and/or  Central  Banks  of  all  involved  MS.  Data  have  been  provided  only  by 

Ireland. 

241  Appendix 4 contains aggregated data on samples of banks used in the analysis for each relevant member State (in particular: DE, 

IE, ES,FR, IT,PT,UK). 

242   The  original  Bank  of  England  methodology,  as  well  as  other  analyses  in  the  literature,  does  not  rely  on  micro-level  data  on 
banks' capital. As a consequence, it implicitly assumes that banks always hold exactly the minimum required level of capital. On 
the  contrary,  in  this  analysis  banks  that  have  a  capital  ratio  higher  than  the  minimum  required  are  considered  for  their  actual 
level of capital. 

243  The Modigliani-Miller theorem does not hold in the considered specification as the cost of equity and debt are not considered to 
change due to a modification in banks’ leverage. The introduction (even partly) of the Modigliani-Miller theorem reduces the 
increase in banks' funding costs due to higher MCR. For how the partial or total application of the MM theorem affects costs, 
see Equation 2. 

244   The  Bank  of  England  methodology  is  basically  that  of  a  static  framework,  where  reactions  by  banks  and  firms  to  increased 

capital costs are not taken into consideration. 

- 190 - 

 
 
                                                 
Costs are in particular given by the equation: 

(7) 

Equation 1 

Costs

Δ=

WACC

of

Banks

⋅

Assets
TotLoans

[
1(

⋅

−

tax

firm

]
leverage
⋅

)

⋅

y
ε
CoC
CostOfCapi

tal

⋅

DF

∞

                       Variation in banks' funding costs 

                            Variation in banks’ spreads 
                          (due to change in WACC of banks) 

                    Variation in non-financial firms' cost of capital 

where: 

ΔWACC of banks = Variation in the banks’ Weighted Average Cost of Capital 

Assets = banks' assets 

TotLoans = Loans of banks to non-financial firms; 

tax

firm

= non-financial firms' tax rate;245 

leverage = banks' lending share of firms financing; 

CostOfCapital = current cost of capital/funding for non-financial firms; 

CoC  = elasticity of GDP to cost of capital, based on a Cobb-Douglas specification with 

εy
30% elasticity of GDP to capital  

∞DF = permanent rent discount factor, defined as 

DF

=∞

equal to 2.5%, leading to a discount factor of 41). 

1

i

+
i

, (i being the discount rate 

The first ratio in Equation 2 is the variation in the funding costs (i.e. the variation in the 
WACC, the Weighted Average Cost of Capital) for banks due to the need to recapitalise 
to  reach  any  required  MCR  level.  The  multiplication  between  the  first  and  the  second 
ratio  estimates  the  variation  in  banks’  lending  spreads  due  to  their  need  to  recapitalise. 
The multiplication by the term in square brackets allows transforming this variation into 
an increase in non-financial firms' cost of capital/funding. The elasticity of GDP to non-
financial  firms'  cost  of  capital,  given  by  εy
CoC ,  divided  by  non-financial  firms  cost  of 
capital  translates  this  increase  in  non-financial  firms  costs  of  capital  into  a  decline  in 

245   Tax rates for banks and firms are set equal to estimated corporate tax rates in each country. 

- 191 - 

 
 
 
                                                                 
 
                    
 
                    
 
                                                 
GDP. The last term,  DF ∞  is used to pass from an annual cost (as GDP declines) to the 
net present value of an infinite stream of such annual costs. 

Table  1  presents  the  calibration  of  model  parameters  used  for  the  estimation  of  macro-
economic costs and benefits. 

Table 1: Model parameters used applying the Bank of England cost-benefit framework. 

Country 

Banks' 
required 
return 
on 
equity 

Bank’s 
average 
interest 
rate on 
debt 

Cost of 
capital 
for 
firms 

Corporate 
tax rates246 

Discou
nt 
factor 

Output 
GDP 
elasticity 
of 
capital 

Leverage 
(bank 
lending 
share of 
firms' 
financing)
247 

Bank loans 
to firms in 
2008 
(billion €) 248 

56.8% 

3,229 

47.4% 

46.6% 

57.8% 

47.4% 

481 

1,986 

2,290 

1,808 

282 

52.6% 

5,118 

30.00% 

7.60% 

34.00% 

31.50% 

22.60% 

22.20% 

10% 

5% 

10% 

29.10% 

2.5% 

30% 

31.5% 

DE 

IE 

ES 

FR 

IT 

PT 

UK 

The  analysis  is  performed  for  7  different  recapitalisation  scenarios.  In  the  first  and 
baseline  scenario,  called  Basel  II,  banks  are  considered  to  be  obliged  to  meet  Basel  II 
MCR,  which  are  satisfied  by  their  2009  capital  without  any  need  for  recapitalization. 
Their capital and RWA are, however, considered according to the new Basel III Accord 
definitions of eligible capital and RWA.249 In the six other scenarios, MCR are introduced 
where  banks  recapitalise  (if  needed)  to  respect  the  various  MCR  levels  considered,  as 
detailed in Table 2. 

246  For the applied tax rates see country chapters of European Commission European Commission (2010), Taxation trends in the 

European Union, 
http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/tax_structures/index_en.htm. 

247  For a study on leverage performed on six EU MS see De Socio A. (2010), La situazione economico-finanziaria delle imprese 

italiane nel confronto internazionale, Questioni di Economia e Finanza n.66, Banca d'Italia 
(http://www.bancaditalia.it/pubblicazioni/econo/quest_ecofin_2/QF_66/QEF_66.pdf). For IE, and PT the  EU average has been 
used. It should be noted that data refer to overall leverage, not just bank debt leverage. As we currently have no access to the 
share  of  bank  loans  in  total  corporate  debts  we  take  the  most  unfavourable  hypothesis  and  assume  that  non-bank  debt  is 
negligible. This has the effect of amplifying the impact of increases in banking spreads on firm’s cost of capital, resulting in a 
higher estimate of costs of increases in banks’ cost of capital. 

248  See Table 6 in ECB EU Banking Structures 2010, 

http://www.ecb.int/pub/pdf/other/eubankingstructures201009en.pdf 

249 

In other words, while banks do not need to recapitalize under Basel II rules, they might result to be under-capitalized under the 
new definitions of capital of Basel III 

- 192 - 

 
 
 
 
                                                 
 
 
 
Table 2: MCR scenarios. 

Scenario name 

BII 

BIII 
6.5% 

BIII 
8% 

BIII 
10.5% 

BIII 
12% 

BIII 
13.5% 

BIII 
15% 

Capital 
definition 

and 

RWA 

Minimum 
requirement (% RWA) 

capital 

Basel III  Basel III  Basel III  Basel III  Basel III  Basel III  Basel III 

none 

6.50% 

8% 

10.50% 

12% 

13.50% 

15% 

Table 3 describes the costs of the introduced scenarios. Each column refers to a different 
scenario while the last column describes costs implied by an increase in capital equal to 
1% of RWA. 

The  first  row  shows  average  total  recapitalization  needs  (i.e.  compared  to  the  Basel  II 
baseline  scenario).  Recapitalization  needs  are  obtained  as  the  sum  of  recapitalisation 
needs for individual banks with a level of capital below the minimum required according 
to the Basel III definitions of eligible capital and RWA. Banks holding a capital above 
the MCR do not need to recapitalise and, therefore, do not change their level of capital.250 

Using  information  in  the  last  column  of  the  first  row  allows  to  express  the 
recapitalization  needed  in  the  different  scenarios  considered  as  a  percentage  of  banks' 
RWA (second row). 

These  recapitalization  needs  produce  the  variations  in  banks'  cost  of  funding,  lending 
spreads  and  in  non-financial  firms'  cost  of  capital  shown  in  rows  3-5  (see  Equation  2 
above for details on calculations). 

The  yearly  costs  in  the  various  recapitalization  scenarios,  as  presented  row  6,  are 
obtained by multiplying the variations in the cost of capital by the constant elasticity of 
GDP to the cost of capital and dividing by non-financial firms cost of capital. 

From  yearly  costs  it  is  possible  to  obtain,  as  shown  in  the  last  row  of  Table  4,  the  net 
present value of an infinite stream of these yearly costs. 

250  To  obtain  recapitalization  needs  for  the  entire  banking  system  in  each  country,  total  recapitalization  needs  for  the  sample  of 
banks in each country are rescaled on the basis of the share of total assets in the sample relative to the entire population (see 
Appendix 4 for detailed figures on samples used in each country). 

- 193 - 

 
 
 
                                                 
Table 3: Costs of the various recapitalization scenarios. All figures are a GDP-weighted 
average over the analyzed MS. 

BIII 
6.5% 

BIII 
8% 

BIII 
10.5% 

BIII 
12% 

BIII 
13.5% 

BIII 
15% 

Δ1% 

2.63 

11.84 

46.90 

76.03 

109.84 

144.81 

21.75 

0.15% 

0.56% 

2.17% 

3.49% 

5.03% 

6.62% 

n.a. 

0.4 

1.5 

5.8 

9.3 

13.4 

17.7 

2.67 

1.0 

3.7 

12.7 

20.2 

28.8 

37.7 

5.57 

0.3 

1.1 

3.8 

6.1 

8.9 

11.7 

1.8 

0.01% 

0.05% 

0.16% 

0.26% 

0.38% 

0.50% 

0.08% 

0.55% 

1.93% 

6.72% 

10.78% 

15.59% 

20.57% 

3.22% 

1 

Recapitalization needs when 
moving  from 
the  baseline 
scenario  to  the  other  MCR 
scenarios. (billion € ) 

(8) 

Recapitalization 

(9) 
needs when moving from the 
baseline scenario to the other 
MCR scenarios (% of RWA) 

3 

4 

5 

6 

7 

Variation  in  banks'  funding 
costs  when  moving  from  the 
baseline  scenario  to  the  other 
MCR scenarios (bps) 

Variation in lending spreads 
when  moving 
the 
baseline  scenario  to  the  other 
MCR scenarios (bps) 

from 

Variation 
in  non-financial 
firms  cost  of  capital  when 
moving  from 
the  baseline 
scenario  to  the  other  MCR 
scenarios (bps) 

Yearly  costs  when  moving 
from  the  baseline  scenario  to 
the  other  MCR  scenarios 
(%GDP) 

NPV  of  costs  when  moving 
from  the  baseline  scenario  to 
the  other  MCR  scenarios 
(%GDP) 

Other  recent  studies  have  performed  a  costs-benefit  analysis  of  increasing  the  level  of 
MCR for banks.251 In Table 4 we report available results, for comparison purposes. 

251  For  reviews  see,  for  instance    EEAG  (2011),  The  EEAG  Report  in  the  European  Economy  “Taxation  and  Regulation  of  the 
Financial  Sector”,  CESifo,  147-169.  http://www.cesifo-group.de/portal/page/portal/ifoHome/B-politik/70eeagreport,  and 
Independent  Commission  on  Banking  (2011)  Interim  Report:  Consultation  on  Reform  Options  (Vickers  report),  http://s3-eu-
west-1.amazonaws.com/htcdn/Interim-Report-110411.pdf 

- 194 - 

 
 
 
 
 
                                                 
Table  4:  Estimated  impacts  of  a  1%    increase  in  banks’  capital  ratios,  literature 
overview.  

Area of 
analysis 

Δ banks' 
funding 
costs 
(bps) 

Δlending 
spreads 
(bps) 

Δfirms' 
cost of 
capital 
(bps) 

Yearly 
costs 
(% GDP)  

Costs NPV
(% GDP) 

This study 

EU-7 

2.7 

5.6 

1.83 

0.08% 

3.22% 

This study, calibrated using 
parameter values as in the 
Cumulative Impact 
Assessment.252 0%MM 
(50%MM) 

Cumulative Impact 
Assessment, 0%MM 
(50%MM) 

BCBS (2010b), median 
effect 253 

EU-7 

5.2 
(2.5) 

EU-27 

10.8 
(5.4) 

10.0 
(5.2) 

3.6 
(1.8) 

0.15% 
(0.08%) 

6.25% 
(3.13%) 

2.8 
(1.6) 

0.21% 
(0.11%) 

8.61% 
(4.57%) 

World 

13 

0.09% 

3.69% 

Bank of England254 

UK 

Barrell et al.255 

OECD-14 

Kashyap 
100% MM256 

et 

al.

Miles et al.257  45%MM 

Slovik, 
(2011)258 

Cournède

Euro Area 

9.4 

14.3 

EU Parl study259 

EU-27 

6 

18 

2.5 

6 

0.10% 

4.10% 

0.08% 

3.28% 

0.01% 

0.45% 

0.05% 

2.1% 

0.06% 

2.46% 

0.18% 

7.38% 

3.4 

1.6 

252   QUEST III model with the following parameters. Banks' RoE = 14.3%, Average cost of banks' debt = 2.5%, see the Commission 

Staff Working Paper "Comprehensive Evaluation of Financial Market Regulatory reform" for details. 

253   BCBS (2010), An assessment of the long-term economic impact of stronger capital and liquidity requirements, Basel Committee 

on Banking Supervision, Bank for International Settlements, Basel 2010, www.bis.org/publ/bcbs173.pdf. 

254   Bank 

Financial 
www.bankofengland.co.uk/publications/fsr/2010/fsrfull1006.pdf. 

England 

(2010), 

of 

Stability 

Report, 

London 

2010, 

255   Barrell, R., David, E.P., Fic, T., Holland, D., Kirby, S. Liadze, I. (2009), Optimal regulation of bank capital and liquidity: how 

to calibrate new international standards: http://www.fsa.gov.uk/pubs/occpapers/op38.pdf 

256   Kashyap,  S.  and  S.  Hanson  (2010),  An  Analysis  of  the  Impact  of  “Substantially  Heightened”  Capital  Requirements  on  Large 

Financial Institutions, University of Chicago. 

257   Miles D., Yang J., Marcheggiano G. (2011), Optimal Bank Capital, External MPC Unit Discussion paper No. 31: revised and 
England, 

expanded 
of 
http://www.bankofengland.co.uk/publications/externalmpcpapers/extmpcpaper0031revised.pdf  

version, 

Bank 

258   Slovik  P.,  Cournède  B.  (2011),  Macroeconomic  Impact  of  Basel  III,  OECD  Economic  Department  Working  Papers,  No  844, 
http://www.oecd-
OECD 
library.org/docserver/download/fulltext/5kghwnhkkjs8.pdf?expires=1311763661&id=id&accname=guest&checksum=B2A5654
CA0003A5337E702720D080C92  

Publishing, 

259   European Parliament (2011), CRDIV – Impact Assessment of the Different Measures within the Capital Requirements Directive 

IV, 
http://www.europarl.europa.eu/activities/committees/studies/download.do?language=en&file=41211#search=%20CRD%20IV%
20  

- 195 - 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
Estimation of the probability of a systemic banking crisis with the SYMBOL model 

The  SYMBOL  model  is  used  to  estimate  the  variation  in  the  SystemicPD  due  to  the 
introduction of different MCR levels.  

Starting from micro data on banks’ MCR and total capital, SYMBOL allows estimating 
the aggregated distribution of losses260 and liquidity shortfalls261 originated by defaults in 
the banking system and potentially hitting society and the economy. Liquidity shortfalls 
are defined as the total amount of insured deposits held by defaulted banks. 

To this aim, SYMBOL operates in two steps: the first step is the estimation of a average 
default probability for the assets of any individual bank, by means of the features of the 
Basel  FIRB  (Foundation  Internal  Ratings  Based)  loss  distribution  function;  the  second 
step is the estimation – via a Monte Carlo simulation - of the distributions of aggregate 
losses  and  liquidity  shortfalls  by  country,  on  the  basis  of  individual  banks'  portfolio 
average default probabilities and total capital. SYMBOL simulations are run by allowing 
for contagion effects between banks.262 

In  order  to  estimate  the  variation  in  the  SystemicPD,  a  definition  of  systemic  banking 
crisis  is  needed.  In  the  present  work  a  systemic  banking  crisis  is  defined  as  a  situation 
where  aggregate  liquidity  shortfalls  due  to  bank  defaults  exceed  a  certain  threshold, 
beyond  which  public  authorities  find  it  difficult  to  intervene  by  injecting  liquidity  and 
therefore would have a hard time in trying and avoiding that the crisis spreads further. 

The threshold for a systemic banking crisis in any country is assumed to be equal to 3% 
of  its  GDP.263  This  threshold  is  loosely  in  line  with  the  average  effective  expenditures 
faced by EU countries in the last financial crisis. It also coincides with the deficit limit in 
the  European  Stability  and  Growth  Pact.  This  threshold  is  finally  also  a  prudent 
estimation  for  2009  of  the  “fiscal  space”  that  was  available  to  EU  governments  before 
public finances would get under tension according to financial analysts.264 

260   Losses are defined as losses in excess of banks' capital, i.e. as (extra-)losses of defaulted banks. 

261   Liquidity shortfalls represent the liquidity problem potentially caused by a reimbursement of depositors of defaulted banks and 
of a bank run. Insured deposits are defined as deposits which are entitled to be repaid by a Deposit Guarantee Scheme in case of 
a bank failure. Insured deposits are obtained for each bank by considering total deposits from non-banking customers, and then 
applying two correction factors at country level: one to obtain the share of deposits eligible for coverage (equal to the share of 
non-banking financial corporations deposits in each country, based on ECB and Eurostat statistics) and one to obtain from this 
amount  the  total  of  deposits  which  are  entitled  to  coverage  (equal  to  the  share  of  eligible  deposits  which  are  estimated  to  be 
under  the  minimum  coverage  threshold,  set  at  €  100.000.  Based  on  updates  to  the  statistics  presented  on  Deposit  Guarantee 
Schemes by the Commission.) 

262   Whenever  a  bank  defaults,  it  is  in  particular  assumed  that  40%  of  the  amounts  of  its  interbank  debts  are  passed  as  losses  to 
creditor banks and distributed among them. The hypothesis of a 40% loss in the interbank exposure is coherent with the upper 
bound of economic research on this issue. See (i) James C. (1991), The Loss Realized in Bank Failures, Journal of Finance, 46, 
1223-42; (ii) Mistrulli P.E. (2007), Assessing Financial Contagion in the Interbank Market: Maximum Entropy versus Observed 
Interbank  Lending  Patterns,  Bank  of  Italy  Working  Papers  n.  641;  (iii)  Upper  C.,  Worms  A.  (2004),  Estimating  Bilateral 
Exposures in the German Interbank Market: Is there Danger of Contagion?, European Economic Review, 8, 827-849.  

Losses are distributed following a criterion of proportionality: the portion of loss absorbed by each bank is proportional to the 
share  of  its  creditor  exposure  in  the  interbank  market.  A  default  driven  by  contagion  effects  takes  place  whenever  with  this 
additional loss any new bank default. The contagion process continues until no new additional bank defaults. Concerning the 
fact that the model distributes extra losses according to a criterion of proportionality, a sensitivity test has been developed which 
demonstrated that results of SYMBOL are not relevantly affected by this assumption. 

