On 12 July 2012, the House of Commons European Scrutiny Committee published its seventh report of the 2012/13 session. The report provides a helpful summary of the proposed EU RRP Directive, together with the UK Government’s views on some of its central themes.
The UK Government broadly welcomes the draft Directive, believing that it will contribute towards increasing the resolvability of financial institutions whilst reducing their reliance on public support. It agrees that a minimum set of resolution tools are necessary, and particularly welcomes the introduction of bail-in powers. However, the government does express concerns about some aspects of the Directive, specifically:
- It is of the view that the ability of Member States to take steps to enhance the resolvability of institutions and to take resolution actions must not curtailed, and points to the risks associated with “overly prescriptive procedural arrangements” such as the time periods for escalating disagreements over group resolution approaches to the EBA;
- It questions the European Banking Authority’s (“EBA”) proposed binding mediation role, querying whether this could potentially limit Member States’ use of both preventative and resolution tools and stating the belief that decision making with respect to measures to enhance the resolvability of groups, resolution planning and resolution action should be left to the authorities of individual Member States due to their local effects on taxpayers, depositors, creditors and investors;
- It questions the need for the significant number of proposals for the EU Commission to adopt delegated acts and technical standards drafted by the EBA;
- It is considering the appropriateness of the proposed resolution powers and resolution financing arrangements;
- It questions the need for the intra-group financial support provisions, expressing its concern that, if triggered, the provisions could actually increase contagion risk within a group;
- It expresses concern that the use of the special manager tool could actually result in reduced confidence in a distressed financial institution thus aggravating the very problem it is designed to avoid;
- It agrees that appropriate resolution financing mechanisms are necessary but is considering further the proposal for ex-ante resolution funds, which it believes could operate undermine the credibility of the resolution tools (particularly the bail-in tool) and so could create moral hazard; and
- It expresses its concern that the proposal to allow borrowing between the resolution funds of individual Member States and the proposal to mutualise the costs associated with resolving a cross-border group, may result in individual Member States contributing to the resolution costs of financial institutions over which they have no supervisory control.