COMMISSION STAFF WORKING DOCUMENT SUMMARY OF THE 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) 167 final 

COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE 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) 166 final} 

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COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE 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 

1. 

PROBLEM DEFINITION 

Over  the  course  of  the  financial  crisis,  the  authorities’  ability  to  manage  crises  both 
domestically  and  in  cross-border  situations  has  been  severely  tested.  It  quickly  became 
evident that neither authorities nor banks were suitably prepared. Contingency planning 
for scenarios of financial distress was insufficient. Not all Member States had the power 
to intervene, stabilise and reorganise an ailing bank at an early stage. Authorities in many 
Member States did not have adequate tools and powers to handle bank failure. Since the 
failure  of  large,  interdependent  banks  could  have  caused  significant  systemic  damage, 
authorities were left with no choice but to use taxpayers’ money to rescue them. 

Furthermore, while the operation of cross-border banks has become highly integrated to 
the  point  where  business  lines  and  internal  services  are  deeply  interconnected  across 
geographical borders of Member States, the authorities’ power to intervene has remained 
national.  As  a  consequence,  if  a  cross-border  bank  fails,  supervisors  and  other 
(resolution) authorities concentrate only on operations within their own territories. This 
may complicate cross-border cooperation and lead to inefficient and possibly competing 
approaches to resolution, with suboptimal results at EU level. 

During the financial crisis, limited or no funds had been built up in advance (‘ex ante’) 
by the private sector to finance resolution measures. 

Public intervention cost taxpayers substantial sums of money and even put some Member 
States’  public  finances  at  risk.  Between  October  2008  and  October  2011,  the 
 4.5  trillion  (equivalent  to  37 %  of  EU  GDP)  in  state  aid 
Commission  approved  €
 1.6 trillion (equivalent to 13 % of EU GDP) 
measures to financial institutions, of which €
 1.2 trillion, or 
was used in 2008-2010. Guarantees and liquidity measures account for €
roughly  9.8 %  of  EU  GDP.  The  remainder  went  towards  recapitalisation  and  impaired 
 409 billion (3.3 % of EU GDP).1 Budgetary commitments 
assets measures amounting to €
and expenditure on this scale are not sustainable from a fiscal point of view, and impose 
a heavy burden on present and future generations. Moreover, the crisis, which started in 

1 

Source: European Commission, State Aid Scoreboard, Autumn Update 2011 [COM(2011) 848]. 

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the financial sector, pushed the EU economy into a severe recession, with the EU’s GDP 
contracting by 4.2 %, or €0.7 trillion, in 2009. 

2. 

ANALYSIS OF SUBSIDIARITY 

Although  the  banking  sector  is  highly  integrated  within  the  EU,  systems  to  deal  with 
bank crises remain nationally based and insufficient to deal with cross-border institutions 
in  difficulty.  Coordination  in  such  circumstances  is  likely  to  be  complicated  and  the 
objectives  pursued  by  each  authority  may  differ.  If  authorities  have  limited  options 
available  to  resolve  banks,  this  increases  the  risk  of  moral  hazard  and  generates  an 
expectation  that  large,  complex  and  interconnected  banks  will  again  need  public 
intervention in the event of problems. Therefore only EU action can ensure that, in times 
of  crisis,  credit  institutions  are  subject  to  coherent  intervention  that  ensures  a  level 
playing field and promotes further integration within the Internal Market. 

No  EU  action  is  needed  to  select  resolution  authorities  and  procedures  for  bank 
resolution. These can be decided on by Member States. 

3. 

OBJECTIVES OF EU INITIATIVE 

The general objectives are to maintain financial stability and confidence in banks and to 
avoid  contagion.  The  proposal  aims  to  minimise  losses  for  society  as  a  whole,  in 
particular  for  taxpayers,  and  to  reduce  moral  hazard.  The  proposed  framework  is  also 
aimed at strengthening the internal market for banking services while maintaining a level 
playing field. 

4. 

PREFERRED POLICY OPTIONS AND THEIR EXPECTED IMPACT 

Preparation and prevention 

The first objective of the bank recovery and resolution framework is to ensure that bank 
failures  are  avoided  as  far  as  possible  and  that  authorities  and  banks  are  prepared  for 
adverse developments. To this end, the following options were examined and selected. 

Voluntary  intra-group  financial  support  agreements  will  enable  financial  groups  to 
transfer assets between entities when one member of a group suffers financial difficulties. 
This could help to stop the financial problems of parts of a group becoming too serious 
and so benefit the group as a whole. However, transferring assets from a healthy entity 
could reduce its liquidity and capital and hence weaken the position of debt holders and 
depositors. Therefore the transfers should be executable only if they do not jeopardise the 
liquidity or solvency of the support provider. Supervisors could give their agreement to 
the framework, which would provide safeguards for all stakeholders. In certain situations 
supervisors could even ask banks that are part of a voluntary group support agreement to 
help another entity in the same group. This scope for optimising the allocation of assets 
in emergency situations would also strengthen the internal market. 