263  The  GDP  is  taken  from  the  AMECO  dataset  by  the  European  Commission  Directorate  for  Economic  and  Financial  Affairs, 

http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm 

264   Market analysts commonly identify a condition of tension on public finances when the ratio of government interest payments on 
government tax revenues, gets beyond 10%. In 2009, the average “fiscal space” before hitting this 10% threshold was some 2% 
of GDP for EU Member States. See for example the article "The grim rater" of 4th May 2010 issue of The Economist. 

- 196 - 

 
 
                                                 
 
Table  5  summarizes  average  results.  The  first  row  shows  the  average  SystemicPDs, 
obtained first applying the 3% threshold to the distribution of liquidity shortfalls for the 
considered  countries  and  then  averaging  over  the  MS.  The  second  row  reports  the 
reduction in the SystemicPD when moving from the baseline scenario Basel II to any of 
the other scenarios The last row presents results in marginal terms, i.e. the reduction in 
the  SystemicPD  normalised  per  point  of  RWA  recapitalisation  in  each  scenario  is 
reported. 

Table 5: Impact of the various recapitalization scenarios on the probability of systemic 
banking crisis. All figures are a GDP-weighted average of the effect in the analyzed MS. 

BII 

BIII 
6.5% 

BIII 
8% 

BIII 
10.5% 

BIII 
12% 

BIII 
13.5% 

BIII 
15% 

0.62% 

0.55% 

0.42% 

0.20% 

0.13% 

0.09% 

0.06% 

- 

0.07% 

0.20% 

0.42% 

0.49% 

0.54% 

0.56% 

- 

0.32% 

0.30% 

0.15% 

0.05% 

0.03% 

0.02% 

1 

of 

Probability 
systemic 
banking  crisis  (SystemicPD) 
under 
the  various  MCR 
scenarios 

(10)

(11) 
Reduction in the 
SystemicPD when moving 
from the baseline scenario 
BII to the other MCR 
scenarios (percentage points) 

3 

in 

Reduction 
the 
SystemicPD  normalised  per 
RWA 
of 
point 
recapitalisation  in  the  various 
MCR scenarios 

Macroeconomic benefits under different minimum capital requirements  

Following  the  approach  proposed  by  the  Bank  of  England,  benefits  are  estimated 
multiplying the reduction in the SystemicPD, moving from the baseline scenario Basel II 
to any of the other MCR scenarios, times the total (avoided) costs on the economy when 
a systemic crisis hits it (presented in Table 1), and then computing the net present value. 
The  first  row  of  Table  6  presents  the  net  present  value  of  benefits  as  a  percentage  of 
GDP.  Corresponding  yearly  benefits  are  reported  in  the  second  row  of  the  table  while 
corresponding yearly marginal benefits normalised per point of RWA recapitalisation are 
reported the last row. 

- 197 - 

 
 
 
 
 
Table6:  Benefits  of  the  various  recapitalization  scenarios.  All  figures  are  a  GDP-
weighted average over the analyzed MS. 

1 

Net  present  value  of  benefits 
when  moving  from  the  baseline 
scenario BII to the various MCR 
scenarios (% GDP). 

(12)

Yearly benefits when 

(13) 
moving from the baseline 
scenario BII to the various MCR 
scenarios. (% GDP) 

3 

benefits 
Yearly  marginal 
normalised  per  point  of  RWA 
recapitalisation  (% GDP) 

BIII 
6.5% 

BIII 
8% 

BIII 
10.5% 

BIII 
12% 

BIII 
13.5% 

BIII 
15% 

3.14% 

7.22% 

14.34% 

16.75% 

18.41% 

19.42% 

0.08% 

0.18% 

0.35% 

0.41% 

0.45% 

0.47% 

0.28% 

0.25% 

0.13% 

0.05% 

0.03% 

0.02% 

These results can be compared with results obtained by the Basel Committee, which are 
presented in Table 7. 

Table7: Estimated yearly marginal benefits of increasing banks’ capital ratio, literature 
overview.  

Capital as 
% of RWA 

Marginal reduction in 
the SystemicPD 

Implied marginal benefit of increasing capital ratio,  

% of GDP, BCBS (2010b) 

Based on mean avoided 

losses of 106% of GDP 

Based on median avoided 
losses of 63% of GDP 

7% 

8% 

9% 

10% 

11% 

12% 

13% 

14% 

15% 

2.60% 

1.60% 

1.10% 

0.50% 

0.40% 

0.30% 

0.20% 

0.10% 

0.10% 

2.76% 

1.70% 

1.17% 

0.53% 

0.42% 

0.32% 

0.21% 

0.11% 

0.11% 

- 198 - 

1.64% 

1.01% 

0.69% 

0.32% 

0.25% 

0.19% 

0.13% 

0.06% 

0.06% 

 
 
 
 
 
Source: EEAG (2011)265 table 5.2, based on BCBS LEI report,266 table A2.2 

Comparing the figures, it can be observed that our approach results in lower reductions in 
the SystemicPD per point RWA recapitalisation, and consequently lower yearly benefits. 
This  difference  can  be  explained  considering  that  the  definition  of  what  constitutes  a 
systemic banking crisis is very different in the two studies. 

Macroeconomic costs-benefits analysis 

Comparing  costs  and  benefits  as  presented  in  the  last  two  sections,  it  is  possible  to 
estimate net benefits of increasing MCR and determine MCR optimal levels.  

Net benefits when moving from the baseline scenario Basel II to any of the considered 
other MCR scenarios are obtained subtracting costs of Table 3 (last row) from benefits of 
Table 7 (first row). They are presented in the first row of Table 8. 

Table 8: Average net benefits when moving from the baseline scenario BII to the various 
MCR scenarios (%GDP). All figures are a GDP-weighted average over the analyzed MS. 

Net present value of net benefits 
when  moving  from  the  baseline 
scenario  BII  to  the  various  MCR 
scenarios (%GDP) 

Yearly  marginal  net  benefits 
normalised  per  point  of  RWA 
recapitalisation (% GDP) 

BIII 
6.5% 

BIII 
8% 

BIII 
10.5% 

BIII 
12% 

BIII 
13.5% 

BIII 
15% 

2.59% 

5.29% 

7.62% 

5.97% 

2.82% 

-1.15% 

0.21% 

0.17% 

0.05% 

-0.03% 

-0.05% 

-0.06% 

The  MCR  increase  scenario  optimizing  the  amount  of  net  benefits  can  be  seen  to 
correspond to the 10.5% MCR (i.e. an 8% MCR plus a capital conservation buffer). 

The  second  row  of  Table  8  shows  yearly  marginal  net  benefits  (i.e.  net  yearly  benefits 
normalised per point of RWA recapitalisation). It is possible to see from this table that 
marginal net benefits go to zero somewhere between the 10.5% and 12% recapitalization 
scenarios, pointing to the fact that the marginal benefits and marginal costs curves cross 
somewhere between these two points. 

265  See EEAG (2011), “Taxation and Regulation of the Financial Sector”, in EEAG Report on the European Economy 2011, 147-

169 

266  See The Basel Committee on Banking Supervision (BCBS – LEI Group), An assessment of the long-term economic impact of 

the stronger capital and liquidity requirements August 2010. 

- 199 - 

 
 
 
 
                                                 
Appendix 6: A "simple rule" for DGS and RF calibrated on SYMBOL results (no 
recapitalisation scenario) 

We  investigate  the  possibility  to  determine  DGS/RF  funding  needs  using  a  simple  rule 
calibrated on the SYMBOL systemic losses in the no recapitalisation scenario. 

We  focus  the  analysis  on  the  99.995th  percentile,  meaning  that  the  funding  needs  for 
DGS+RF are to cover losses in 99.995% of the cases. For this analysis, we work under 
Scenario 2.bis (Basel III with 10.5% RWA capitalisation, no contagion between banks). 

Funding  needs  at  the  99.995th  percentile  are  first  regressed  against  an  estimate  of 
covered  deposits  as  of  2009.  267,268  Results  show  that  the  fit  is  extremely  good  and  the 
coefficient for covered deposits is 1.41%. 

Regressing  SYMBOL  funding  needs  at  99.995%  against  2009  total  liabilities269  gives 
instead a coefficient roughly equal to 0.34%. 

267   The estimated amount of 2009 covered deposits is obtained combining data from two different sources: 2007 data on deposits 
estimated  by  JRC  on  the  basis  of  a  survey  among  EU  DGS  held  in  2010  (see  JRC  Report  under  Article  12  of  Directive 
94/19/EEC)  and  2007/2009  data  on  deposits  from  ECB  (EU  banking  structures,  October  2008  and  EU  banking  structures, 
October  2010).  The  estimation  procedure  ensures  that  the  proportion  of  covered  deposits  does  not  change  from  one  year  to 
another if the level of coverage remains unchanged, i.e. covered deposits increase proportionally to eligible deposits. 

268   The regression is forced to have no intercept. 

269   The  estimated  amount  of  2009  liabilities  used  in  the  analysis  is  obtained  from  ECB  data  in  EU  Banking  Structures  (October 

2010) and in the ECB EU Banking Sector Stability (September 2010). 

- 200 - 

 
 
                                                 
Table 1: Results of the regressions performed to calibrate  the simple rule on SYMBOL 
results. 

Multiple R 

R Square  

Regression on 
covered deposits 

Regression on non-
equity liabilities 

0.95083019 

0.96429716 

0.90407805 

0.92986902 

Statistics 

Adjusted R Square 

0.84852249 

0.87431346 

Standard Error 

Observations 

Intercept coefficient 

X Variable coefficient 

Results 

X Variable Standard Error 

X Variable Lower 95% 

X Variable Upper 95% 

3178.71629 

2717.98924 

19 

0 

1.41% 

0.11% 

1.18% 

1.63% 

19 

0 

0.34% 

0.02% 

0.29% 

0.39% 

On  the  basis  of  the  regression  results,  the  DGS+RF  funding  needs  are  considered 
according to the following "simple rule": 

 DGS/RF  funding  needs  =  'simple  rule'  =  max[1.5%  covered  deposits,  0.3%  total  non-
equity liabilities]. 

As  it  can  be  seen  from  Figure  1  below,  while  not  always  coinciding  with  SYMBOL 
results  at  99.995%,  fund  sizes  based  on  such  a  rule  would  never  be  smaller  than  those 
calculated by SYMBOL at 99.95%. 

- 201 - 

 
 
 
  
 
Figure 1: Results of the simple rule (x-axis) versus SYMBOL results (y-axis).  

The dashed line is y=x. Whenever a MS lies above this line it means that funding needs 
estimated via SYMBOL for this MS are higher than the funding needs estimated using 
the simple rule. Vice versa, if a MS is below the diagonal, funding needs of the simple 
rule are higher than those estimated via SYMBOL. 

In  Table  2  the  DGS/RF  funding  needs  for  all  EU  MS,  based  on  the  simple  rule  are 
presented.  The  third  last  column  shows  the  funding  needs  for  DGS+RF,  further  split 
following  the  54%-46%  split  rule  obtained  in  SYMBOL  results  (see  Table  2)  into  the 
parts of them for DGS (second last column) and RF (last column) purposes respectively. 

- 202 - 

 
 
 
Table  2:  Estimated  DGS/RF  funding  needs  based  on  the  simple  rule  calibrated  on 
SYMBOL losses at 99.995th percentile (data for 2009, m€) 

Countr
y 

Total 
Liabilities 

Covered 
Deposits
270 

1.5% 
covered 
deposits 

0.3% 
non-
equity 
liabilities 

DGS + RF 

DGS 

RF 

A 

B 

C = Higher of 
[A, B] 

54% of 
C 

46% of 
C 

BE 

1,019,685 

195,582 

2,934 

3,059 

3,059 

1,652 

1,407 

BG 

CZ 

31,471 

15,701 

129,698 

59,630 

236 

894 

94 

389 

236 

894 

127 

483 

108 

411 

DK 

1,017,226 

126,664 

1,900 

3,052 

3,052 

1,648 

1,404 

DE 

6,970,615 

2,087,206 

31,308 

20,912 

31,308 

16,906 

14,402 

EE 

14,684 

4,711 

71 

44 

71 

38 

33 

IE 

1,140,899 

175,665 

2,635 

3,423 

3,423 

1,848 

1,574 

GR 

420,895 

141,089 

2,116 

1,263 

2,116 

1,143 

974 

ES 

3,010,189 

709,771 

10,647 

9,031 

10,647 

5,749 

4,897 

FR 

6,671,434 

1,484,843 

22,273 

20,014 

22,273 

12,027 

10,245 

IT 

3,184,578 

449,133 

6,737 

9,554 

9,554 

5,159 

4,395 

CY 

125,249 

44,291 

664 

359 

306 

664 

80 

125 

376 

73 

61 

80 

125 

43 

67 

24,289 

5,330 

20,387 

8,308 

LV 

LT 

LU 

644,367 

104,396 

1,566 

1,933 

1,933 

1,044 

HU 

109,571 

33,256 

MT 

36,972 

8,797 

499 

132 

329 

111 

499 

132 

269 

71 

37 

57 

889 

229 

61 

NL 

2,060,855 

435,011 

6,525 

6,183 

6,525 

3,524 

3,002 

AT 

958,961 

159,563 

2,393 

2,877 

2,877 

1,554 

1,323 

PL 

PT 

232,477 

88,046 

1,321 

697 

456,709 

112,445 

1,687 

1,370 

RO 

73,263 

30,357 

455 

220 

1,321 

1,687 

455 

713 

911 

246 

608 

776 

209 

270   Based on DGS and ECB data, as total covered deposits are not available in Bankscope for all EU Member States. The weighted 
average difference (in absolute terms) between this data and the corresponding column of Table 1 in Appendix 4 is 18.9%. 

- 203 - 

 
 
 
 
 
                                                 
SI 

SK 

FI 

SE 

48,783 

17,495 

45,843 

21,692 

262 

325 

146 

138 

348,619 

87,124 

1,307 

1,046 

262 

325 

1,307 

142 

176 

706 

121 

150 

601 

836,518 

159,175 

2,388 

2,510 

2,510 

1,355 

1,154 

UK 

5,548,517 

1,010,592 

15,159 

16,646 

16,646 

8,989 

7,657 

EU 

35,182,754 

7,775,873 

116,638 

105,548 

123,979 

66,949 

57,030 

- 204 - 

 
 
ANNEX XIV  A  COMPREHENSIVE  STRATEGY  TO  RESTORE  FINANCIAL  STABILITY  TO 
UNDERPIN SUSTAINABLE GROWTH IN THE EU 

As soon as the crisis broke in 2007, the EU acted promptly adopting a series of urgent 
measures to prevent the crisis spreading and limit its extent and impact. In particular the 
focus  was  on  coordinating  the  European  economic  stimulus  package  to  promote 
recovery,  applying  the  state  aid  regime  firmly  but  flexibly  so  as  to  avoid  distortions  of 
competition while allowing banks to restructure, and increasing the amounts guaranteed 
by Deposit Guarantee Schemes (DGSs) up to €100,000 per account.  

Following this wave of “emergency” measures, the Commission launched a programme 
of  reforms  which  implements  the  commitments  taken  by  the  G20  and  aims  at  tackling 
more  structural  issues  in  the  EU  financial  sector  and  address  the  main  sources  of  its 
vulnerability as unveiled by the crisis: 

•  The  low  levels  of  high  quality  capital  and  insufficient  liquidity  in  the  banking 
sector,  partly  reflecting  inadequate  and  pro-cyclical  prudential  requirements  and 
failures in risk assessment and management;  

•  Supervisory  shortcomings,  particularly  with  regard  to  the  supervision  of 
individual institutions operating in a cross-border context and to the unregulated 
financial sector;  

•  Corporate  governance  failures  which  contributed  to  excessive  risk  taking 

practices in financial institutions;   

• 

Insufficient market transparency and inadequate disclosure of information to the 
authorities 
to  complex 
including  supervisors,  particularly  with  reference 
structured financial products; 

•  Lack of adequate regulation and supervision of Credit Rating Agencies;  

• 

Insufficient  macro  prudential  surveillance  of  the  financial  sector  as  a  whole  to 
prevent macro-systemic risks of contagion;  

•  The  absence  of  a  harmonised  framework  to  facilitate  the  orderly  wind-down  of 
banks and financial institutions which has contributed to put pressure on Member 
States to inject public money into banks to prevent a general collapse 

The  building  blocks  of  this  programme  were  illustrated  in  the  Communication  of  4 
March  2009,  Driving  European  Recovery,  and  the  Communication  of  2  June  2010 
'Regulating  financial  services  for  sustainable  growth"  which  set  out  the  details  of  the 
financial reform package.  

The  first  elements  were  put  in  place  in  the  period  2009-2010.  The  most  important  is 
represented  by  the  new  architecture  for  financial  supervision  which  involved  the 
establishment  of  the    European  Systemic  Risk  Board,  which  will  ensure  that  macro-
prudential  and  macro-economic  risks  are  detected  at  an  early  stage,  and  three  new 
European Supervisory Authorities responsible for banking (European Banking Authority 

- 205 - 

 
 
 
 
or  EBA),  insurance  (.European  Insurance  and  Occupational  Pensions  Authority  or 
EIOPA)  and  securities  markets  (  European  Securities  Markets  Authority  ESMA)  to 
ensure reinforced supervision and better co-ordination among supervisors.  

An  important  gap  in  regulation  has  been  plugged  through  the  Regulations  on  credit 
rating  agencies  ('CRA  I'  and  'CRA  II')  introducing  strict  authorisation  requirements 
and  supervision  for  CRAs,  and  entrusting  ESMA  with  the  supervision  on  CRAs. 
Moreover  the  Capital  Requirements  Directive  (CRD)  was  amended  ('CRD  III')  to 
reinforce capital rules for the trading book and for complex derivatives and to introduce 
binding rules on remuneration and bonuses in financial institutions. A further regulatory 
and  supervisory  gap  has  been  plugged  with  the  Directive  on  managers  of  alternative 
investment  funds,  including  hedge  funds  (AIFM  Directive)  providing  robust  and 
harmonised  regulatory  standards  for  all  managers  and  enhancing  transparency  towards 
investors. 

The interplay between the persisting fragilities of the financial sector, particularly due to 
the  funding  conditions  for  the  banking  sector,  and  pressures  on  governments'  public 
finance and sovereign debt markets, the so called twin crisis', became of mounting source 
of concern in the end of 2010 and during the first half of 2011.   

In order to tackle effectively the twin crisis and to restore the EU economy to sustainable 
long term growth, the Commission and Member States have developed a coordinated and 
gradual approach to address both dimensions, i.e. the structural fragilities of the financial 
sector and the vulnerabilities of sovereign markets, in parallel. This requires bringing to 
completion the on-going reform programme to achieve a healthier financial sector along 
a series of measures to deliver a new quality of economic policy coordination to reduce 
the  contagion  risks  from  the  vulnerable  Member  States  to  other  sovereign  markets  and 
ensure public-debt sustainability. 

