Including updates on the EBA's recovery plans for banks in the EU and an update on the CRD IV proposals

 

EBA jumps ahead of EC with recovery plans

On 15 May 2012, the European Banking Authority (EBA) published a discussion paper and draft template for banks to produce recovery plans. The EBA proposals deal only with recovery plans – resolution plans are beyond its remit. The discussion paper precedes the anticipated consultation from the European Commission (EC) on crisis management and resolution plans which should be published on 6 June, according to Mario Nava, Head of Banking unit at the EC’s Directorate General of Internal Markets and Services. The timing of the EBA publication is interesting – it suggests that EBA is likely to push ahead with its own plans in this area, regardless of how long EU legislators take to agree the forthcoming EC proposals.

Some Member States have already taken significant steps in this area. For example, the UK Financial Services Authority (FSA) consulted on rules for recovery and resolution plans back in August 2011 and produced feedback and updated draft rules earlier this month. In addition, the FSA is conducting a pilot exercise on recovery plans and resolution packs with a number of large banking entities in the UK. These firms must submit their recovery plans and resolution packs to the FSA by the end of June.

The EBA’s draft template for recovery plans is split into three sections:

  1. General overview of the plan - including a summary setting out the main conclusions and any changes made since the plan was last updated. Firms will also be required to provide general information, on areas such as legal structure and internal governance arrangements, which would cover how the plan was developed and the escalation process for decision making if the plan is activated.
  2. Core of recovery plan - according to the EBA, a recovery plan should not forecast what might cause a crisis but instead should assess the robustness of options available to the firm in dealing with one. The plan will include information on the recovery options and measures available to a firm, and the early warning and triggers it will use to decide which of those options and measures might need to be used. It will also include the assumptions and scenarios used by the firm in developing the recovery plan and the firm’s operational contingency plan explaining how it would continue to do business if it had to use a recovery measure. A communication plan, setting out how the firm would communicate its use of a recovery plan internally and externally to key stakeholders and an information management plan, setting out how the firm would provide data to regulators in a timely manner during a crisis period will also need to be included.
  3. Follow-up - firms will need to outline what additional action they could take, following implementation of a plan, to avoid any need to launch a recovery plan in future. This will include the preparatory measures the firm is taking to shorten the execution time of using a recovery measure and any areas the firm has identified where it could improve, including staff training and changes to organisational and governance structure.

The EBA’s draft template largely follows the same path as the FSA rules. However the granularity of detail within the FSA’s template for a recovery (and resolution) plan indicates that its thinking in this crucial area is perhaps more advanced.

The consultation period for the EBA discussion paper closes on 15 June 2012. If the release of the EC’s proposal is on 6 June, firms will have ten days to consider and respond to the template alongside the EC’s draft proposals on crisis management and bank resolution.

 

 

Agreement moves ever closer on the Capital Requirements Directive IV

European agreement on fourth revision of the Capital Requirements Directive (CRR/CRD IV) moved closer last week. Crucial votes on compromise texts were approved by the European financial ministers (ECOFIN Council) on 15 May 2012 and the European Parliament’s Economic and Monetary Affairs (ECON) Committee on 14 May 2012. The process now moves into the ‘trilogues’ where the Council and the European Parliament work together with the EC to come up a consensus on the revised rules.

ECON made a particularly controversial change to the CRD IV proposals, stipulating that the variable remuneration awarded to bankers should not exceed their fixed pay. The EC’s initial proposal and the Council’s position both recommended that EBA should be asked to develop regulatory technical standards in this area. However, there was significant debate in the ECON Committee prior to the vote on this issue, and in spite of a few dissenting voices, the vast majority of MEPs supported the direction if not the precise terms of this amendment.

Therefore, it seems unlikely that the ECON negotiators will give up easily on this amendment in the trilogue discussions. Given the ratio of fixed to variable remuneration which currently exists in some banks, such a requirement would have a significant impact on human resource strategies and fixed costs, potentially in the relatively short timeframe. Discussions in the Council in the run up to the vote on 15 May centred on the Council’s proposal in relation to the amount of flexibility that should be built into the system to enable individual member states to take action to address systemic risks emerging in their countries or on a cross-border basis.

The Danish Presidency has committed to achieving political agreement on CRD IV before its terms ends in June. The changes voted on by ECON and ECOFIN mean we still have crucial negotiations ahead of us to meet this imposed deadline.