Banks and authorities will be required to develop contingency plans for crisis situations. 
Recovery  plans  drafted  by  banks  could  help  supervisors  identify  appropriate  action  to 

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restore  bank  soundness  at  an  early  stage.  Drafting  recovery  plans  would  also  help  the 
banks themselves to review their operations, risks and necessary actions in a problematic 
situation.  Resolution  plans  drafted  by  the  authorities  would  enable  any  measures  to  be 
taken  more  quickly,  more  efficiently  and  more  effectively,  which  could  substantially 
decrease the (social) cost of bank failure. If resolution authorities are fully aware of the 
ways  in  which  they  can  effectively  resolve  or  liquidate  a  failing  bank  or  group  in  an 
orderly fashion, the likelihood of success is substantially higher. 

Resolution authorities will be given additional powers to enable them to require changes 
to  banks’  operational  and  business  structures  and  to  limit  the  banks’  exposure  and 
activities. The measures aim to ensure that banks are resolvable in case of failure; they 
would  contribute  to  removing  the  implicit  state  support  (a  likely  bail-out)  from  those 
banks that are too complex, big or important to fail. This would reduce moral hazard and 
force  banks  to  operate  more  prudently.  If  banks  are  resolvable,  the  extensive  use  of 
taxpayers’ money to bail them out is not the only solution, as ‘managed failure’ becomes 
an  option.  However,  removing  the  implicit  state  guarantee  would  probably  increase 
banks’  funding  costs.  Moreover,  while  the  increased  powers  of  resolution  authorities 
would  help  to  defend  the  public  interest,  they  might  limit  the  fundamental  rights  of 
shareholders  and  management  to  operate  in  the  way  that  best  suits  their  objectives  and 
business  strategies.  Hence,  any  measures  to  remove  impediments  to  resolution  would 
have to be proportionate to the systemic importance of the credit institution and the likely 
impact  of  its  failure  on  financial  stability.  Measures  should  be  non-discriminatory  and 
serve the public interest. 

Early intervention 

The  existing  early  intervention  framework  managed  by  supervisors  will  be  further 
developed.  Supervisors  will  be  able  to  intervene  at  an  even  earlier  stage  (i.e.  upon  a 
likely  breach  of  the  Capital  Requirements  Directive2  (CRD)  as  opposed  to  an  actual 
breach as at present) and will be equipped with an expanded list of tools and powers. In 
this way supervisors could avoid further deterioration of any problems at a bank. 

An  expanded,  harmonised  set  of  early  intervention  tools  could  pre-empt  or  correct 
problems at supervisory level and therefore greatly increase the overall effectiveness of 
crisis management in the EU. Measures such as requiring divestment of certain activities 
could  substantially  reduce  excessive  risks  accumulated  by  institutions,  thus  preventing 
their  failure.  The  appointment  of  a  special  manager  would  enable  authorities  to  stop 
mismanagement of banks immediately and to implement corrective measures to prevent 
adverse situations from deteriorating. 

Having  a  larger,  more  consistent  set  of  tools  available  to  all  supervisors  will  improve 
cooperation between them and enable important measures that are presently not available 
in all Member States where cross-border banking groups operate. 

Some  of  the  tools  could,  however,  limit  the  freedom  of  management  (e.g.  limiting 
business, replacing managers with a special manager) and shareholders (e.g. suspending 
dividend  payments).  Such  measures  could  therefore  be  introduced  only  together  with 

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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. 

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safeguards that ensure that they will not be misused, will serve the public interest and are 
proportional. 

To  enable  banks  to  increase  their  capital  in  an  emergency  situation,  legislation  will  be 
amended to give the general meeting of shareholders the power to decide in advance of 
any crisis that a general meeting can be called at reduced notice should the need arise for 
an emergency capital increase. 

Resolution 

The introduction of a minimum set of special bank resolution tools (e.g. sale of business, 
asset  separation,  bridge  bank)  in  all  Member  States  will  significantly  increase  the 
authorities’  chances  of  achieving  successful  and  effective  resolution  (managed,  timely 
failure  of  banks)  and  hence  of  maintaining  the  continuity  of  key  financial  services  and 
the  stability  of  the  financial  system  as  a  whole.  In  contrast  to  normal  insolvency 
procedures, a special resolution procedure for banks would give authorities the ability to 
use techniques which are more suited to the needs of the banking business and allow a 
more appropriate balance of priorities to be struck with regard to stakeholders (resolution 
favours depositors, continuity of services and, ultimately, financial stability). 

A  supplementary  mechanism  would  enable  banks’  debt  to  be  written  down  or  partially 
converted  into  equity  (‘bail-in’).  This  can  be  beneficial in  cases  where  other  tools  may 
not be sufficient to resolve a large, complex and interdependent financial institution in a 
way that protects financial stability and taxpayers’ money. 

The bank resolution framework will reduce or remove the implicit state guarantee of the 
debt of even the largest and most important banks. As a natural consequence, the funding 
costs  of  banks  are  expected  to  increase  somewhat.  In  other  words,  the  costs  previously 
borne  by  taxpayers  will  now  be  borne  by  bank  stakeholders  (creditors  and  owners). 
Increased bank funding costs could reduce GDP slightly. 