The first component is articulated along three dimensions: 

I. Improving stability and governance of financial institutions 

–  Improved stability of financial institutions will be achieved through the new European 
Supervisory  Authorities  which  will  coordinate  the  work  of  national  supervisors, 
ensuring  coherent  supervisory  practices  and  contributing  to  the  establishment  of  a 
common  rulebook  for  financial  institutions.  In  the  summer  2011,  the  Capital 
Requirements  Directive  (CRD)  will  be  revised  again  in  order  to  implement  the 
“Basel  III”  agreement,  which  significantly  increases  the  levels  of  capital  which 
banks  and  investment  firms  must  hold  to  cover  their  risk-weighted  assets.  The 
proposal  will  include  provisions  to  improve  risk  control  and  oversight  as  well  as 
enhance supervisory review of risk governance in financial institutions. 

–  At  the  end  of  2011,  a  new  legislative  proposal  on  CRAs  ('CRA  III')  will  tackle 
further risks related to the functioning of the rating business, such as the "issuer-pays" 
model,  the  overreliance  on  ratings,  the  lack  of  competition  in  the  sector,  and  the 
specificities  of  sovereign  debt.  In  that  respect  the  initiative  will  contribute  also  to 
reducing the pressure on sovereign markets. 

- 206 - 

 
 
 
 
–  A  proposal  for  a  review  of  the  Directive  of  financial  conglomerates  has  been 
adopted  to  simplify  and  clarify  the  Directive  with  respect  to  a  number  of  current 
problems  (inadequacy  of  thresholds,  complexity  of  supervisory  tools  etc.),  and 
harmonise its application. 

–  The  publication  of  the  results  of  the  2011  EU-wide  stress  test,  based  on  stricter 
requirements, better coordination and peer review and a significantly higher degree of 
transparency, will provide the right incentives for banks to restructure their operations, 
strengthen  their  capital  base,  and  regain  viability.  Coordinated  back-stop  measures, 
with  market  based  recapitalisation  in  the  first  place,  will  be  set-up  to  take  remedial 
action for banks failing the stress test. In last resort case of public interventions, the 
EU State aid rules will provide the appropriate framework to ensure financial stability 
and a level playing field.  

–  New  State  Aid  control  measures  based  on  Article  107(3)(c)  TFEU  will  be 
introduced as of 1 January 2012 with a gradual tightening of conditions towards a new 
permanent  State  Aid  Regime.  The  continuation  of  the  crisis  regime  under  Article 
107(3)(b)  could  be  envisaged  for  those  Member  States  that  would  be  subject  to  a 
macroeconomic adjustment programme accompanying financial assistance. 

–  The legislative proposal for a new EU bank resolution regime will establish a series 
of legal arrangements that allow the relevant authorities to more easily restructure or 
resolve a distressed credit institution without recourse to public financial support. The 
new regime will include certain tools ("bail-in") to ensure that the objective of making 
shareholders and creditors of the credit institutions contribute to the restructuring and 
resolution  of  the  banks.  The  approach  of  increasing  market  discipline  by  clearly 
setting  the  rules  for  burden  sharing  between  public  and  private  sector  in  crisis 
situation  will  be  a  common  element  also  in  the  State  aid  framework  and  in  the 
European Stability Mechanism created for the sovereign, which foresees some private 
sector involvement. 

II. Enhancing efficiency, integrity, liquidity and transparency of markets 

–  The  review  of  the  Markets  in  Financial  Instruments  Directive  (MiFID)  will 
improve transparency, efficiency and integrity of securities markets in several ways. 
For example, the scope of MiFID will be extended to new types of trading platform 
and financial products, thus removing some opaque areas of securities markets. Some 
derogations will be also removed, and transparency requirements will be extended to 
all kinds of securities, not just shares.  

–  The  Market  Abuse  Directive  (MAD)  will  also  be  revised  to  provide  for  a  more 

effective prevention, detection and sanctioning of market abuses.  

–  A Regulation has been proposed on Over-The-Counter (OTC) derivatives markets 
implementing the G20 commitment that standardised OTC derivative transactions be 
cleared  via  central  counterparties  (CCPs).    If  a  party  to  a  transaction  fails  in  mid-
transaction,  the  existence  of  a  CCP  would  remove  the  risk  and  uncertainty  as  to 
whether the transaction will be completed. A further obligation for OTC derivatives to 
be registered in trade repositories, with access for supervisors in the EU, will provide 
a  better  overview  of  who  owes  what  and  to  whom  and  to  detect  any  potential 
problems, such as accumulation of risk, early on.  

- 207 - 

 
 
–  A proposed Regulation regarding short selling and Credit Default Swaps (CDSs) 
will  increase  transparency  via  a  requirement  for  flagging  of  short  orders  on  trading 
venues, and notification or disclosure of significant short positions relating to shares 
and sovereign debt (including through the use of CDSs). This will enable supervisors 
to  detect  when  such  transactions  are  reaching  dangerous  levels  and  consider 
intervention on markets.  

–  Further  security  will  be  provided  by  a  planned  Securities  Law  Directive  (SLD), 
which  will  ensure  that  intermediaries  always  possess  the  securities  which  they 
maintain  for  the  account  of  their  customers.  In  addition,  envisaged  legislation  on 
Central Securities Depositories (CSDs) will further secure the post trading handling 
of securities till their final settlement. 

III. Achieving a greater protection and inclusion of consumers and investors 

–  The  Commission  has  brought  forward  proposals  to  reform  Deposit  Guarantee 
Schemes  (DGS)  and  Investor  Compensation  Schemes  (ICS),  on  top  of  recently 
agreed increase of the guaranteed amount (to € 100,000 under DGS, € 50,000 under 
ICS). The proposed revised Directives include improved payout times, better funding 
of schemes, and a proposal for interlinkages and a mutual support mechanism between 
schemes (both deposit guarantee and investor compensation), to ensure that schemes 
in difficulties do not fail, to the detriment of consumers.  

–  A legislative proposal on fair practices relating to mortgage credits will improve 
the way in which mortgages are sold to consumers,  analogous to existing obligations 
in place for consumer credit; and ensure that all mortgage lenders and intermediaries 
are properly regulated and supervised.  

–  The Commission has proposed a Regulation setting an end-date for the completion of 
the Single European Payments Area (SEPA) for direct debits and credit transfers to 
speed up the process that will make payments all over the Euro zone as easy and quick 
as domestic payments.    

–  For  packaged  retail  investment  products  (PRIPs),  a  proposal  is  planned  to  make 
sure that all consumers in Europe will in the future be able to get short, focused, and 
plainly-worded  information  about  investments  in  a  common  format,  with  risks  and 
costs  made  much  clearer  and  easier  to  understand,  aiding  comparisons.  In  addition, 
EU  rules  governing  those  selling  the  products  will  be  made  more  consistent  and 
standardised where necessary.  

–  To  enhance  financial  inclusion  the  Commission  will  table  a  proposal  to  ensure  EU 
citizens  might  have  access  to  a  basic  bank  account  with  electronic  payment 
instruments. 

On  a  macro-financial  level,  the  positive  impact  on  public  debt  sustainability  of  these 
initiatives will be backed by implementing the decisions taken by the European Council 
in  March  2011  on  delivering  a  new  quality  of  economic  policy  coordination  through 
reinforced economic governance, including the excessive imbalance procedure (EIP), the 
"Pact for the Euro" and the new European Stability Mechanism (ESM). 

- 208 - 

 
 
 
ANNEX XV  DETAILS  ON  THE  NECESSARY  DEROGATIONS  FROM  STAKEHOLDERS' 
RIGHTS UNDER EU COMPANY LAW RULES IN THE RESOLUTION PHASE 

Directive 

Article 

Content 

Justification for derogations 

Second Company 
Law Directive on the 
formation of public 
limited liability 
companies and the 
maintenance and 
alteration of their 
capital (77/91/EC) 

Serious loss of 
capital 

17(1) 

Increase of capital 

25(1) 

In the case of a serious loss of the subscribed 
capital, a general meeting of shareholders must 
be  called  within  the  period  laid  down  by  the 
laws  of 
to  consider 
whether  the  company  should  be  wound  up  or 
any other measures taken.  

the  Member  States, 

Any  increase  in  capital  must  be  decided  upon 
by the general meeting. Both this decision and 
the  increase  in  the  subscribed  capital  shall  be 
published in the manner laid down by the laws 
of  each  Member  State,  in  accordance  with 
Article 3 of Directive 68/151/EEC.  

25(3) 

27 (2) 

Expert report when 
shares are issued for 
a consideration other 
than in cash  

Pre-emption right 

29 

Where  there  are  several  classes  of  shares,  the 
decision by the general meeting concerning the 
increase of capital referred to in paragraph 1 or 
the  authorization 
the  capital 
referred to in paragraph 2, shall be subject to a 
separate  vote  at  least  for  each  class  of 
shareholder  whose  rights  are  affected  by  the 
transaction.  

increase 

to 

The  consideration  referred  to  in  paragraph  1 
shall be the subject of a report drawn up before 
the increase in capital is made by one or more 
experts  who  are  independent  of  the  company 
or 
and 
an 
administrative  or 
judicial  authority.  Such 
experts may be natural persons as well as legal 
persons  and  companies  and  firms  under  the 
laws of each Member State.  

appointed 

approved 

by 

(1)  Whenever  the  capital  is  increased  by 
consideration  in  cash,  the  shares  must  be 
offered on a pre-emptive basis to shareholders 
in proportion to the capital represented by their 
shares.  

(2) The laws of a Member State: 

- 209 - 

the 

resolution  phase 
convocation 

a 
In 
mandatory 
of 
shareholders'  meeting  can  hinder 
rapid 
resolution 
authorities.  

actions  by 

the 

actions  by 

resolution  phase 
convocation 

a 
In 
mandatory 
of 
shareholders'  meeting  can  hinder 
rapid 
resolution 
authorities.  Also,  shareholders 
potential negative decision on the 
increase  can  be  detrimental  for 
the process.  

A  separate  vote  at  least  for  each 
class  of  shareholder  can  hinder 
rapid 
resolution 
authorities.    

actions  by 

The  requirement  for  an  expert’s 
time-
valuation 
consuming  and  can  hinder  rapid 
action by resolution authorities. 

usually 

is 

A  pre-emption  right  allows  a 
shareholder  to  participate  in  any 
new share issue for cash. Member 
States  have  to  be  able  to  remove 
the 
in 
situations where it is in the public 
is 
interest 

pre-emption 

rights 

bank 

that 

the 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
recapitalised  promptly  by 
issuance  of  new  shares 
specific new shareholder.  

the 
to  a 

a) need not apply paragraph 1 above to shares 
which  carry  a  limited  right  to  participate  in 
distributions  within  the  meaning  of  Article 
15and/or  in  the  company's  assets  in  the  event 
of liquidation; or 

b) may permit, where the subscribed capital of 
a  company  having  several  classes  of  shares 
carrying different rights with regard to voting, 
or  participation  in  distributions  within  the 
meaning of Article 15 or in assets in the event 
of  liquidation,  is  increased  by  issuing  new 
shares in only one of these classes, the right of 
pre-emption  of  shareholders  of  the  other 
classes  to  be  exercised  only  after  the  exercise 
of this right by the shareholders of the class in 
which the new shares are being issued.  

(3) Any offer of subscription on a pre-emptive 
basis  and  the  period  within  which  this  right 
must  be  exercised  shall  be  published  in  the 
national  gazette  appointed  in  accordance  with 
Directive 68/151/EEC. However, the laws of a 
Member  State  need  not  provide  for  such  a 
publication  where  all  a  company's  shares  are 
registered.  In  such  case,  all  the  company's 
shareholders must be informed in writing. The 
right of pre-emption must be exercised within 
a  period  which  shall  not  be  less  than  14  days 
from  the  date  of  publication  of  the  offer  or 
from  the  date  of  dispatch  of  the  letters  to  the 
shareholders.  

(4)  The  right  of  pre-emption  may  not  be 
restricted  or  withdrawn  by  the  statutes  or 
incorporation.  This  may, 
instrument  of 
however,  be  done  by  decision  of  the  general 
meeting.  The  administrative  or  management 
body  shall  be  required  to  present  to  such  a 
meeting a written report indicating the reasons 
for  restriction  or  withdrawal  of  the  right  of 
pre-emption, and justifying the proposed issue 
price.  The  general  meeting  shall  act 
in 
accordance  with  the  rules  for  a  quorum  and  a 
majority  laid  down  in  Article  40.  Its  decision 
shall be published in the manner laid down by 
the laws of each Member State, in accordance 
with Article 3 of Directive 68/151/EEC.  

the 

the 

statutes, 

instrument 

(5) The laws of a Member States may provide 
that 
of 
incorporation or the general meeting, acting in 
accordance  with  the  rules  for  a  quorum,  a 
majority  and  publication  set  out  in  paragraph 
4,  may  give the  power  to  restrict  or  withdraw 
the right of pre-emption to the company body 
which  is  empowered  to  decide  on  an  increase 
in  subscribed  capital  within  the  limit  of  the 
authorized  capital.  This  power  may  not  be 
granted for a longer period than the power for 
which provisions is made in Article 25(2). 

(6) Paragraphs 1 to 5 shall apply to the issue of 
all securities which are convertible into shares 
or  which  carry  the  right  to  subscribe  for 
shares,  but  not  to  the  conversion  of  such 

- 210 - 

 
 
Reduction of capital  

30  

securities,  nor  to  the  exercise  of  the  right  to 
subscribe.  

(7)  The  right  of  pre-emption  is  not  excluded 
for the purposes of paragraphs 4 and 5 where, 
in accordance with the decision to increase the 
subscribed  capital,  shares  are  issued  to  banks 
or  other  financial  institutions  with  a  view  to 
their  being  offered  to  shareholders  of  the 
company in accordance with paragraphs 1 and 
3.  

Any reduction in the subscribed capital, except 
under a court order, must be subject at least to 
a  decision  of  the  general  meeting  acting  in 
accordance  with  the  rules  for  a  quorum  and  a 
majority  laid  down  in  Article  40  without 
prejudice to Articles 36 and 37. Such decision 
shall be published in the manner laid down by 
the  laws  of  each  Member  State  in  accordance 
with Article 3 of Directive 68/151/EEC.  

The  notice  convening 
the  meeting  must 
specify  at  least  the  purpose  of  the  reduction 
and the way in which it is to be carried out.  

A  capital 
reduction  may  be 
needed  to  absorb  losses  prior  to 
recapitalisation.  

the 

actions  by 

resolution  phase 
convocation 

a 
In 
mandatory 
of 
shareholders'  meeting  can  hinder 
resolution 
rapid 
authorities.  Also,  shareholders 
potential negative decision on the 
reduction  can  be  detrimental  for 
the resolution process. 

31 

Where  there  are  several  classes  of  shares,  the 
decision  by  the  general  meeting  concerning  a 
reduction  in  the  subscribed  capital  shall  be 
subject  to  a  separate  vote,  at  least  for  each 
class of shareholders whose rights are affected 
by the transaction.  

A  separate  vote  at  least  for  each 
class  of  shareholder  can  hinder 
resolution 
rapid 
authorities.    

actions  by 

Creditor protection 
in the event of 
reduction of capital.  

32 

in 

the 
the  event  of  a  reduction 
(1)  In 
subscribed capital, at least the creditors whose 
claims antedate the publication of the decision 
on the reduction, shall at least have the right to 
obtain  security  for  claims  which  have  not 
fallen  due  by  the  date  of  that  publication. 
Member States may not set aside such a right 
unless the creditor has adequate safeguards, or 
unless  such  safeguards  are  not  necessary 
having regard the assets of the company.  

The  right  to  obtain  security  for 
claims which have not fallen due 
by 
the 
the  date  of  antedate 
publication of the decision on the 
reduction  and 
rules  and 
conditions  accompanying  it  may 
hinder  the  necessary  and  swift 
reply by the resolution authorities 
to counter the crisis. 

the 

to  apply 

Member  States  shall  lay  down  the  conditions 
for the exercise of the right provided for in the 
first  subparagraph.  In  any  event,  Member 
States  shall  ensure  that  the  creditors  are 
the  appropriate 
authorised 
administrative  or 
for 
adequate  safeguards  provided  that  they  can 
credibly demonstrate that due to the reduction 
in  the  subscribed  capital  the  satisfaction  of 
their  claims  is  at  stake,  and  that  no  adequate 
safeguards  have  been  obtained  from 
the 
company.  

to 
judicial 

authority 

(2)  The  laws  of  the  Member  States  shall  also 
stipulate  at  least  that  the  reduction  shall  be 
void or that no payment may be made for the 
benefit  of  the  shareholders,  until  the  creditors 
have  obtained  satisfaction  or  a  court  has 
decided  that  their  application  should  not  be 

- 211 - 

 
 
 
 
 
 
Directive 
2011/35/EC 
concerning mergers 
of public limited 
liability companies 

Sixth Company Law 
Directive concerning 
the  division of 
public limited 
liability companies 
(82/891/EEC) 

Directive 
2005/56/EC on 
cross-border mergers 
of limited liability 
companies  

Directive 
2004/25/EC on 
takeover bids 

5(1) 

acceded to. 

the 
(3)  This  Article  shall  apply  where 
reduction  in  the  subscribed  capital  is  brought 
about  by  the  total  or  partial  waiving  of  the 
payment  of  the  balance  of  the  shareholders' 
contributions. 

Whole directive 

The requirements of the Directive 
,  especially  the  approval  of  a 
merger  by  the  general  meeting 
may  hinder  the  effective  use  of 
resolution 
the 
powers 
resolution authorities.  

by 

There  is  a  possibility  already 
foreseen  for  Member  States  not 
to  apply  the  directive    in  cases 
where the company or companies 
which  are  being  acquired  or  will 
cease  to  exist  are  the  subject  of 
proceedings, 
bankruptcy 
to 
proceedings 
the 
insolvent 
winding-up 
companies, 
judicial 
arrangements,  compositions  and 
(Art. 
analogous 
1(3)).  

relating 
of 

proceedings 

Whole directive 

As  above,  in  the  context  of  a 
domestic division.  

Whole directive 

As  above,  in  the  context  of  a 
cross-border merger.  

