European Bank Recovery and Resolution Directive

The following post comes to us from Valia SG Babis at University of Cambridge.

The present article, Bank Recovery and Resolution Directive: Recovery Proceedings for Cross-Border Banking Groups, examines recovery proceedings for cross-border banking groups under European Union law. Recovery (or “early intervention”) includes measures intended to stabilize a bank (or banking group) and enable its recovery from financial stress. Recovery is targeted at a stage before resolution, when the bank (or group) in question has not breached the triggers for resolution, and therefore its economic recovery is still possible. The focus of this paper is primarily on three group recovery mechanisms under EU law: group recovery plans, intra-group financial assistance and coordination of early intervention measures regarding groups.

Effective recovery proceedings, coordinated across borders and across group affiliates, are an issue of fundamental importance for the EU. EU banks are free to “passport” by establishing branches and providing services across member states and in fact, the EU banking sector is dominated by large cross-border groups. This means that, where more than one group affiliate face financial troubles which justify supervisory intervention, effective coordination of such interventions is necessary to safeguard financial stability and to prevent financial contagion across borders. In addition, coordinated group recovery proceedings can be more effective and expedient than separate (and potentially inconsistent) recovery proceedings for individual group affiliates. Coordinated recovery proceedings can preserve intra-group synergies, reduce losses for the group and increase the group’s recovery potential. Very importantly, even if recovery fails to restore the situation of the group, a consistent group-wide approach to recovery can better prepare the ground for group resolution.

The EU Recovery and Resolution Directive (RRD) makes provisions for group recovery plans, intra-group financial assistance and coordinated early intervention measures for groups. This article examines the question whether the proposed EU framework for group recovery can function effectively and ensure a consistent recovery procedure for the entire banking group across borders. The article argues that even if the regulatory framework provides group recovery mechanisms, the actual use of these mechanisms across borders depends on the approach of supervisors of group affiliates. Recovery mechanisms can only apply across borders if supervisors reach joint decisions and make use of recovery tools and powers in a consistent, cooperative and coordinated manner. This means that the effectiveness of group recovery depends greatly on the emerging institutional architecture of supervision in the EU. Consequently, in order to assess the likely success of coordinated recovery measures at group level, it is necessary to look carefully into the emerging supervisory framework in the EU, which consists of: the Single Supervisory Mechanism (SSM) with the European Central Bank at its core, national supervisory authorities within and outside the SSM, supervisory colleges and the European Banking Authority.

The structure of the article is as follows. The article begins by examining the EU law provisions for group recovery plans, intra-group financial support and group early intervention measures. The article then examines the important role of supervisors of group affiliates in group recovery. The article assesses how the new EU supervisory architecture is likely to affect group recovery proceedings, and identifies areas where problems could arise. The article concludes that the assessment can be optimistic with regard to group affiliates located within the SSM, but more robust supervisory arrangements are needed in order to prevent fragmentation between the SSM and the rest of the EU. With this in mind, the article makes proposals for improvement.

The full paper is available for download here.

Both comments and trackbacks are currently closed.