The United Kingdom is moving forward with plans to implement the European Union banking union, with its financial regulator proposing changes to meet requirements of the EU directive before it takes effect at year’s end.
The EU’s Bank Recovery and Resolution Directive (BRRD), also known as the banking union, established a common framework for supervising the bloc’s largest banks and financial institutions. The directive, triggered by the financial crisis, tightened prudential requirements for banks and placed about 6,000 large institutions under the direct supervision of the European Central Bank in a bid to catch problems early on. Smaller firms will remain supervised by national regulators. Last month the EU finalized a key piece of the banking union with the publication of the Single Resolution Mechanism in the Official Journal of the EU. The SRM provides a uniform process for quick winding down of failing banks, including those banks operating solely within one nation and those with cross-border operations. That piece of the regulation takes effect 19 August.
The U.K.’s Prudential Regulation Authority (PRA) proposed changes to reconcile its own recovery and resolution framework, in effect since January, with the EU framework. The changes, included in a consultation paper released late last month, include new rules on recovery plans, resolution packs, financial support agreements within a group, notifications of failure or likely failure, and including bail-in agreements in contracts, the PRA said.
The changes will apply to banks, building societies, investment firms, and holding companies of those types of firms.
Andrew Bailey, the U.K.’s deputy governor for prudential regulation and chief executive officer of the PRA, said the changes will build on the safeguards the U.K. regulators already have put in place. “The financial crisis demonstrated that the authorities did not have the powers or tools needed to deal with failing banks. This meant that public funds had to be used to prop up the banks,” Bailey said in a statement. “The U.K. authorities have taken a number of important steps since the crisis to increase the resilience of our banking sector, including stress testing the major banks and strengthening the capital framework. The BRRD provides a framework and tools to deal with banks in distress and builds on the steps we have already taken to ensure firms have recovery and resolution plans that minimize disruption to the wider financial system.”
The U.K. already provides a tool to bail-in liabilities of failing banks. But under the BRRD, that tool must be contractually recognized for liabilities which are governed by laws of a third country, and which are not excluded from the scope of the bail-in, the PRA said. In order to boost transparency, the authority is proposing that banks include language in their contracts informing creditors that the liability may be subject to the bail-in regime. The PRA said this change also will help mitigate risks of cross-border resolutions relating to bailing in creditors.
The PRA also plans to ask firms to conduct scenario testing of various recovery plan options, including an idiosyncratic scenario, a system-wide scenario, and a combination of the two. Those scenarios should be severe but plausible. The regulator said such scenario testing will help firms determine the best course of action for various situations.
The consultation paper also included a recommendation that firms make public their intragroup financial support agreements, and how financial support can be given between entities within a group to shore up the group as a whole without jeopardizing the entity giving the support. The PRA is suggesting that the agreements be made public at minimum on an annual basis, and only be allowed if certain conditions are met.
The consultation ends 19 September, with the final rules due by the end of the year.
While German lawmakers also have started the process of implementing the banking union directive, a group of economists have mounted a legal challenge to try to block the new rules. Germany was often a dissenting voice in the wrangling over the banking union during the EU legislative process.
According to the news site EUbusiness, Germany’s high court received the complaint last month that the banking union violates Germany’s legal system foundation by ceding the direct supervisory role to the European Central Bank. A spokesman for the Federal Constitutional Court told Agence France-Presse that the plaintiffs believe the new system is unconstitutional because it involves “the complete transfer” of national oversight duties to the ECB.
Markus Kerber, an economist and former finance ministry official who is lead plaintiff, was quoted by EUbusiness as saying the banking union amounts to a “trap of far-reaching mutualisation of liability.”
“Countries like Germany with (its) cooperative and savings banks sector will share the risks of banking mismanagement in France and southern Europe,” Kerber reportedly said in a statement.
It was unclear how quickly the court will rule on the complaint.