The  mandatory  bid  rule  may 
cause  a  burden  for  the  acquiring 
party  in  the  resolution  phase  and 
may  thus  hinder  the  necessary 
measures  by 
resolution 
authorities.  

the 

Where a natural or legal person, as a result of 
his/her  own  acquisition  or  the  acquisition  by 
persons  acting  in  concert  with  him/her,  holds 
securities  of  a  company  as  referred  to  in 
Article  1(1)  which,  added  to  any  existing 
holdings of those securities of his/hers and the 
holdings  of  those  securities  of  persons  acting 
in  concert  with  him/her,  directly  or  indirectly 
give  him/her  a  specified  percentage  of  voting 
rights in that company, giving him/her control 
of  that  company,  Member  States  shall  ensure 
that such a person is required to make a bid as 
the  minority 
protecting 
a  means 
shareholders of that company. Such a bid shall 
be  addressed  at  the  earliest  opportunity  to  all 
the  holders  of  those  securities  for  all  their 
holdings  at  the  equitable  price  as  defined  in 
paragraph 4.     

of 

Directive 
2007/36/EC on the 
exercise of certain 

Whole directive 

The  Directive  focuses  on  the 
procedural 
rights 
related  to  the  general  meeting. 

shareholder 

- 212 - 

 
 
 
 
 
 
 
 
 
 
rights of 
shareholders in listed 
companies  

They  should  not  be  applicable  in 
the resolution stage.  

- 213 - 

 
 
ANNEX XVI  IMPACTS ON FUNDAMENTAL RIGHTS 

In accordance with Article 52 of the Charter, limitations on these rights and freedoms are 
allowed. However, any limitation on the exercise  of  these  rights  and  freedoms  must  be 
provided for by the law and respect the essence of these rights and freedoms. Subject to 
the principle of proportionality, limitations may be made only if they are necessary and 
genuinely meet the objectives of general interest recognised by the Union or the need to 
protect the rights and freedoms of others. 

Bank  resolution  measures  may  interfere  with  shareholder  rights,  for  instance  by 
suspending  or  restricting  the  corporate  governance  rules  that  would  otherwise  apply  in 
troubled banks or by depriving shareholders of their property. The power of a resolution 
authority  to  transfer  the  shares  or  all  or  part  of  the  assets  of  a  bank  to  another  entity 
(using  the  sale  of  business  tool,  the  bridge  bank  tool  or  the  asset  separation  tool) 
interferes  with  the  property  rights  of  shareholders  as  these  transfers  would  be  effected 
without the consent of the shareholders that are normally be required in a pre-insolvency 
phase.  These  powers  also  involve  possible  disruptions  to  the  property  rights  of  the 
bondholders that are left with the residual part of the bank, which will be wound down. 
In  addition,  the  authorities  would  have  the  power  to  decide  which  liabilities  to  transfer 
out of a failing bank, based upon the objectives of ensuring the continuity of services and 
avoid  adverse  effect  on  financial  stability.  As  a  result,  the  bank  debt  holders  may  be 
subject to different treatment.  

From the perspective of the Charter of Fundamental Rights and the European Convention 
for  the  Protection  of  Human  Rights  and  Fundamental  Freedoms  the  most  relevant 
provisions concern the protection of property (Article 17 of the Charter and Article 1 of 
the First Additional Protocol to the Convention). All Member States have signed and/or 
ratified the European Convention, including the First Additional Protocol. In respect of 
Article  1  of  the  First  Additional  Protocol  to  the  ECHR,  the  European  Court  of  Human 
Rights has held that a share in a company’s basic capital is a property of the shareholder. 
A  share  is  capable  of  being  economically  valued  as  any  other  possession.  Therefore, 
Article 1 of the First Additional Protocol protects bank owners’ property interests in their 
shares. The Court therefore protects shareholdings against deprivation and certain forms 
of governmental control and interference. However, this right is not granted without any 
limitation. The State may (only) deprive shareholders of their shares subject to conditions 
provided by law and to general principles of international law, when there is a public or 
general interest justifying the measures and against the payment of ‘fair’ compensation.  

The  objective  pursued  by  the  measures  in  question  is  the  preservation  of  financial 
stability in the European Union. A pre-requirement for the use of these powers is in fact 
that  the  bank  cannot  be  wound  up  under  normal  insolvency  proceedings  because  this 
would  destabilize  the  financial  system.  The  measures  are  designed  to  ensure  the  rapid 
transfer  and  continuation  of  systemically  important  functions  (particularly  payment 
transactions,  the  deposit  business  and  the  lending  business)  in  the  event  of  failure  of  a 
systemically important bank and at the same time ensure that the non-viable part of the 
bank  can  be  wound  up.  If  the  authorities  had  to  seek  the  shareholders'  and  creditors' 
consent  before  effecting  the  transfer,  they  would  not  be  able  to  act  with  the  required 
speed  and  certainty  and  thus  preserve  public  confidence  in  the  financial  system.  The 
measures  furthermore  reduce  the  need  to  use  public  funds  to  rescue  banks.  If  the 

- 214 - 

 
 
authorities cannot rapidly transfer the essential bank functions, they are forced to support 
the whole business including the non-viable part.  

The Court of Justice has recognised in a number of judgments that the protection of the 
banking and financial system is a general interest pursued by EU law and national laws 
governing  banks  and  financial  institutions  and  that  the  protection  of  this  interest  may 
constitute a justification for restrictions to the fundamental freedoms of the Treaty under 
national  law,  provided  that  the  restrictions  are  proportionate  and  suitable  to  reach  the 
objectives they pursue (see case C 110/84, paragraph 27 and case C 101/94, paragraphs 
10  and  26).  In  another  judgement,  the  Court  has  considered  that  maintaining  the  good 
reputation of the national financial sector may constitute an imperative reason of public 
interest  capable  of  justifying  restrictions  on  the  freedom  to  provide  financial  services 
(Case  C-384/93).  Accordingly,  the  measures  in  question  are  in  conformity  with  an 
objective of general interest pursued by the European Union.  

It remains to be assessed whether the restrictions on the right to property resulting from 
those  measures  constitute  a  disproportionate  and  intolerable  interference  impairing  the 
very substance of the right to property.  

The interference with the right of property is not disproportionate because the framework 
provides  for  a  right  to  compensation  for  the  affected  shareholders  and  creditors. 
Shareholders and creditors are entitled to be compensated for the value of their shares or 
credits that they would be entitled to under normal liquidation of the company. A further 
safeguard is the requirements that the amount of compensation should be determined by 
reference to the value of the business as assessed by an independent valuer. Furthermore, 
compensation  should  ensure  that  shareholders  and  creditors  do  not  receive  less 
favourable  treatment  as  a  result  of  the  application  of  the  resolution  tool  or  use  of  the 
resolution power than they would have received if this tool or power had not been used 
and  the  entire  credit  institution  had  instead  entered  insolvency  under  the  applicable 
national law. In particular, where a creditor's claim remains with a credit institution from 
which assets, rights or liabilities have been transferred to another entity and the residual 
credit institution is wound up, the creditor should be compensated if the amount received 
in that winding up is less than the creditor would have received in the insolvency of the 
institution if the transfer had not been made. 

The above rules concerning compensation preserve the essence of the right to property. 
In fact if the resolution powers were not exercised, the failing company would undergo 
insolvency proceeding. Under bankruptcy law, the creditors are entitled to a proportional 
distribution  of  the  proceeds  obtained  from  the  sale  of  the  banking  assets  and  the 
shareholders are entitled to the distribution of what assets remain after the payment of all 
creditors.  This  essence  is  preserved  under  the  principles  governing  compensation. 
Therefore the restrictions do not disproportionally restrict the right to property.  

As  the  resolution  of  banks  also  involves  administrative  and  judicial  procedures,  the 
provisions concerning related rights such as due process and having an effective remedy 
against the measures are also relevant (Article 47 of the Charter and Article 1 of the First 
Additional Protocol, and Articles 6 and 13 of the European Convention). 

The  case  law  of  the  European  Court  of  Human  Rights  indicates  that  it  will  give 
Contracting States wider scope for restricting shareholders’ right to due process if they 
can show that it is an emergency and that the crisis requires expedited procedures.  The 
restriction  must  not  be  disproportionate  to  the  task  the  authorities  have  set  themselves. 
Articles  6  and  13  of  the  European  Convention,  furthermore,  set  out  the  shareholder’s 

- 215 - 

 
 
right  to  due  process  and  to  an  "effective  remedy".  An  effective  remedy  implies  that 
national  laws  must  afford  to  the  individual  or  entity  concerned  procedural  guarantees 
allowing a reasonable opportunity for presenting its case and effectively challenging the 
measures interfering with the rights guaranteed by that provision. Shareholders are thus 
entitled  to  have  their  grievance  against  the  restructuring  measures  heard,  even  if  the 
measures  alleged  to  have  violated  the  European  Convention  are  taken  by  a  competent 
authority and are justified in the public interest.  

- 216 - 

 
 
 
ANNEX XVII  OVERVIEW  OF  THE  RESULTS  OF  THE  PUBLIC  CONSULTATION  ON 
TECHNICAL DETAILS OF A POSSIBLE EU FRAMEWORK FOR BANK RESOLUTION 
AND RECOVERY (JANUARY - MARCH 2011) 

Who responded to the public consultation?  

The Commission received 140 responses from a variety of stakeholders: 

•  28 responses from national public authorities, from 22 EU Member States and 1 

EEA Member State  

•  3 responses from EU/international organisations (EBA, IMF and ECB).  

•  86 responses from industry stakeholders (26 banks, 39 federations and 21 other 

financial industry)  

•  10 contributions from non-financial industry and 6 responses from law firms 

•  7 private individuals/academic committees  

Federations 39

Other financial 
industry 21

Othe r non-
financial industry 
10

Law fims 6

Citizens/Academi
a 7

Banks 26

National public 
authorities 28

National public  authorities

Bank s

Federat ions

Other financial industry

Other non-f inancial indus t ry

Law f ims

Citizens / Academia

Scope and authorities 

Scope 

The  majority  of  respondents  agree  with  the  Commission  that  there  is  a  sound  case  for 
applying a resolution regime to all credit institutions and investment firms, but that any 
decision  on  what  type  of  institutions  to  be  included  must  be  taken  on  the  basis  of  a 
proportionality  test;  the  systemic  relevance  of  the  institution  concerned  is  the  option 
favoured by most contributions. The Commission is called upon following the CRD line 
when defining the categories of investment firms to be covered.  

- 217 - 

 
 
 
 
 
In order to achieve an effective group resolution, respondents suggest that bank holding 
companies  be  included  in  the  framework  as  well.  Aware  that  this  option  brings  along 
problems (such as the risk that the resolution of the financial part of the group is done at 
the  expense  of  the  non  financial),  some  respondents  recommend  the  creation  of  sub-
holdings  for  the  financial  part  only  (in  the  context  of  preventative  powers).  Some 
respondents also point out that a clear definition of financial holding is necessary. Some 
are  worried  that,  by  applying  resolution  at  holding  level,  the  groups  might  engage  in  a 
strategy of moving their assets to third countries. Resolution authorities should be able to 
include  bank  holding  companies  even  if  the  holding  company  does  not  itself  meet  the 
conditions for resolution 

Authorities 

The  main  view  within  the  contributions  favours  leaving  the  choice  of  authorities 
responsible for resolution to each Member State's national discretion, provided that it is 
clear  who  the  authority  in  charge  is.  Banks  express  their  preference  to  have  the  same 
responsible  authority  in  all  Member  States,  as  this  would  facilitate  cross  border 
resolution.  However,  most  respondents  suggest  that  contact  points  or  an  adequate 
composition of resolution colleges be defined in the framework. 

A considerable amount of contributions consider it more effective to combine resolution 
and  supervision  in  the  same  institution,  but  establish  functional  separation.  Another 
possibility,  as  expressed  by  some  of  the  respondents,  would  be  to  establish  a 
differentiation between decision (trigger) and execution. The risk of forbearance should 
not thus imply the creation of a separated resolution authority. 

Even if resolution authorities are a matter of national choice, respondents believe that the 
EU framework should require that any action take account of the possible impact in other 
Member States. 

Supervision, Preparation and Prevention 

Supervision 

National authorities found it difficult to estimate the need for increased resources at this 
stage.  Some  federations  anticipated  considerable  costs,  but  without  specifying  any 
amounts; other expressed their wish to have the employee dimension taken into account. 
Only Santander made a quantitative estimation, divided into a one-off cost (spread over 2 
years) of 6 million Euros and an additional on-going annual cost of 2.7 million Euros.  

Recovery Planning 

There is general agreement with the content of the preparatory recovery plans suggested 
by  the  Commission.  A  number  of  additional  elements  were  suggested  by  supervisory 
authorities  and  banks  (such  as  the  identification  of  potential  legal,  operational  and 
regulatory implementation barriers; the governance and ownership of the institution; the 
assessment  of  the  credibility  of  the  recovery  plan,  including  probability  of  success  in 
response  to  both  idiosyncratic  and  market  wide  stress).  Federations  call  for  minimal 
harmonisation and proportionality, while law firms consider that additional criteria must 
be taken into account (such as equal treatment for creditors). 

In case of banking groups, most respondents opt for a group preparatory recovery plan. If 
entity-specific  recovery  plans  are  to  be  drafted,  Member  States  consider  that  both  host 

- 218 - 

 
 
and  consolidating  supervisors  should  be  allowed  to  require  changes  to  recovery  plans, 
while  the  industry  believes  that  only  the  consolidating  supervisor  should  have  such 
powers.  

The proposed mediation role given to EBA in case of disagreement between competent 
authorities  was  welcomed  by  the  respondents.  However,  public  authorities  and 
federations  do  not  always  mention  if  the  decision  issued  by  EBA  should  be  binding  or 
not  for  the  supervisors  involved  in  the  disagreement.  Banks  are  divided:  some  accept 
EBA's  implication,  while  others  believe  that  any  disagreement  should  be  solved  by  the 
consolidating supervisor. 

Intra-group financial support 

In general, respondents are split on the issue of intra-group asset transfer. Some Member 
States  believe  that  a  framework  for  asset  transferability  would  improve  the  ability  of 
groups  to  prevent  financial  difficulties  and  to  increase  the  overall  legal  certainty  and 
transparency;  others  fear  that  it  would  blur  the  boundaries  of  the  limited  liability  of 
individual  companies  and  become  a  source  of  contagion  within  a  group.  The  main 
concern  from  host  countries  is  the  provision  of  up-stream  financial  support,  thus  they 
propose  that  the  supervisor  of  the  subsidiary  should  have  the  power  to  veto  each 
individual transfer on grounds of protection of financial stability. The banking industry is 
mainly in favour of the framework with the exception of a few respondents, who think 
that banks are already able to transfer assets within groups under the current rules and are 
concerned that the framework might reduce flexibility. 

To Commission's proposal of limiting the support to loans, guarantees and the provision 
of collateral to a third party for the benefit of the group entity that receives the support, 
MS give their support, while the vast majority of the industry respondents would prefer a 
broader scope. Most respondents believe that any kind of intra-group support should be 
possible (down-stream, up-stream or cross-stream) and that a mediation role of EBA is 
necessary;  however,  on  this  last  issue,  again  the  views  are  split  regarding  whether  this 
should  imply  a  binding  decision  or  not.  Host  MS  generally  object  to  a  legally  binding 
decision of consolidating supervisor or of EBA.  

If  the  remuneration  is  fixed  within  the  agreement,  respondents  consider  that  only  its 
parameters  should  be  determined,  while  the  price  should  be  established  at  the  moment 
when  the  financial  support  is  granted.  According  to  most  respondents,  a  review  should 
not be required.  

There  is  broad  acceptance  across  the  board  of  the  conditions  proposed  by  the 
Commission  for  the  provisions  of  intra-group  financial  support.  All  respondents  agree 
that the decision should be reasoned; only 2 contributions from law firms suggest leaving 
the matter to national law.  

National  supervisory  authorities  agree  to  grant  the  power  to  prohibit  or  restrict  a 
transaction under a group financial support agreement to the supervisor of the transferor, 
but the industry is less supportive on the ground that supervisors might use this power for 
protectionist  or  ring-fencing  purposes.  Regarding  the  deadlines  for  reaction,  the  vast 
majority of respondents indicate that maximum 48 hrs is an appropriate time limit for the 
competent authority to make a statement and that the supervisor of the beneficiary should 
also be imposed a time limit for reply.  

- 219 - 

 
 
On the matter of insolvency protections for the transferor and its creditors, the majority 
of responses coming from supervisory authorities demonstrate a preference for having in 
place both a priority claim for the transferor and a claw back regime. The industry side is 
divided between either accepting both mechanism as appropriate, or giving preference to 
the  priority  claim,  as  long  as  certain  conditions  are  respected  (the  financial  support 
should be capped at a certain amount, the priority claim ranks below all claims that enjoy 
priority  according  to  national  law,  etc).  Law  firms,  on  the  contrary,  tend  to  reject  both 
legal  instruments.  MS  consider  that,  if  adopted,  each  instrument  should  be  subject  to  a 
time limit, although they tend not to mention the exact amount of months. The industry is 
more  specific,  establishing  a  12  months  maximum limit. A small number of banks and 
federations consider that no time limit should be imposed whatsoever.  

Answers  from  Member  States  on  the  disclosure of agreements for intra-group financial 
support  reflect  a  general  positive  approach.  Some  respondents  call  for  a  case-by-case 
evaluation  of  the  disclosure  needs  or  a  limited  disclosure  only  to  the  interested  parties. 
Banks are divided. The majority of federations do not opt for disclosure. 

Resolution Planning 

Individual resolution plans 

As for the scope, Member States consider that resolution plans should be required for all 
credit  institutions,  provided  that  such  an  obligation  is  proportionate  to  the  size  and 
systemic nature of the entity covered. The industry, on the other hand, expresses mixed 
views:  some  prefer  to  have  all  institutions  covered  by  the  framework  in  order  to 
circumvent the difficulties of establishing the systemic relevance of a firm on an ex ante 
basis, whereas others prefer that small firms, which are not interconnected, to be carved 
out. 

As  for  the  content,  the  elements  suggested  by  the  Commission  are  considered  to  be 
adequate  in  order  to  prepare  for  resolution.  However,  some  respondents  are  concerned 
about  too  much  auto-complacency  it  is  almost  impossible  to  foresee  all  possible 
scenarios. As for the additional elements, the following were suggested: 

• 

• 
• 

• 
• 

key dependencies of economic functions on the central functions of the group and 
the proposed solutions to these in a resolution scenario,  
exposures to other financial institutions,  
details  of  the  governance  process  for  the  preparation  and  implementation  of  the 
plan (for example cooperation between authorities),  
specific resources for the execution of resolution within the required timescale, 
information about key contracts, guarantees and safeguards. 

Group resolution plans 

With  the  exception  of  the  ECB,  IMF,  four  Member  States  and  three  industry 
organizations,  all  the  other  respondents  consider  that  preventative  powers  would  be  an 
unjustified interference in the freedom of the firm to organise its business. In relation to 
the  proposed  powers,  most  respondents  particularly  oppose  to:  requiring  the  credit 
institution to limit or cease certain existing/proposed activities; restricting or preventing 
the development or sale of new business lines or products and requiring changes to legal 
and operational structures of the entity for which the resolution authority is responsible. 