The conditions for the use of resolution tools and powers need to ensure that authorities 
are  able  to  take  action  before  a  bank  is  economically  insolvent  in  order  to  increase  the 
realistic  chances  of  successful  and  effective  resolution.  Managed  failure,  where  the 
management and shareholders bear the losses first, will also reduce moral hazard. At the 
same  time,  resolution  measures  could  limit  the  fundamental  rights  of  shareholders  and 
debt holders. Therefore they would only be applied in exceptional situations and in the 
interest of the general public. 

Cross-border cooperation 

Cooperation  among  resolution  authorities  will  be  institutionalised  and  formalised. 
Various options such as providing EU authorities with resolution powers and setting up 
an EU resolution authority were discussed. The preferred option is to make arrangements 
for  cooperation  through  resolution  colleges.  Resolution  colleges  would  ensure  that 
national authorities inform each other of emergency situations, discuss them and decide 
on joint or coordinated actions in the event of a failure among cross-border banks. The 
participation  of  the  European  Banking  Authority  (EBA)  in  resolution  colleges  would 
further  ensure  that  the  interests  of  all  Member  States  and  stakeholders  are  taken  into 
account and fragmentation of the internal market is avoided. 

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Financing 

Jointly  calibrated  ex-ante  resolution  funds  (RFs)  and  deposit  guarantee  schemes  (DGS) 
financed  by  the  industry  will  increase  the  success  of  resolution  measures  and  provide 
further safeguards for taxpayers. Although DGS and RFs differ in scope, designing them 
in combination will produce a number of synergies. There would be economies of scale, 
as resolution reduces the risk of contagion and optimal calibration of resolution funding 
reduces the financing requirements for DGS. 

Based  on  model  calculations,  the  optimal  target  size  of  the  DGS  and  RFs  would  be  at 
least  1 %  of  covered  deposits  held  by  EU  banks.  Ex  ante  funds  could  possibly  be 
accumulated  in  DGS,  but  in  that  case  DGS  should  be  able  to  finance  resolution.  If  a 
Member  State  does  not  allow  the  DGS  to  finance  resolution,  a  separate  fund  would  be 
needed. 

Under  this  policy,  other  options  such  as  setting  up  national  resolution  funds  strictly  in 
isolation from DGS and a resolution fund at EU level were also assessed but rejected. 

Overall impact 

The  proposed  crisis  management  framework  at  EU  level  is  intended  to  further  enable 
financial stability, reduce moral hazard, protect depositors and critical banking services 
and save taxpayers money. In addition it aims to protect and further develop the internal 
market for financial services. 

The  framework  is  expected  to  have  a  positive  social  impact,  firstly  by  reducing  the 
probability  of  a  systemic  banking  crisis  and  a  resulting  fall  in  GDP,  and  secondly  by 
preventing taxpayers’ money from being used to bail out banks again in a future crisis. 
The cost of crises, if they happen, should be borne by bank shareholders and debt holders 
in the first instance. 

The  costs  of  the  framework  derive  from  the  potential  increase  in  the  funding  cost  of 
banks  due  to  the  removal  of  the  implicit  state  support  and  from  the  costs  of  setting  up 
resolution funds. Banks might pass on the increased cost to customers or shareholders by 
pushing  rates  on  deposits  lower,  increasing  lending  rates  and  banking  fees  or  reducing 
returns on shares. However, competition might reduce banks’ ability to pass on the costs 
in full. 

Increased funding costs might reduce GDP, while the stability of the financial sector and 
reduced risk of taxpayers’ money being needed to recapitalise failing banks would have a 
positive effect on GDP. The new capital requirements under the Basel III accord (which 
reduces  the  probability  of  bank  failures)  are  expected  to  generate  net  benefits  equal  to 
0.14 %  of  the  EU’s  GDP  annually.  The  jointly  calibrated  DGS  and  RF  are  expected  to 
bring positive net benefits equal to 0.2-0.3 % of the EU’s GDP annually. The debt write-
down tool (bail-in) could produce economic net benefits equal to 0.3-0.6 % of the EU’s 
GDP annually. Overall, these measures are expected to generate a cumulative net benefit 
equal to 0.7-1.0 % of the EU’s GDP annually. 

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The  preferred  options  do  not  lead  to  any  significant  administrative  burden.  Some 
elements of this proposal could be seen as entailing an administrative burden, but based 
on the public consultation these are assumed to be immaterial. 

The proposal has been scrutinised to check that 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). Limitations on these rights and 
freedoms  are  allowed  if  they  are  necessary  and  genuinely  meet  the  general  interest 
objectives recognised by the EU or the need to protect the rights and freedoms of others. 

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. 

This proposal has no impact on the environment. 

5. 

MONITORING AND EVALUATION 

Since  bank  failures  are  unpredictable  and  the  aim  is  to  avoid  them,  one  cannot  plan  to 
monitor bank resolution 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  measures  implemented  by  the  authorities  based  on  these  plans  could  be 
monitored. This could be the task of the European Banking Authority. The transposition 
of any new EU legislation will be monitored under the Treaty on the Functioning of the 
European Union. 

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