- 220 - 

 
 
 
Authorities  that  oppose  reason  that  such  powers  will  conflict  with  the  powers  already 
granted under Pillar 2 of the CRD. Some respondents could accept them as long as they 
were to be used at the early intervention stage. Some contributions also warn about their 
impact on the single market. 

General principles 

Asked  if  resolution  planning  achieve  an  appropriate  balance  between  ensuring  the 
effective resolvability of credit institutions and groups and preserving the Single Market, 
respondents  generally  qualify  the  suggested  powers  as  rather  intrusive  and  thus  able  to 
interfere  with  the  normal  functioning  of  the  Single  Market.  In  this  direction,  different 
points were raised: 

• 

• 

• 
• 

the  power  to  require  changes  to  the  legal  or  operational  structure  of  a  banking 
group raises concerns given its potential effects on the Single Market; 
the  procedure  foreseen  at  group  level  is  partly  inconsistent  with  the  procedure 
proposed at the entity specific level; 
the "public interest" notion in D5 is not clear enough; 
the  proposed  powers  conflict  with  the  freedom  of  institutions  to  structure  their 
own organisation. 

A  scenario  where  only  the  group  resolution  authority  is  entitled  to  require  changes  did 
not receive any support amongst Member States: they opt either for involving both home 
and  host  resolution  authorities.  Banks  are  split:  some  consider  that  no  resolution 
authority  should  be  given  such  power  on  the  basis  of  perceived  future  impediments  to 
resolution;  those  that  accept  to  grant  such  decision  only  to  the  group  level  resolution 
authority require either that (i) the organizational structure of a firm be taken into account 
in day to day supervision and demands for changes as a result of recovery or resolution 
planning be kept to an absolute minimum, or that (ii) possible requests pass through the 
home  regulator  and  when  necessary,  the  College  of  Supervisors  and  the  EBA. 
Federations  think  that,  in  order  to  avoid  the  mistakes  of  the  recent  financial  crisis, 
changes to legal or operational structures should not be decided by a single authority; it 
would be fairer and more effective to confer such a power to the resolution college as a 
whole with a decisive mediation role played by EBA. 

In  terms  of  safeguards,  answers  are  divided:  on  one  hand,  there  are  those  who  believe 
that  the  proposed  safeguards  are  adequate  and,  on  the  other,  those  that  suggest  adding 
extra guarantees beyond the right of appeal and judicial review, such as:  

• 
• 

• 

• 
• 

greater clarity on the determination of significant impediments; 
an  appeal  and  mediation  process  as  an  initial  phase  before  legal  appeal/judicial 
review  –  perhaps  the  EBA  or  a  college  of  resolution  authorities,  subject  to 
suitable safeguards around confidentiality; 
the  implementation  of  the  powers  should  be  stayed  pending  a  finally  binding 
judicial decision being handed down; 
any proceedings should be held in private with no public disclosure; 
clarification  of  the  conditions  under  which  a  right  to  challenge  rises:  where  the 
affected entity can challenge such a decision; who has the right to challenge the 
decision;  if  a  Court  declared  such  a  change  unjustified,  how  is  the  bank 
compensated for the damages suffered. 

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Early Intervention 

Early intervention powers 

The revised trigger for supervisory intervention under Article 136(1) CRD is welcomed 
by Member States, who consider it sufficiently flexible to allow supervisors to promptly 
and effectively address a deteriorating situation. The industry respondents and some MS 
are concerned that the wording 'likely breach' gives too much discretion to supervisors; 
this trigger is considered to be too vague and subjective and might lead to contradictory 
interpretations across jurisdictions.  

Many  respondents  pointed  out  that  a  number  of  early  intervention  powers  are  already 
available  to  supervisors  under  Pillar  2.  The  industry  also  expressed  concern  about 
maintaining  confidentiality,  as  market  awareness  of  the  use  of  early  intervention  tools 
could  exacerbate  a  firm's  problems  and  lead  to  financial  instability.  Some  respondents 
pointed out that certain powers that are too visible to the market - such as requiring the 
institution  to  negotiate  restructuring  of  debts  or  requiring  the  replacement  of  the 
management  –  should  be  withdrawn  from  the  list.  Two  respondents  suggested  that, 
before  an  early  intervention  phase  is  triggered,  there  should  a  period  of  confidential  or 
'silent' intervention where supervisors can impose measures when a firm is likely to fail 
to meet the CRD requirements.     

When consulted on whether the additional powers proposed for Article 136 are sufficient 
to  ensure  that  competent  authorities  take  appropriate  action  to  address  developing 
financial problems, Member States agree, but call for flexibility as to decide on the use of 
additional  tools.  Most  of  the  industry  considered  that  the  powers  are  too  far  reaching, 
especially if they are linked to 'likely breaches'. The main suggestion is there should be a 
clear distinction between early intervention and resolution. Certain powers seem to mix 
the two phases. Further suggestions are made: 

•  the replacement of the management or special management should be linked to 
specific  conditions  such  as  suspect  of  fraud  or  inability  to  ensure  prudent 
management; 

•  the early intervention should be dived in 2 phases: a first phase of intervention of 
supervisor  with  the  management  of  the  firm,  with  the  possibility  to  appoint  a 
special management at a much later stage. 

Law firms consider that there should be clear rules in the framework ensuring creditors' 
engagement in early intervention. They made the point that early intervention measures 
designed  to  restore  capital  will  be  embedded  in  the  Basel  3  capital  buffers  anyway,  so 
there is no more need to include them in the EU framework.  

Special management 

Most public authorities support the special manager tool. However, some Member States 
either  express  reservations  or  are  clearly  against  it.  They  consider  that,  if  made  public, 
the appointment of a special manager risks creating a loss of confidence in the distressed 
bank  and  thus  has  negative  financial  consequences.  Several  suggestions  were  maid  by 
those in favour: 

• 

• 

the  mandate  of  the  special  manager  should  be  enlarged  and  not  limited  to 
preparing a restructuring plan;  
the triggers should be more stringent than those for early intervention powers, as 
this measure is more intrusive (e.g. it should be linked to actual breaches of the 

- 222 - 

 
 
CRD requirements, to the risk of suspension of payments or of insolvency or to 
the inability of the bank managers to ensure a sound and prudent activity, etc.);  
the liability of the special manager should be addressed; 

• 
•  early  intervention  powers  should  include,  in  addition  to  the  power  to  appoint  a 
special  manager  in  the  terms  proposed  by  the  Commission,  the  possibility  to 
appoint a manager to assist the board of directors and veto their decisions.  

The industry expresses mixed views on the proposal to appoint a special manager. Many 
banks and federations suggest using it as a resolution tool instead of an early intervention 
one,  thus  only  making  it  available  when  a  firm  is  very  close  to  failure.  Other  industry 
respondents - especially from the MS who already use "special management" -, although 
in favour, pointed out that this measure should be used only as a last resort. 

Public authorities prefer that the supervisor appoints one or more special managers only 
when the management of the credit institution is not willing or able to take the required 
measures based on Article 136 CRD; in other words, the triggers should not be linked to 
the  failure  of  a  firm's  recovery  plan,  as  this  could  delay  the  appointment  of  a  special 
manager. All the industry respondents were in favour of a proportionality restriction. 

Group treatment 

Some  respondents  agree  that  the  assessment  and  implementation  of  the  recovery  plans 
should be done by the consolidating supervisor, while others state that the appointment of 
a special manager is a matter for the consolidated supervisor. The majority of Member 
States  concur  that  the  decisions  as  to  whether  a  specific  group  recovery  plan,  or  the 
coordination at group level of measures under Article 136(1) CRD or the appointment of 
special managers should be taken by the consolidating supervisor, provided that all other 
relevant supervisors of the group are consulted. Banks follow the same line. While some 
federations  agree  that  the  consolidating  supervisor  should  take  these  decisions,  others 
prefer  to  grant  this  power  to  the  consolidating  supervisor  in  coordination  with  the 
supervisory college.  

Regarding  the  binding  or  non-binding  character  of  the  consolidating  supervisor's 
decision,  there  is  a  clear  division  between  Member  States.  Those  that  agree  with  such 
binding decision (as well as the big majority of banks and federations) also consider that, 
in case of disagreements, the EBA should be able to mediate. Arguments for denying the 
binding character include: 

• 

• 

• 

risk on real conflict of administrative law of different member state, plus the issue 
of applicability of foreign administrative law and right to appeal such decisions in 
domestic courts; 
these  decisions  should  be  taken  as  joint  decisions  consistent  with  the  approach 
taken in relation to group financial support; and 
the  national  supervisory  authorities  of  subsidiaries  should  have  the  legal 
responsibilities for the stability of the national financial systems. 

Assessment of group level recovery plans 

Most  contributions  reflect  the  idea  that  the  assessment  of  group  level  recovery  plans 
should  be  done  by  the  consolidating  supervisor.  Federations  suggest  that  the 
consolidating  supervisor  be  assisted  by  the  supervisory  college.  Where  disagreements 
rise, EBA should intervene as a mediator. 

- 223 - 

 
 
 
Resolution tools, powers and mechanisms and ancillary provisions 

Conditions for resolution 

The Commission proposes three different sets of trigger conditions for resolution. While 
the  EBA  and  the  IMF  state  their  preference  for  Option  2  (a  condition  based  on 
supervisory  assessment  of  continued  compliance  with  the  conditions  for  authorisation), 
Member  States  are  split  between  either  considering  Option  1  alone  (which  focuses  on 
conditions  that  are  similar  to  those  for  insolvency  but,  by  including  cases  where  the 
institution  is  likely  to  meet  the  conditions  specified,  allows  intervention  before  actual 
balance  sheet  insolvency),  option  2  alone  or  the  two  of  them  combined.  Few  Member 
States propose different triggers, such as: 

•  the use of two categories: one trigger to reflect that the credit institution did not 
manage to restore its solvency in a certain period and another one to reflect the 
probability:  (i)  that  circumstances  leading  to  the  exhaustion  of  the  own  funds 
occur; (ii) that the market value of the credit institution’s assets is lower than the 
liabilities; (iii) that the entity is no longer able to fulfil its contractual obligations. 

•  the new common equity Tier 1 ratio; 
•  the going-concern risk. 

Industry  respondents  indicate  their  preference  for  Option  1,  mentioning  that  Option  3 
(which  is  a  purely  quantitative,  capital  trigger)  is  included  in  Option  1  anyway.  The 
following conditions should be applied to triggers: 

•  only  be  used  after  all  other  alternatives have  been  explored  to  keep  the  bank  in 

going concern;  

•  not automatic and as objective as possible;  
•  aligned with the triggers for bail-in; 
•  harmonised across EU and internationally;  
•  easy to understand for investors. 

Law  firms  favour  a  combination  of  quantitative  conditions,  supplemented  by  Option  3. 
Representatives of the non-financial industry support the Option 2 trigger. 

A significant amount of respondents manifest a clear concern about the use of the term 
"likelihood", which might create legal uncertainty.  

Asked  to  evaluate  the  resolution  objectives  put  forward  by  the  Commission,  all 
respondents  consider  them  as  sensible.  Those  contributions  coming  from  public 
authorities express mixed views as half of respondents considered that financial stability 
should be given precedence over all the other objectives and the other half responded that 
all  the  objectives  should  be  equally  considered.  Some  respondents  suggested  that  we 
include the following objectives: 

•  protection of client assets held by the institution; 
•  minimisation of costs of resolution; 
•  protection of shareholders and creditors regardless of the jurisdiction and 
•  protection  of  financial  stability  in  countries  other  than  the  one  of  the  resolution 

authority. 

As  for  the  general  principles  governing  resolution,  the  overwhelming  majority  of 
respondents  consider  them  acceptable.  The  main  view  from  the  authorities  is  that 

- 224 - 

 
 
 
 
creditors of the same class should be treated equally, the only exceptions accepted being 
those based on public interest concerns. By contrast, the industry does not envisage any 
possible  derogation.  Besides,  some  respondents  specifically  require  that  the  legal 
framework spells out the ranking of creditors. On the matter of valuation, there is general 
acceptance of independent valuation, leaving open the possibilities of (i) doing it ex post 
and (ii) including it in the living wills. 

Resolutions tools and powers 

General 

The resolution tools recommended by the Commission are considered by the respondents 
as  sufficiently  comprehensive  to  allow  resolution  authorities  to  deal  effectively  with 
failing  banks;  very  few  contributions  suggest  including  partial  nationalisation  and/or 
capital injection within the options available, provided that they are properly restricted in 
order to avoid moral hazard. However, the authorities call for "minimum" harmonisation 
in  this  area,  while  some  industry  respondents  disagree,  mentioning  that  the  tools  are 
comprehensive and that Member States should not be allowed to add more. 

The sale of business tool 

Respondents agree with the conditions suggested by the Commission for the application 
of  the  sale  of  business.  As  for  the  marketing,  most  of  the  respondents  believe  that  it 
should  be  transparent  and  done  at  a  fair  price  (if  marketing  takes  place  under  stressful 
market conditions or in a weekend, confidentiality should apply). 

Bridge bank tool 

There is general agreement that an express requirement that the residual bank be wound 
up should be included; only a minor number of contributions consider that the framework 
should  remain  silent  on  this  possibility.  The  Commission  is  asked  to  consider  the 
prospect  of  maintaining  the  bank  temporarily  alive  in  order  to  provide  services  to  the 
bridge bank. The bridge bank must comply with the CRD requirements and, regarding its 
duration in time, half of the respondents consider that no time limit should be established, 
whilst the other half agreed with the limits proposed by the Commission. 

Asset separation tool 

The majority of the respondents believe that the asset management tool should only be 
used in combination with the other tools. 

Resolution powers 

In  general,  authorities  consider  the  resolution  powers  proposed  by  the  Commission  are 
comprehensive  enough.  The  industry,  on  the  other  hand,  finds  them  too  far  reaching. 
Some respondents propose additional powers: 

•  power to change the maturity of debts or the amount of interests paid. 
• 
•  powers to transfer claims for the return of segregated client's assets. 

temporary public ownership, 

Transfer powers: Ancillary provisions 

- 225 - 

 
 
The Commission's provisions to ensure that the transfer is effective and the business can 
be  carried  on  by  the  recipient  are  generally  welcomed  by  the  respondents.  However, 
some clarity is needed as to the scope of any overriding rights to terminate, accelerate or 
declare default under an agreement or other instrument. 

Transfer powers: continued support from transferor 

On  the  matter  of  extending  the  power  to  require  a  residual  credit  institution  to  provide 
any  necessary  services  or  facilities  as  to  allow  authorities  to  impose  equivalent 
requirements  on  other  entities  of  the  same  group,  the  vast  approach  is  positive.  Some 
respondents  propose  that  these  obligations  be  limited  to  the  provision  of  services  and 
premises and be done at arm's length commercial terms.  

Transfers of foreign property 

Where a transfer includes assets located in another Member State or rights and liabilities 
that  are  governed  by  the  law  of  another  Member  State,  respondents  follow  the 
Commission  approach,  stating  that  the  transfer  cannot  be  challenged  or  prevented  by 
virtue of provisions of the law of that other Member State. The doubt as to whether this is 
the same outside the EU is however raised. 

Resolution mechanisms 

The Commission proposes three different models by which resolution can be carried out: 
(i) a receivership model, (ii) one based on administration and (iii) an executive order or 
decree  mechanism.  Member  States  vote  for  full  flexibility  and  the  recognition  of  their 
national  discretion  when  applying  either  one  of  the  three  proposed  models.  While  the 
industry would prefer the development of a common EU framework, they also recognize 
that Member States have very different legal models and that this provision should be left 
to the discretion of MS, provided that it does not impinge on the level playing field in the 
EU.  As  long  as  it  is  clear  what  resolution  mechanism(s)  Member  States  use,  different 
resolution  mechanisms  should  not  stand  in  the  way  of  an  efficiently  coordinated  cross-
border resolution.  

While half of the respondents opt for the harmonisation of resolution mechanisms as far 
as possible, the other half consider that it is sufficient to provide for the resolution tools 
and  powers  and  that  flexibility  should  govern  the  legal  means  in  which  the  resolution 
powers are exercised. If harmonisation is not possible, it is suggested that Member States 
develop  arrangements  for  the  mutual  recognition  of  mechanisms  applied  in  resolution 
proceedings. 

Procedural obligations of resolution authorities 

The  notification  and  publication  requirements  seem  appropriate  to  the  respondents. 
However, in terms of the publication, it would be onerous to require publication in one or 
more  newspapers  in  each  of  the  locations  where  the  institution  has  branches.  It  is  also 
suggested  that,  in  addition  to  publishing  a  statement  on  the  websites  of  the  authorities 
and the EBA, there should be a requirement to publish the statement on the institution’s 
website. Attention should be given to the sensitivity of timing, e.g. the time of disclosure 
should not mean an additional risk to the resolution process. 

Protection of stakeholders: compensation 

- 226 - 

 
 
The core principle that no creditor should be worse off as a result of resolution than in 
bank  liquidation,  although  possibly  difficult  to  apply,  receives  wide  support.  The 
suggestion that the assessment of compensation is based on valuation by an independent 
valuer  was  also  welcomed  (one  bank,  however,  noted  that  the  use  of  an  independent 
valuer may not always be proportionate and one Member State considered that any such 
requirement should not compromise the speed of intervention). Some contributions also 
note that the EU framework should specify the principles for valuation and the reference 
date should be harmonised.  

Temporary suspension of rights 

•  Limited  suspension  of  certain  obligations:  Opinion  on  a  power  for  resolution 
authorities to enforce a temporary suspension of payment or delivery obligations 
is  fairly  evenly  split.  The  majority  of  Member  States  support  the  proposal, 
although  a  couple  express  concerns  about  the  interaction  with  the  Settlement 
Finality  Directive  and  with  the  Financial  Collateral  Directive  if  a  stay  affected 
rights in relation to financial collateral. A number of industry respondents and a 
couple of Member States oppose such a power, or express strong concerns based, 
variously,  on  the  risk  that  it  could  spread  contagion,  its  impact  on  financial 
infrastructure systems, lack of clarity about its scope, and the possible losses that 
might be incurred by affected counterparties if, as a result of the stay, they were 
unable to perform their own delivery obligations to third parties.  

•  Opinion  is  also  divided  on  the  exclusion  of  protected  deposits  from  any  such 
suspension.  While  some  support  the  suggestion,  others  note  that  it  could  be 
impracticable  (difficult  to  identify  protected  deposits,  or  the  amount  covered  by 
the DGS if aggregating several accounts), and a couple warn that the existence of 
such a power risked increasing the chances of a bank run.   

•  A  number  of  respondents  suggest  further  exclusions,  such  as:  all  obligations 
entered  into  clearing  and  settlement  systems;  trade  creditors  and  non-financial 
creditors;  salaries  and  other  operational  costs;  and  payments  under  secured 
funding instruments such as covered bonds. 

•  Temporary suspension of close out netting: Most Member States support the need 
for  a  temporary  suspension  of  close  out  netting  rights,  as  suggested  in  the 
consultation.  A  number  point  out  that  a  proposal  would  need  to  clarify  the 
interaction  with  other  EU  measures,  including  the  Financial  Collateral  and 
Settlement  Finality  Directives,  EMIR  and  MiFID,  or  to  deal  with  the  impact  of 
resolution  on  default  and  cross-default  clauses.  Many  of  the  respondents  that 
support the principle of a temporary suspension consider that there should be an 
exemption  for  central  banks,  CCPs  and  payment  and  settlement  systems  for 
reasons of financial stability. Industry respondents are more divided on this issue. 
While  many  recognize  the  need  for,  and  support  a  stay,  provided  it  is  limited, 
subject to strict conditions and backed by the safeguards proposed in section H of 
the  consultation,  a  couple  strongly  disagree  and  others  express  concerns. 
Particular concerns are expressed by exchanges, clearing and settlement systems 
and  bodies  representing  this  industry  sector.  Others  note  the  need  for  clear 
notification procedures to avoid legal uncertainty about the exact beginning and 
end of the period of suspension. 

•  Scope of rights to challenge resolution: Member States are divided on this issue: 
some agree that the judicial review of resolution decisions should be limited to a 
review of the legality of the decision - without the possibility to revert it - and to 
set compensation, where appropriate, while others object to a complete exclusion 

- 227 - 

 
 
of the possibility to revert the resolution decision. They observe that a complete 
exclusion  may  be  incompatible  with  effective  judicial  protection,  or  with  the 
European  Convention  of  Human  Rights  or  the  European  Charter  of  Human 
Rights  or  with  the  constitutions  of  Member  States.  A  Member  State  points  out 
that  excluding  the  possibility  for  the  Courts  to  quash  the  decision  may  result  in 
increasing  the  liability  for  damages  of  the  authorities  Another  Member  State 
suggests  that  the  Court  should  have  the  power  to  declare  unlawful  and  quash  a 
decision  that  is  found  irrational,  illegal,  procedurally  improper  or  incompatible 
with a Convention right.  

•  Most  industry  respondents  support  the  idea  of  limiting  judicial  review  to  the 
legality  of  the  action  and  of  excluding  the  power  of  the  court  to  revert  the 
authority's decision. Some respondents suggested limiting the power of a Court to 
reverse a decision to certain cases, e.g. when the authority has infringed the rules 
on  resolution  and  when  the  reversal  of  the  decision  is  practically  feasible  and 
would not cause systemic risk or undermine legitimate expectations. The concepts 
of "legitimacy and legality" should be clarified. 

Confidentiality 

All Member States but one support the confidentiality rules proposed in the consultation 
document. In addition, Member States made the following suggestions: 

•  confidentiality requirements should also apply to the special manager;  
• 

the  framework  should  allow  for  an  exchange  of  confidential  information  with 
third  country  authorities,  provided  that  the  confidentiality  requirements  are 
equivalent to those in the EU; 

•  any breach of confidentiality should be subject to sanctions.  
•  All the banking industry respondents stress the importance of confidentiality and 
consider  the  provisions  proposed  by  the  Commission  to  be  adequate  to  protect 
confidential information. The following specific comments and suggestions come 
from the industry:  

• 

•  other  parties  should  be  explicitly  included  in  the  list  of  professionals  bound  by 
confidentiality,  such  as  the  entity  or  person  that  perform  the  evaluation,  the 
managers  of  the  firm  at  the  time  when  the  resolution  decision  is  taken,  the 
advisers of the potential acquirer;  
it  should  be  clearly  established  that  the  confidentiality  rules  should  override 
national rules on public access to documents;  
the  allowance  that  information  could  be  published  if  "it  is  in  summary  or 
collective  form"  can  lead  to  misinterpretation,  since  there  may  particular  cases 
when, even in aggregate form, the information remains sensitive, for example in 
the case when one or more institutions are in the resolution stage; 
the  employees  of  the  resolution  authority  and  the  authority  advisers  need  to  be 
able to use the information for the purpose of effecting, or seeking to effect,  the 
resolution transaction, but this would not be covered by the formulation proposed. 

• 

• 

Respondents from other non-financial industry express the view that the provisions were 
too  far  reaching  and  that  more  transparency  would  be  desirable.  In  their  view,  better 
public understanding of the risks to which a credit institution is exposed and of the way 
these  risks  are  addressed  by  the  institution  itself  and  the  supervisory  authorities,  will 
prove to be beneficial. 

Safeguards 

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Partial transfers: safeguards for counterparties  

Overall,  there  is  almost  universal  support  among  respondents  for  the  principle  that 
safeguards  of  the  kind  suggested  in  the  consultation  are  necessary,  and  the  majority 
agrees  with  the  approach  that  EU  legislation  should  prescribe  the  outcomes  to  be 
achieved,  and  leave  Member  States  flexibility  of  implementation  in  order  to  adapt 
appropriately to the differences in national law.  However, a number of respondents (both 
public  and  industry)  expressed  the  view  that  the  framework  should  specify  the 
consequences  of  any  contravention  of  the  safeguards.  Several  recommended  in  this 
regard that in the case of a breach the counterparty should be able to exercise termination 
rights.   

There  is  strong  support  from  industry  respondents  for  the  suggested  safeguards.  Those 
respondents  contribute  a  range  of  technical  comments,  including  the  need  to  ensure 
equivalent  protection  for  assets  and  liabilities  located  outside  the  EU  or  subject  to  the 
governing  law  of  a  third  country;  and  the  difficulty  of  defining  the  structured  finance 
arrangements  to  ensure  a  sufficiently  comprehensive  application  of  the  safeguards. 
Particular  concerns  are  expressed  in  response  to  a  number  of  provisions  in  section  H 
about  the  treatment  of  foreign  property  and  the  consequences  if  robust  legal  opinions 
could not be provided as a result of that treatment.   

The  majority  considers  that  further  harmonisation  of  definitions  is  not  necessary, 
although several argue in favour of harmonisation on the grounds that current definitions 
in EU and national law vary and this could give rise to legal uncertainty. 

Respondents generally consider that the scope of protection suggested in the consultation 
is appropriate and adequate. 

A minority of Member States express concern that an inflexible 'no cherry picking' rule 
could unduly constrain the freedom of action of resolution authorities. One suggests that 
the  safeguards  should  be  limited  to  contracts  that  need  to  be  protected  for  reasons  of 
financial  stability,  and  another  that  compensation  could  offer  an  alternative  in  cases 
where  contravention  of 
respondents 
overwhelmingly  disagree  that  there  is  any  significant  risk  that  the  safeguards  would 
detrimentally  affect  the  flexibility  of  resolution  authorities,  and  stress  that  they  are 
necessary  to  ensure  legal  certainty  of  financial  market  arrangements  that  are  important 
for financial stability.  

the  principle  was  necessary. 

Industry 

Appropriate protection for financial collateral, set-off and netting arrangements 

All  respondents  support  the  safeguards  for  title  transfer  financial  collateral,  set-off  and 
netting arrangements. One MS, while supporting these safeguards, suggests that it would 
be necessary to limit asset encumbrance to ensure that heavy use of secured funding does 
not limit the ability of authorities to ensure an orderly resolution while limiting costs to 
taxpayers.  

A  slight  overall  majority  of  respondents  (including  all  public  authorities)  also  supports 
exclusion  for  retail  rights  and  liabilities  –  although  a  majority  of  industry  respondents 
opposes the latter exclusion on the grounds that any exclusion is unjustified or it could 
undermine  legal  certainty.  One  law  firm  points  out  the  possible  impacts  on  regulatory 
capital of the proposed exclusions. 

- 229 - 

 
 
Appropriate protection for security arrangements 

All respondents to this question supported the safeguard for security arrangements. 

Appropriate protection for structured finance arrangements 

Respondents  generally  support 
the  suggested  safeguard  for  structured  finance 
arrangements.  One  Member  State  suggests  that  there  should  be  some  scope  for 
authorities  to  separate  contracts  under  such  arrangements  in  appropriate  cases.  Some 
industry respondents consider that more clarity is needed as to the scope of the safeguard. 
A law firm argues that structured finance arrangements pose particular difficulties in the 
context  of  resolution  as  a  result  of  their  complexity  and  the  potential  number  of  roles 
played by banks, and that the safeguard as suggested in the consultation may not, alone, 
be sufficient to provide certainty for such arrangements. 

Member States and most industry respondents support an exclusion of insured deposits. 
A couple of industry respondents question the logic of a carve out for all eligible deposits 
and several disagree on the grounds that any exclusion would lead to legal uncertainty.  

Partial transfers: Protection of trading, clearing and settlement systems 

A slight majority of respondents believe that an express provision is necessary in relation 
to  the  protection  of  trading,  clearing  and  settlement  systems.  Such  a  provision  would 
enhance  legal  certainty.  Besides,  the  scope  of  the  Settlement  Finality  Directive  is 
considered  too  narrow  and,  in  particular,  does  not  cover  physical  commodities 
transactions. Nevertheless, a significant minority considered the SFD to be sufficient.  

On the matter of partial transfers and the need to compensate third parties – respondents 
show  their  support  the  principles  outlined  in  the  consultation.  Opinion  is  divided  as  to 
whether it is necessary to specify the details of compensation in the EU framework, with 
a  small  majority  supporting  the  view  that  general  detailed  provision  is  not  needed. 
However,  a  number  of  respondents  argue  that  the  EU  framework  should  include  more 
detailed  provision  on  the  specific  issue  of  valuation.  The  framework  should  deal,  in 
particular, with valuation principles, including the method of valuation and the reference 
date. 

Group Resolution 

Resolution colleges 

The  composition  of  the  resolution  colleges  receives  diverging  approaches  in  the 
contributions. Some Member States agree with the Commission, while others think that 
all  the  authorities  should  be  members  of  the  colleges,  but  that  it  will  be  for  the  lead 
authority to decide which entity takes part in the meetings depending on the issues to be 
dealt  with.  Some  Member  States  consider  that  the  resolution  colleges  should  only  be 
established  intra  EU,  leaving  outside  those  banks  that  have  established  FSB  CBS.  It  is 
suggested  to  include  into  the  colleges  significant  branches.  Finally,  some  respondents 
disagree with the need to establish resolution colleges. 

As for the industry, the overwhelming majority is in favour of the Commission proposal. 

Group resolution 

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The  majority  of  Member  States  consider  that  the  effectiveness  of  the  proposed 
coordination mechanism is diminished by the fact that the host resolution authority may 
decide  not  to  comply  with  the  scheme  and  to  take  independent  measures  where  they 
reasonably consider it necessary for reasons of national stability. Each national resolution 
authority should remain responsible for the legal entities incorporated in its jurisdiction 
and  host  countries  need  to  exercise  independent  judgement  even  in  branch  bank 
structures.  However,  they  all  agree  that  coordination  by  the  group  level  resolution 
authority  is  desirable.  The  very  few  Member  States  that  agree  with  the  suggested 
framework  require  additional  elements  to  be  considered,  such  as  making  the  group 
resolution plan not binding or make the 24h deadline more flexible.  

The industry's view is that the framework suggested does strike a reasonable balance.  

However, all respondents call for flexibility, given that each financial crisis is different 
and a too detailed regulation risks ruling out efficient measures not foreseen today.  

Multilateral arrangements with third country 

Respondents  agree  that  an  internationally  coordinated  approach  is  most  definitely 
desirable and suggest using international fora such as G-20, FSB and BCBS in order to 
promote  it.  Nevertheless,  the  creation  of  an  international  legal  framework  should  be 
preceded by harmonisation of EU rules. Some respondents point out that this will not be 
a short-term option.  

Firm specific arrangements 

This tool is perceived by most respondents as a useful interim stage until a general global 
agreement  is  reached.  When/if  used,  it  should  be  applied  on  a  voluntary  basis.  One 
Member  State  considers  that  national  resolution  authorities  should  be  responsible  for 
their national branches located in 3rd countries, while another one states that individual 
solutions for single institutions should not be  legally  binding.  Banks  welcome  as  many 
countries to be covered by the framework. Federations consider it to be a good starting 
point,  but  the  optimal  outcome  is  for  the  EU  to  mutually  recognize  3rd  countries' 
resolution schemes. 

Assessment of third country resolution arrangements 

While admitting that the possibility of requiring changes to the organization or operating 
structure  of  the  credit  institution  in  a  third  country  has  a  rather  intrusive  character,  the 
public  and  the  private  sector  take  opposite  views:  most  of  Member  States'  supervisory 
authorities  consider  it  justified;  the  industry,  on  the  contrary,  does  not  find  it  neither 
appropriate, nor proportionate.  

Financing arrangements 

Overall, there is limited support from industry for the need of resolution financing, with 
many arguing that alternative arrangements already exist (DGS, national levies) or are in 
the process of being installed. Notable exceptions are those from Member States where 
resolution  funds  already  exist.  Also,  call  on  the  Commission  to  take  into  account  on-
going reforms to improve resilience of financial system (e.g. Basel III/CRDIV).  

Requirement for each Member State to establish a bank resolution fund 

- 231 - 

 
 
Many Member States call on the Commission proposing a general requirement for them 
to make financing available for resolution, but leaving the design of such a requirement 
at  the  discretion  of  Member  States.  At  most,  some  general  principles  can  go  in  the 
Directive.  As  regards  defining  what  the  fund  can  do,  some  argue  that  it  should  also  be 
able to finance recapitalisation measures / restructuring procedures for going concern but 
then such financing being subject to strict conditions (e.g. shareholder/creditor write-offs, 
restructuring).  

The  financial  industry  remains  unconvinced  of  the  need  to  set  up  a  specific  resolution 
financing regime and argue that it can increase moral hazard (less incentive for market to 
police the system) and come with significant deadweight costs (bind up resources in ex 
ante funds that could otherwise finance real economy). They also call on the Commission 
to take into account other risk mitigation instruments (e.g. CRDIV/Basel III), changes to 
the DGS, other resolution measures (e.g. RRPs) as well as national financing measures 
(e.g.  systemic  taxes/levies).  Many  argue  that  DGS  is  already  sufficient  for  financing 
purposes. Furthermore, a generally held view is that it is not necessary to specify what a 
regime  can  finance.  However,  if  a  financing  regime  is  established,  most  respondents 
stress that the overarching purpose should be to absorb residual losses and administrative 
costs and that there should be coordination so as to avoid e.g. double imposition. On the 
contrary, there is wide opposition to funds being used for liquidity support, as this would 
be too significant and quickly deplete any funds. 

While  relatively  few  contributions  from  the  non-financial  industry  comment  on  the 
financing  aspect,  those  who  do  highlight  the  uphill  task  of  ensuring  a  coordinated 
outcome in an area where a number of Member States have already adopted a financing 
approach. Others highlight the difficulty of mustering political will to establish funds of 
sufficient  size  and  the  need  to  ensure  risk  based  contributions  so  as  to  avoid  prudent 
institutions not cross-subsidising risky ones. 

Financing of the Fund 

While some Member States highlight that it is difficult to foresee how much funds will 
be  needed  ex  ante  and  that,  therefore,  it  is  important  to  develop  ex  post  financing 
arrangements,  respondents  provide  little  guidance  how  such  arrangements  could  look 
like.  Others  stress  that  it  is  important  to  keep  maximum  flexibility  about  alternative 
funding  arrangements  and  that  therefore  no  further  detail  is  needed.  The  financial 
industry's predominant view is that this does not need to be further spelled out but rather 
left  to  national  discretion.  Some  actually  call  for  less  prescription,  so  as  to  maximise 
flexibility. 

Calculation of contributions to the Fund 

Some  Member  States  highlight  the  need  to  follow  a  DGS  approach,  with  harmonised 
risk-weighted parameters to be taken into account when determining contributions. Some 
call for base to be harmonised so as to avoid double imposition and unlevel playing field 
and  agree  that  eligible  liabilities  best  way  forward.  Others  highlight  the  need  for  full 
discretion so as to cater for different national circumstance and in the same vein do not 
see need for any harmonisation in this field, as long as Member States can credibly show 
that they have some form of resolution financing in place.  

- 232 - 

 
 
Some contributions from the financial industry stress the need for full harmonisation as 
regards base, so as to ensure level playing field and avoid competitive distortions. Most 
also stress the virtues of risk based contributions. Others stress the need for discretion in 
order to cater for existing safeguards at Member State level.  

Relationship with the DGS 

Most  public  authorities  welcome  the  possibility  of  exploiting  synergies  between  DGS 
and  resolution  financing.  Some  argue  that  more  funds  will  be  needed  in  the  future  to 
cover  new  resolution  obligations,  while  others  point  out  that,  if  the  two  instruments 
become integrated, then safeguards will be needed to ring fence resources for depositor 
pay-out  function.  On  contributions,  some  disagree  with  DGS  contributions  being  fully 
the  base  for  calculating 
deducted  from  resolution  fund  contributions.  Instead, 
contributions to both funds should be coordinated (e.g. deducting customer deposits from 
calculation basis of bank levy). 

At a general level, financial industry representatives widely welcome the recognition of 
synergies  between  DGS  and  resolution  financing,  as  many  argue  that  both  are  crisis 
management  tools.  Many  argue  that  there  should  be  no  requirement  for  national 
resolution  funds  separated  from  DGS  and  therefore  welcome  the  intentions  to  allow 
Member  States  to  establish  a  single  legal  entity.  However,  some  respondents  call  for 
separation of DGS and resolution financing, as objectives differ, the contributors and the 
base  for  contributions  are  likely  to  be  different  and  decision-making  procedures  for 
mobilising  the  finances  may  be  different.  Some  fall  in  between,  arguing  that  the  two 
funds  should  be  managed  separately,  which  does  not  mean  that  there  needs  to  be  two 
entities.  As  regards  the  contributions,  most  agree  that  contributions  to  DGS  should  be 
deductible from those to a resolution fund. 

Privileged creditor position 

While many Member States do not see the need for ex ante resolution funds, in the event 
that  they  were  established,  most  support  giving  a  priority  ranking  to  such  funds  / 
creditors  financing  resolution.  The  argument  put  forward  is  that  this  would  incite 
participation in resolution financing. 

The  financial  industry  has  mixed  views  with  general  reluctance  to  grant  exceptions  to 
normal  rank  order.  Some  argue  that  a  priority  ranking  is  useful  where  resolution  funds 
and  DGS  are  merged.  This  would  protect  depositors,  put  the  major  burden  on  the 
resolved  entities  and  protect  others.  Once  they  are  protected,  the  fund  should  rank  pari 
passu with senior creditors. Some argue that such priority ranking should be exceptional 
and at any rate should not only be granted to a resolution fund but also to other tools for 
temporary funding.  

Discussion of possible approaches to the design of debt write-down (or 'bail-in') as a 
resolution tool 

Comprehensive approach 

Most respondents agree that certain senior debt categories should be excluded from the 
bail-in regime. Some consider that wholesale deposits and short term debt should not be 
excluded.  In  addition,  the  non  covered  part  of  covered  debts  (residual)  should  also  be 
bail-in-able in the opinion of certain respondents. One respondent mentioned that if some 

- 233 - 

 
 
derivative  transactions  are  too  big,  there  might  be  a  need  for  write  off,  too  (see  AIG 
case). 

A minor number of banks and associations were against that senior debt could be written 
down at all. In their opinions only subordinated debt and maybe some special new debt 
instruments (coco) could be written off. 

Regarding  the  different  treatment  of  creditors,  the  majority  of  respondents  disagree,  as 
this  could  create  uncertainty,  decrease  transparency,  breach  fundamental  rights,  give 
opportunity  for  abuse,  and  unfair  arbitrary  treatment.  In  addition  guidelines  on  how  to 
discriminate creditors would be difficult to design. On the other hand, many respondents 
admit  that  in  the  case  of  excluding  certain  debt  classes  from  the  bail-in  regime,  such 
differentiated treatment might be unavoidable to reach the objectives of resolution. Some 
argue that the bail-in regime would work only if a new ranking among senior creditors is 
established,  in  view  of  the  exclusions  of  certain  debt  types.  A  compensation  scheme 
could be put in place to settle discrimination of creditors. 

Respondents have a range of ideas on how to avoid regulatory arbitrage and restructuring 
of debt: the power and circumstances under which authorities could write down debt and 
the classes of bail-in-able debt should be clearly defined to prevent regulatory arbitrage; 
the  consistency  at  global  level  to  avoid  geographical  relocation  of  debt;  the  interaction 
with  the  new  capital  rules,  buffers  and  capital  surcharges  for  SIFIs  should  be  further 
considered. 

Targeted approach 

Some  respondents  oppose  any  minimum  level  of  bail-in  debt,  as  they  believe  it  is 
impossible  to  estimate  the  appropriate  level  of  bail-in  debt  ex  ante  because  of  the 
idiosyncratic  nature  of  any  future  crisis.  Others  argue  that  a  minimum  requirement  for 
bail-in  debt  will  be  equivalent  to  increasing  minimum  capital  requirement  (so  they 
suggest leaving it to the banks' discretion).  

Many  respondents  are  concerned  that  allowing  the  credit  institution  to  insert  a  write 
down  term  in  any  debt  instrument  will  dramatically  increase  complexity  because  all 
banks can shape BID the way they like. Therefore many call for standardization. On the 
other hand, others see as advantage what some call complexity. Concerns are raised on 
the following matters:  

•  Banks  may  issue  too  many  BID  or  BID  on  too  many  types  of  debt  which  may 

• 

spoil purpose of BID; 
Inserting  a  write  down  clause  into  a  contract  should  not  arbitrarily  and 
retrospectively  impede  rights  of  creditors.  Which  instrument  "is  deemed 
appropriate" is not a predictable standard; 

•  Unclear where incentive to insert write down clause should come from.  

Market capacity for such instruments 

The  general  view  across  the  board  is  that  the  triggers  should  be  clear,  transparent  and 
predictable;  they  should  also  be  the  same  as  the  resolution  ones.  Respondents  do  not, 
however,  present  views  as  to  which  should  be  the  elements  that  the  trigger  should 
incorporate.  Although  a  trigger  point  far  from  insolvency  would  facilitate  the  possible 

- 234 - 

 
 
 
restructuring and recuperation of the bank, it is also considered by most respondents that 
it will make the bail-in debt difficult to market. In this respect it seems to be preferable 
(at  least  from  the  investor  point  of  view)  that  the  trigger  is  the  closer  possible  to 
insolvency. Some respondents argue that it would not be good to have a trigger based on 
market data because this could lead to market manipulation. 

Big  banks  are  confident  that  there  will  be  a  market  for  such  instruments.  In  order  to 
reinforce it (i) triggers must be clear, (ii) creditors ranking must provide legal certainty, 
(iii)  these mechanisms apply only to new debt and (iv) an adequate transition phase is 
foreseen. Small banks and insurers consider that, if there is such a market, small entities 
will be disadvantaged. 

Compensation mechanisms  

A  number  of  respondents  point  out  that  the  overarching  principle  for  bail-in  (and 
resolution  generally)  must  be  that  no  creditor  is  worse  off  than  they  would  be  in 
liquidation, and the level of any compensation should be benchmarked against recovery 
in liquidation. Compensation would be needed if certain creditors are left worse off as a 
result  of  the  use  of  (statutory)  bail-in  (or  resolution  generally).  One  law  firm  notes, 
however,  that  this  principle  is  hard  to  prove  (especially  where  compensation  takes  the 
form of conversion to shares) because of the difficult questions about the timing of the 
assessment of the quantum of recovery in liquidation.  

On  the  matter  of  conversion  as  a  form  of  compensation,  a  majority  took  the  view  that 
conversion to equity would be generally sufficient compensation for the interference to 
property that statutory write down entails. A number pointed out that conversion would 
not be possible in all cases. Several suggested other forms of compensation, such as write 
up  clauses,  schemes  that  purchase  the  converted  shares  from  the  bondholders,  or  later 
repayment  from  retained  earnings  (in  order  of  priority  –  senior  debt  before  capital 
holders). However, a few argued that conversion may not be sufficient, particularly if the 
converted equity is wiped out in a subsequent resolution or winding up.   

A majority take the view that (provided priority is respected, write down is accompanied 
by  conversion  to  equity  and  the  principle  of  'no  creditor  worse  off'  is  respected)  no 
additional compensation mechanisms would be required.  Others go further and argued 
that it is not self-evident that compensation is needed if the terms of the write down is 
transparent from the outset (although not clear whether this means only contractual). A 
couple note that any compensation would undermine the purposes of the proposal. One 
banking association notes that mechanisms would be needed to ensure that creditors that 
cannot hold equity could share in the recovery, while a major bank suggests that claims 
should be restored on recovery (and offered to provide a model to achieve this). A couple 
of  banks  state  that  compensation  would  be  needed  if  debt  is  written  down  (and  not 
converted) and the bank subsequently recovers, or if the ranking is subverted.  However, 
the bank would be unlikely to have sufficient resources to pay compensation.  One bank 
and a couple of banking associations point out that if bail-in is subsequently followed by 
a winding up or further resolution measures, compensation may be needed to address the 
greater  loss  suffered  by  senior  debt-holders  that  had  been  subject  to  bail-in  compared 
with those that were not. However, that could only work as a subordinated claim against 
the bank in resolution.   

- 235 - 

 
 
Group treatment  

Responses  are  split  on  the  question  of  flexibility  as  to  the  level  at  which  bail-in  debt 
should be issued. Most industry responses and one Member State generally suggest that 
flexibility would be preferable (with the exception of one body representing in investors, 
which saw no reason for flexibility), while several Member States who favour flexibility 
also note that that the college of supervisors should play a role in deciding where the debt 
should be issued.  

Respondents are divided as to whether the debt should be issued at parent level only, or 
at  the  level  of  subsidiaries.  One  industry  respondent  suggests  that  issue  by  subsidiaries 
would give rise to unnecessary complexity, while others are concerned about the effect of 
conversion  at  the  level  of  subsidiaries  on  the  structure  of  the  group.  A  number  of  MS 
respondents  express  concerns  about  the  ability  of  hosts  to  intervene  if  the  debt  is  only 
issued at parent level.     

Views are split on the question of the trigger and its relation with the level at which the 
debt is issued. One MS respondent notes that bail-in could not be triggered at parent level 
if  only  subsidiaries  met  the  conditions  for  resolution,  while  another  argues  that  group 
bail-in would be possible if the trigger for group bail-in debt (at parent level) were linked 
to  the  capital  adequacy  of  the  subsidiaries.  A  number  of  MS  and  industry  respondents 
note  that  the  question  of  level  is  intimately  linked  to  the  extent  to  which  liquidity  and 
capital  could  be  freely  transferred  within  the  group;  if  transfer  is  possible  and  national 
ring-fencing  of  capital  restricted,  it  might  not  be  necessary  to  require  issuance  at  solo 
level, but in that case it must be transparent to investors that they are exposed to the risk 
of the whole group.  

Several MS argued that the power to require and trigger bail-in debt should be invested in 
solo  supervisors,  with  joint  agreement  or  cooperation.  One  academic  respondent  notes 
that in theory bail-in should be at group level, but in practice it would probably not be 
achievable  for  the  group-level  authority  to  take  the  lead.  An  investor  notes  that  bail-in 
should not be applied at parent level simply because it is easier to apply it at the level of 
subsidiaries 

A  couple  of  respondents  make  reference  to  the  need  for  consistent  implementation  of 
bail-in  in  all  major  jurisdictions  (EU,  US,  Japan)  to  avoid  geographical  and  legal 
arbitrage,  and  recommends  that  a  regime  should  require  debt  instruments  issued  in  or 
governed by the law of a jurisdiction without a bail-in regime to contain bail-in terms. 

Ensuring creditor confidence and adequate liquidity 

The majority of supervisors welcome the proposal for a "super senior" status granted to 
some creditors of the newly bailed in institution, but they call for further considerations 
to be provided in the legislative proposal:  

• 
• 

the definition of the categories of claims eligible for such status; 
the degree of discretional recognition conferred to the resolution authority. 

Banks  and  federations  also  agree  that  such  priority  right  could  set  an  incentive  to 
potential lenders to provide the bailed-in bank with urgently needed liquidity. However, 
the industry proposes various requirements: 

- 236 - 

 
 
• 
• 
• 
• 

the consent of all remaining senior creditors; 
the status should be limited in time; 
the senior debt should be pari passu; 
the super senior status should be restricted to new funds injected after the bail-in 
event 

The respondents are divided on the question of opting for a discretionary / statutory rule.  

Supervisory authorities in Member States believe that a bail-in mechanism should also be 
applicable to non-joint stocks companies, provided that the principles of the bail-in are 
applicable proportionally without regard to the legal form of the institution; the special 
features  of  mutuals  are  taken  into  account;  all  equity  holders  and  other  subordinated 
capital  providers  have  been  fully  wiped  out  before  creditors  must  absorb  the  losses. 
Three MS consider that non-joint stock companies should be excluded from the bail-in 
requirement.  

As a general principle, banks and federations believe that bail-in should be applicable to 
both  joint-stock  and  non-joint  stock  companies  to  ensure  a  level  playing  field  for 
recovery  and  resolution  measures.  With  respect  to  cooperative  banks,  however,  the 
specificities  of  their  governance  and  internal  financial  relations  should  be  taken  into 
account so as to restrict bail-in to write-down and avoid any measures of conversion into 
capital. 

Regarding  the  fact  that  co-operative  banks  are  governed  by  public  law,  several 
federations  propose  as  a  solution  the  conversion  into  silent  contributions  which  do  not 
give any rights of active involvement.  

Possible changes to company law 

Most  respondents  agree  with  the  Commission  that  derogations  from  Company  Law 
Directives are needed in order to allow Member States to effectively implement the crisis 
management framework. However, a considerable number of public authorities point out 
to the following issues when dealing with the use of resolution powers:    

•  derogations should be allowed only if necessary for the financial stability; 
• 
• 
• 

the Cross-border Mergers Directive should also be included in this package; 
the derogation from the Shareholders' Rights Directive seems excessive; 
further  analysis  of  the  Takeover  Bids  Directive  (and  possible  formulation  of  an 
exception in connection with “poison pills”). 

The  industry  respondents  remind  of  the  fundamental  nature  of  shareholders'  rights,  but 
agree, however, that derogations are necessary so that the framework can function. Some 
banks  suggest  to  address  the  problem  of  large  creditors  who,  as  part  of  a  debt 
restructuring, agree to convert debt for stock, and who may be faced with the obligation 
to  make  a  mandatory  public  bid  on  the  remaining  stock  (which  would  operate  as  an 
unintended bail-out mechanism for the remaining shareholders). Some federations point 
out to the fact that derogations are also needed from the Market Abuse Directive insider 
information  reporting  requirements  and  to  the  fact  that  shareholders  should  have  swift 
and simple access to court in order to have the decision to use a resolution tool reviewed 
in full.   

- 237 - 

 
 
One law firm, followed by a few other entities, requires that, in addition to the articles 
proposed for amendments by the Commission, the following should be considered:  

(i) Articles 10 and 10(a) of the Second Company Directive (77/91/EEC, as amended) if it 
is  possible  that  the  failing  institution  may  wish  to  issue  shares  for  a  non-cash 
consideration,  because  the  requirement  for  an  expert’s  valuation  is  usually  time-
consuming; 

(ii) Article 27(2) of the Second Company Directive (for the same reason as in (i)); 

(iii)  Article  29(7)  of  the  Second  Company  Directive,  where  shares  are  to  be  issued  to 
banks or other financial institutions and offered to shareholders; 

(iv) Article 32 of the Second Company Directive, because allowing creditors the right to 
obtain security for claims or to apply to court could delay the proposed action; 

(v)  Article  33  of  the  Second  Company  Directive  which  relates  to  capital  reductions  to 
offset losses; 

(vi) Directive 2005/56/EC – the Cross Border Mergers Directive – if it is proposed that 
the powers that could be taken could involve a cross-border merger of companies; 

(vii)  Directive  2003/6/EC  –  the  Market  Abuse  Directive  –  Article  6  of  which  requires 
issuers  to  inform  the  public  as  soon  as  possible  of  inside  information  which  directly 
concerns the issuer. It may be unhelpful for an issuer to have such an obligation where a 
supervisory authority proposes to take measures relating to it or is taking such measures; 
and 

(viii)  Directive  2004/109/EC  –  Transparency  Directive  –  Articles  4,  5  and  6  place 
obligations  on  issuers  to  provide  financial  information  within  certain  time  periods.  It 
would be useful to consider whether issuers should be relieved of these obligations or if 
the time periods should be extended if the issuer is subject to measures by its supervisory 
authority. 

In  addition,  the  provisions  of  Article  1(3)  of  Directive  78/855/EEC  (which  are  also 
applied  to  Directive  82/891/EEC)  merely  say  that  a  Member  State  need  not  apply  the 
Directive where the company which is being acquired or will cease to exist is the subject 
of  bankruptcy  proceedings  etc.  A  Member  State  may  therefore  have  allowed  the 
Directives to apply in such cases – in which case presumably the provisions will need not 
to be applied. 

Regarding  the  creation  of  a  mechanism  for  rapid  increase  of  capital  for  emergency 
situations in the early intervention phase, Member States respondents tend to favour the 
proposed  Option  2  (an  ex-ante  mandate  to  the  management  body  to  take  a  decision  on 
capital  increase)  or  a  combination  of  Option  1  (an  ex-ante  decision  on  a  shortened 
convocation period to convene the general meeting to decide on an increase of capital) 
and Option 2. The private sector mostly opts for Option 2. 

- 238 - 

 
 
ANNEX XVIII RESULTS OF TARGETED DISCUSSIONS ON BAIL IN 

Annex XVIII (a) Summary of meetings with stakeholders on bail-in  

After publication of the discussion paper on bail-in on 30 March 2012, the Commission 
organized three meetings with various stakeholders:  

−  Member States (mostly ministries of finance and central banks) – on 13 April 2012;  

−  Banking industry – on 17 April 2012;  

−  Legal experts – on 19 April 2012.  

Issue 

Triggers 

Feedback 

Member  States:  Most  Member  States  agree  that  bail-in  should  be 
available  at  the  same  point  as  other  resolution  tools  (point  of  non-
viability).  Some  MS  may  send  further  views  on  how  to  balance  the 
need  for  this  point  to  offer  sufficient  legal  certainty  yet  flexibility  for 
authorities  to  react,  as  well  as  when  and  how  this  point  should  be 
construed for groups (holding company level, parent, subsidiary).  

Industry:    a)  Broad  support  for  the  same  triggers  for  bail-in  and  other 
resolution tools.  

b)  Investors  suggested  to  follow  the  Swiss  model  and  prescribe  an 
intermediate  buffer  of  bonds  (CoCos)  automatically  convertible  to 
equity  when  the  minimum  capital  sinks  below  a  certain  level.    Other 
instruments  could  be  convertible  at  the  point  of  non-viability.  The 
intermediate  buffer  could  provide  more  layers  of  loss  absorbency  and 
give more confidence to investors.  

c)  It  was  suggested  to  clarify  that  recourse  to  emergency  liquidity 
assistance  (ELA)  should  not  be  a  sufficient  condition  for  presuming  a 
liquidity problem.  

d)  Some  banks  expressed  concern  about  the  discretional  nature  of  the 
triggers and the possibility that they are interpreted in different ways by 
different authorities.  

Legal experts: The lawyers supported flexible and discretional triggers. 
They noted that requiring objective elements to support that the bank is 
failing  constrains  too  much  authorities.  There  is  always  a  subjective 
element in the assessment made.  They noted that the triggers should be 
slightly different for the holding and for the credit institution.  Solvency 
problems  of  the  holding  should  not  automatically  trigger  resolution  of 
the subsidiary credit institution. The suggestion was made that a rapid 
judicial  review  of  the  decision  to  bail  in  a  bank  could  give  more 
certainty  to  authorities,  shareholders  and  creditors.  Others  pointed  out 
that  this  could  delay  and  complicate  the  process  and  that  it  would  be 
difficult  to  define  the  extent  of  the  review  and  whether  the  review 
would be subject to appeal. 

Scope 

Member  States:    Most  Member  States  supported  a  broad  scope.  Some 

- 239 - 

 
 
of them expressed reservations over inclusion of DGS at least as a first 
buffer;  others  of  exclusion  of  short-term  (<  1month)  debt  altogether. 
General support for suggested inclusion of derivatives. 

Industry:    The  industry  would  prefer  a  narrow  scope  limited  to 
subordinated  debt,  or  to  other  specific  contractual  capital  instruments.  
They claim that a broader scope would make it extremely difficult for 
banks  to  finance  themselves  on  the  market,  with  consequent  effect  of 
deleveraging and significant reducing of lending capacity. 

However, if the choice is to have a broad scope, the industry supported 
the  exclusion  of  short  term  debt  (some  suggested  >3  months  as  this 
would be the minimum time required to concretely apply bail-in) and of 
derivatives (because of the complexity of bailing in these instruments, 
of  the  problems  it  creates  for  hedging  risks,  and  because  derivatives 
holders  are  the  bank  clients).  There  was  support  for  the  use  of  DGS 
together with bail-in. 

Legal experts:  The lawyers' views were divided. Some argued that it's 
impossible to apply bail to all liabilities in an open bank and that bail in 
should  be  only  for  subordinated  debt  and  certain  categories  of  senior 
debt.    Others  supported  a  broad  scope  coinciding  with  the  scope  of 
insolvency.    There  was  general  agreement  that  distinguishing  on  the 
basis of the maturity would not be workable. 

Hierarchy 
claims 

of 

Member  States:    Some  expressed  a  preference  for  respecting  ordinary 
insolvency ranking while most other MS indicated that some deviations 
were  preferable.  Questions  centred  on  possible  cost  increases  of  the 
different options but no MS had firm views. 

Industry:    The  industry  was  sceptical  about  the  sequential  bail  in, 
investors  could  be  deterred  by  the  added  complexity  and  critically 
damage the funding prospects for large parts of the EU banking sector, 
adding  to  on-going  funding  difficulties  amid  sovereign  debt  stress. 
They  would  rather  prefer  that  the  hierarchy  of  claims  in  insolvency  is 
respected. 

Legal experts:  The lawyers were sceptical about the sequential bail in. 

Group 
resolution  and 
bail-in 

Member  States:    It  needs  to  be  clarified  what  is  the  trigger  of  a 
resolution  executed  at  group  level:  whether  trigger  conditions  at 
subsidiary level justify the intervention at mother or holding level. 

Industry:    Different  arrangements  for  bail-in  in  different  group 
structures  were  advocated.  Authorities  should  be  able  to  execute  the 
resolution/bail-in  at  mother/holding  or  subsidiary  level  depending  on 
the case. 

In the US, SIFIs mostly have holding structure. In a resolution only the 
holding  company  is  placed  under  receivership,  while  the  subsidiaries 
are  untouched.  The  holding  is  placed  into  a  bridge  holding  and  its 
creditors are haircut and converted into equity holders.  

Legal experts: They asked for more clarity how the triggers function in 
the group context. Notably if the failure of the parent can automatically 
justify the resolution of subsidiaries, or the failure of the subsidiary may 

- 240 - 

 
 
Minimum 
requirement  of 
loss  absorbing 
capacity  

allow resolution at mother / holding level. Some suggested introducing 
separate triggers for different cases.  

The  treatment  of  intra  group  debt  was  also  discussed.  There  were 
arguments for subordinating such debts (convert them first before other 
senior  to  protect  ordinary  creditors)  while  others  argued  against  it  as 
this would change the order of ranking and would increase the risk of 
intra group contagion. 

Member  States:  Feedback  thus  far  is  mixed.  Some  MS  have  indicated 
support  for  the  idea  of  a  harmonised  minimum  level  but  do  not  have 
firm  views  on  the  suggested  level  (i.e.  10%)  arising  from  the 
preliminary economic analysis. Other MS who favoured a broad scope 
of  bailinable  instruments  argued  that  no  minimum  level  may  be 
required.  One  MS  expressed  a  preference  for  national  authorities  to 
determine any required level per bank case-by-case, taking account of 
differences in banks' funding profile and systemic relevance. 

Industry:  Generally  quite  critical  of  a  common  minimum  requirement. 
Many  argue  that  it  would  fail  to  take  account  of  different  banking 
models and that it would force them to raise new capital or issue debt 
which  is  costly  or  inconsistent/inefficient  from  the  point  of  view  of 
their  funding  model.  Some  questions  about  why  the  minimum  is 
expressed in terms of total liabilities and not risk weighted assets, and 
whether  deposits  could  be  excluded  from  the  total  liabilities.  Some 
indicated a preference for flexibility in determining suitable bail-in/loss 
absorption tools individually together with their regulators. 

Legal experts: In favour of specific class of bailinable debt, which to be 
credible, would need a minimum although they also indicate preference 
for flexibility to work it out together with authorities.   

Grandfathering 
and 
transitional 
entry-into-
force  

Member States: Very little support for grandfathering of existing debt. 
Greater consensus over delayed implementation of bail-in tool.  

Industry: Any expected stability-benefits from grandfathering would be 
marginal.  Markets'  and  investors'  anticipation  of  bail-in  would  outdo 
them  and  could  still  hasten  the  plight  of  weaker  banks.  Some  support 
for a delayed entry into force of the tool to give market time to adapt.  

Legal  experts:  No  support  for  grandfathering.  Comment  that  all 
outstanding debt issued in third countries would still be grandfathered. 
Few  views  on  the  merits  of  a  delayed  entry  into  force  except  that  it 
could be inconsistent with adopting the bridge bank tool with no delay 
(which are often economically identical outcomes). 

- 241 - 

 
 
Annex XVIII (b) Summary of written comments  

In  response  to  its  discussion  paper  on  bail-in  published  on  30  March  2012,  the 
Commission received around 60 written comments, submitted between 18 April and 10 
May 2012. Respondents can be divided in the following groups of stakeholders:  

−  Public sector – national authorities from Member States (ministries of finance, central 

banks, supervisors) and European institutions/organizations;  

−  Banking industry – banks, banking associations;  

−  Financial institutions (e.g. insurance/investment firms) and their associations;  

−  Legal experts and academics.  

Issue 

General 
remarks  

Key findings 

Overall,  most  stakeholders  from  both  public  and  private  sectors  were 
generally  supportive  to  the  suggested  bail-in  framework  –  however, 
they  raised  several  concerns  about  some  specific  issues.  A  few 
stakeholders  were  strongly  against  including  the  bail-in  tool  in  the 
forthcoming  Commission  proposal.  In  some  key  areas,  there  were 
mixed/opposite  views.  Often  further  analysis  was  needed  –  impact  of 
initiatives  (CRD,  Solvency  II), 
bail-in,  consistency  with  other 
cumulated impact, etc.  

Stakeholders  agreed  that  the  implementation  of  the  bail-in  framework 
must  be  consistent  across  Member  States.  Therefore,  harmonization  in 
the  EU  is  key  –  but  not  enough  since  many  European  banks  operate 
globally  (sometimes  having  extensive  operations  outside  the  EU)  and 
there  are  jurisdictional  limits  of  EU  law.  Hence,  as  emphasized  by 
several  stakeholders,  international  coordination  and  harmonization  is 
essential (G-20, FSB, Basel Committee). Otherwise, in the absence of a 
broader  international  agreement,  the  efficiency  of  the  proposed  EU 
framework  would  be  limited  in  relation  to  banking  arrangements 
involving  foreign  property  and  contracts  governed  by  the  law  of  a 
jurisdiction  outside  the  EU.  Thus,  the  bail-in  tool  could  only  apply  to 
the European parts of international banks. This would create regulatory 
arbitrage  in  banks’  funding  operations  and  very  different  standards  of 
resilience in different parts of the global financial system.  

Point  of  entry 
into resolution  

There  is  a  broad  agreement  among  all  stakeholders  (from  both  private 
and  public  sectors)  that  the  point  of  entry  into  resolution  (trigger) 
should be the same as for the other resolution tools (close to but before 
insolvency).  

As emphasized by the banking industry, bail-in should be considered as 
a  "last  resort"  tool  since  this  is  a  resolution  and  not  a  recovery 
mechanism.  

Most  representatives  of  the  banking  industry  are  of  the  opinion  that  a 
breach  of  capital  requirements  should  not  be  a  formal  trigger.  Also, 
there  should  be  no  automatism  regarding  the  opening  of  a  resolution 

- 242 - 

 
 
 
proceeding, and the final decision to trigger resolution of a failing bank 
must  be  made  by  the  competent  authority  (supervisor  /  resolution 
authority).  

As  regards  a  group  resolution  perspective,  there  are  mixed  views.  On 
the  one  hand,  some  respondents  present  a  stand-alone  view:  bail-in 
should  only  be  used  for  entities  which  meet  the  conditions  for  bail-in 
(i.e.  no  cross  bail-in  of  sound  entities  within  a  group).  Some  others 
prefer a "single point of entry" at the holding company level (similarly 
like in the US – FDIC).  

and 

Open- 
closed-bank 
models  

On  the  one  hand,  several  stakeholders  (from  both  private  and  public 
sectors) believe that the framework should be as broad as possible and 
support  both  open-  and  closed-bank  scenarios  for  bail-in.  This  would 
provide  resolution  authorities  with  the  flexibility  as  to  how  best  to 
structure the bank’s resolution.  

Scope  of  the 
bail-in tool  

On the other hand, several respondents (mostly banks) are reluctant to 
the  open-bank  model.  Hence,  they  strongly  recommend  the  use  of  the 
bail-in  tool  in  a  closed-bank  scenario  only,  as  it  is  defined  in  the 
Commission’s  discussion  paper  (possibly  limited  to  the  set-up  of  a 
bridge-bank).  

Some respondents would like to seek further clarification on the open- 
and closed-bank models, as it needs to be ensured that the bail-in tool is 
not used as a tool in the recovery phase.  

Others complain that the terminology used in this context is unhelpful 
and  risks  confusion  (e.g.  references  to  "going  concern"  and  "non-
viability" as well as "open bank" and "closed bank"). One bank thinks 
that 
is 
the  distinction  between  open-  and  closed-bank  models 
misleading.  

Some  stakeholders  (associations  of  cooperative  and  savings  banks) 
strongly emphasize the need for a proper application of the principle of 
proportionality.  Therefore,  the  bail-in  tool  should  only  be  applied  to 
systemically  important  financial  institutions  (SIFIs)  since  only  such 
institutions  may  cause  a  systemic  risk  to  the  financial  stability  in  the 
EU. Bail-in should not be applied to small banks (such as cooperative 
banks).  

There  is  a  general  agreement  among  stakeholders  (from  both  private 
and  public  sectors)  that  the  bail-in  framework  should  be  as  broad  as 
possible in terms of eligible bailinable liabilities, i.e. as little liabilities 
as possible should be excluded from the scope of the bail-in tool. The 
wide  scope  of  bail-in  and  a  short  list  exclusions  should  be  helpful  in 
mitigating  the  riskthat  financial  instruments  are  designed  with  the 
purpose of being excluded from the scope of bailinable liabilities.  

As  regards  potential  exceptions,  stakeholders  agree  that  covered 
deposits (i.e. deposits protected under Directive 94/19/EC, currently up 
to € 100 000) should in principle be outside the scope of the bail-in tool. 

At  the  same  time,  some  Member  States  are  strongly  against  including 
DGS  in  the  scope  of  bail-in.  They  are  deeply  concerned  that  it  would 

- 243 - 

 
 
have  a  number  of  important  negative  consequences  (e.g.  undermining 
the  fundamental  purpose  of  DGS,  increasing  moral  hazard,  risk  that 
DGS  would  in  effect  pay  twice  for  the  same  liabilities,  increasing  the 
risk  of  public  funds  being  used  for  saving  failing  banks,  etc.).  Some 
stakeholders  (banks  and  lawyers)  are  more  supportive  –  in  their  view, 
there is a case (at least in principle) for treating the claims of the DGS 
itself against the bank pari passu with other creditors subject to bail-in.  

With regard to short-term liabilities, stakeholders present rather mixed 
views.  Several  respondents  (from  both  the  public  and  private  sectors) 
stated  that  both  their  inclusion  and  exclusion  could  have  some 
undesirable  consequences  (e.g.  it  would  encourage  banks  to  rely 
excessively  on  short-term  funding  in  normal  times,  which  would  be 
totally  inconsistent  with  Basel  III  and  CRD  IV).  Several  respondents 
(mostly banks, but also some ministries and legal experts) believe that 
very short-term liabilities should be excluded, but the rest of short-term 
liabilities (beyond a specified maturity) could be subject to bail-in. They 
generally state that a cut-off set at 1 month is inappropriate (too short), 
so it should be minimum 3-4 months and preferably 6 or 12 months.  

There are also opposite views with reference to derivatives. On the one 
hand, several stakeholders (majority of the banking industry, some legal 
experts  and  securities  market  associations)  are  in  favour  of  excluding 
derivatives  from  the  scope  of  bail-in.  On  the  other  hand,  other 
stakeholders  (mostly  Member  States,  but  also  some  banks)  prefer 
including  those  instruments.  Both  proponents  and  opponents  indicate 
several practical obstacles relating to the inclusion of derivatives in the 
scope of bail-in (e.g. valuation difficulties).  

Apart  from  the  above  exemptions  from  the  scope  of  bailinable 
liabilities,  some  stakeholders  (mostly  legal  experts)  suggest  other 
potential  exclusions  (e.g.  clearing,  settlement  and  payment  systems, 
trade  creditors,  foreign  exchange  transactions,  custody  arrangements, 
etc.)  as  well  as  an  exemption  for  public  creditors  such  as  social 
insurance systems.  

No  support  for  the  sequential  model.  Stakeholders  from  both  private 
and  public  sectors  believe  that  the  insolvency  hierarchy  should  be 
respected  as  far  as  is  possible.  In  their  opinion,  the  sequential  model 
introduces  unnecessary  complexity,  e.g.  the  distinction  between  short 
and long term liabilities. In this context some lawyers point out that the 
sequential  model  cannot  be  described  as  being  consistent  with 
insolvency  rules  as  they  are  not  aware  of  any  jurisdiction  where,  in  a 
liquidation, the priority of debts depends on their maturity.  

As  regards  derivatives  cleared  and  not  cleared  through  a  CCP,  some 
banks regard this distinction as artificial or even fictitious. They argue 
that  in  all  basic  aspects,  derivatives  cleared  through  a  CCP  (CCP-
transactions)  are  identical  to  derivatives  not  cleared  through  a  CCP 
(bilateral transactions).  

Moreover,  both  public-  and  private-sector  stakeholders  are  not 
convinced  that  resolution  regime  should  be  the  instrument  to  promote 
the  development  of  derivatives  that  are  cleared  through  a  CCP.  There 

- 244 - 

Hierarchy  of 
claims  

 
 
are  other  pieces  of  legislation  and  initiatives  specifically  designed  to 
meet this end (Basel III already sets incentives for CCP clearing).  

Minimum 
requirement 
for 
liabilities  

eligible 

The  main  consensus  is  that  there  should  not  be  a  set  minimum  for 
bailinable liabilities. This is because, in the main, it is thought that there 
the 
exists  enough  pre-existing  debt 
implantation of Basel III.  

in  banks,  especially  after 

If there is to be a set amount then opinion is much divided between the 
EU setting a fixed amount and it being left up to national supervisors. 
The main benefit of having a set EU wide level is that it creates a level 
playing  and  does  not  lead  to  the  possibility  of  regulatory  arbitrage. 
However there is a fear this may create a trigger effect if institutions fail 
to maintain this level. 

 The main benefits espoused of a flexible regulator set amount is that it 
can be adapted to suit the different banking models in the EU and that it 
rewards banks that fund themselves from safer sources. If this was to be 
adopted  it  seems  that  EU  level  guidance  for  the  regulators  would  be 
needed to try and limit discrepancies.  

There is no clear consensus on which is better and there are suggestions 
of a comprises such a low fixed minimum with discretionary top up or 
else different set levels for different types of banks.  

It is also clear from the vast majority of responses that it should be risk 
weighted assets and not total liabilities that should be the metric. This is 
because the organisations feel that this better reflects the risk profile of 
the different banks and keeps the proposal in line with Basel III. 

Finally it is preferred by the majority of respondents that any minimum 
debt requirement be set at the holding group level, where applicable, not 
at an entity level. 

The  majority  of  responses  were  in  favour  of  following  existing 
insolvency procedures in wiping out shareholders before moving on to 
cancelling or converting debt. However this raises legal concerns and it 
is unclear if, legally, total cancellation is allowable due to pre-emption 
rights and minimum capital requirements. This concern is heightened in 
the case in a going concern bail-ins where there may be residual value. 
This could be seen as an unlawful expropriation.  

 It  is  stressed  that  flexibility  should  be  one  of  the  main  driving  points 
here  and  that  therefore  there  should  be  no  automatic  need  to  cancel 
shareholders. It was also raised that if dealing with a group situation it 
may be unfeasible to cancel shareholders at that level.  

In  relation  to  the  write  down  or  conversion  of  creditors  it  is  seen  that 
conversion is preferred and that again the no creditor worse off mantra 
should be followed. However, there is concern that this new ownership 
structure  after  conversion  may  not  be  the  most  suitable  and  perhaps 
converted share should have none or restricted voting rights.  

It  is  also  noted  that  the  conversion  from  debt  to  equity  may  also  have 
large  tax  implications  for  the  new  institutions,  particularly  in  some 
jurisdictions.  Finally  it  was  noted  that  some  jurisdictions  have  public 

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Selected  legal 
issues  

 
 
Recovery  and 
reorganization 
measures 
to 
accompany 
bail-in  

Contractual 
provisions  

Timing  

law institutions which could not have their equity cancelled. 

There is a wide support for the benefits of having a thorough plan about 
bail-in as it will reassure investors and the market. There are however 
two main comments:  

First, that the 1 month time limit is not suitable particularly if the bank 
is  being  reorganised  and  there  is  new  management.  However,  that  the 
plan  should  be  published  as  soon  as  possible,  if  there  is  not  a  pre-
existing  one,  but  that  flexibility  should  be  given  to  regulators  re  the 
exact timing. Suggestions of a possible timescale were 2-3 months.  

Secondly,  there  will  already  be  recovery  and  resolution  plans  in 
existence  under  the  new  regulatory  regimes  and  it  would  be  better  to 
implement  these  as  they  have  been  drawn  up  by  existing  management 
and  the  regulators.  To  not  use  these  would  undermine  the  point  of 
having tem and in this regard they should be drawn up to include bail-
in. 

There is wide acceptance of the need of contractual recognition in order 
to involve third country debt. However, there are major concerns over 
the practicality of this measure as it is unclear what the effectiveness of 
contractual  acceptance  of  an  EU  statutory  bail-in  and  how  third 
countries courts would enforce this.  

The  respondents  were  concerned  about  market  confidence  and  while 
supportive  were  careful  to  stress  the  sanctity  of  contract  and  how  any 
measures  should  respect  this  to  keep  confidence  among  third  country 
investors. It is also noted of course that any contractual recognition can 
only be prospective and not retrospective 

It  is  agreed  that  international  agreement,  at  G20  level  for  example,  on 
the  issue  of  international  recognition  would  be  desirable  as  it  would 
foster a more effective regime.  

There  is  a  wide  agreement  that  the  introduction  of  a  debt  write  down 
tool  will  have  significant  and  adverse  effects  on  the  applicable  banks. 
The main impact would be on the funding of banks. It is seen that the 
cost  of  funding  will  increase  and  that  potentially  the  debt  market  will 
contract  as  European  debt  will  be  seen  as  less  attractive  due  to  the 
possibility of bail-in. 

There is a wide range of views on this but the main convergence is that 
grandfathering  should  not  happen,  as  its  implication  on  funding  (i.e. 
with cliffs and the increased cost of non-grandfathered new debt) is too 
high. It is also agreed that there should be a transition period to allow 
markets  to  adjust  and  that  implantation  should  be  in  line  with  other 
requirements under Basel III and CRR. This then gives an appropriate 
implementation date of either 2019 or 2022.  

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