Gunnar Hökmark’s presentation on bank recovery and resolution legislation in committee
Gunnar Hökmark’s report on the Recovery and resolution directive was today formally presented in the the Econonomic and monetary affairs committe. Below you will find his introductory statement.
As I have said many times with regards to this dossier, it is to a very large extent about making sure that owners of financial institutions do not only ripe the profits of their efforts but also face losses when they occur.
Every business must in this sense face the threat of bankruptcy otherwise the incentives for that business will be severely distorted.
I have, therefore, very much welcomed the Commission’s initiative in this field, although I would have preferred to have the proposal presented even earlier as the Parliament requested many times.
Nevertheless, I consider, as I said in our first exchange of views, the proposal presented by the Commission to have been very properly drafted and addressing most of the central issues related to this subject.
Alongside other proposals such as CRD4 and DGS it is crucial in achieving the single rule book for the banks so dearly needed. I would by the way at this point, once again, just like to highlight the risk I see currently by throwing too many proposals of different kinds up in the air at the same time. Getting those we now have on the table must be an absolute priority before we dig into further dossiers. I say this with special address to the Commission representatives present here today.
Having said this on my overall starting point for the dossier and on the formalities, I would like to turn to some of the areas where I have sought to further improve the Commission’s proposal.
First of all I would like to touch upon the subject which has been my predominant concern: the fundamental difference between a single bank in a crisis and a banking crisis.
We will never be able to predict what shape or form the next crisis will take; therefore, I think the best thing we can do is to make sure we are as well prepared as possible. This includes drafting regulation on many different matters of the financial industry, but also being humble enough to say that we are not in a position to fully gauge the consequences of our new rules; even, perhaps, to admit that some of the rules we made in the past contributed to increasing risk rather than reducing it and that this might happen again.
Hence, we will not know what the next crisis will be like and for that reason I see a need for being flexible and adaptive, primarily by further expanding the tool-box available in the resolution phase – which is arguably the most important part of the proposal.
I have, in my draft report, introduced what I call “Government financial stabilization tools”, including the opportunity for the individual Member State to take, if so deemed necessary as a final resort, the institution fully or partly under temporary public ownership or issuing a guarantee of the liabilities of one or more institutions.
I do not do this because I think the government should be running banks. You may accuse me of many things but not for being a supporter of state run enterprises.
I rather do it because I think it is unrealistic to assume all future crises will be resolved without a single cent of tax-payers’ money involved. And if we anyhow go along with that assumption, reality will prove us wrong and we will see situations where Member States will have to resort to various forms of public intervention the day the systemic crisis occurs anyway.
I see it better then to ex-ante clearly define when and how the government may intervene. Not only to provide for this option, but equally so in order to make sure there will be some order for how this is done. If we refrain from including this in the directive today, we certainly run the risk of seeing Member States taking uncoordinated action in the next crisis if nothing else can prevent a further deterioration. That would increase uncertainty about what will actually be the management of the next crisis.
This would, to my mind, be a worse outcome.
Apart from this, although certainly very related, I have tried to make a clearer distinction between the powers and measures in the recovery, early intervention and resolution phases, e.g. by moving the Special Manager to the resolution phase as this is where a my mind tool with so far-reaching powers naturally should be.
I have moreover tried to make it clearer that owners shall still be the ones to carry full responsibility of the institution as long as it has not fallen into resolution, when authorities shall take over in full. A blurred line would serve to increase uncertainty and raise the expectations of public intervention at various points in time: quite the opposite to what we seek to achieve.
On the bail-in tool, I have extended the exemption of short-term liabilities to 6 months in order to make sure short-term funding is not adversely affected by what should be a tool for governance of the institution in the medium to longer term.
Finally, I have tried to introduce a slightly new concept of the way to think about resolution funds. I acknowledge this is a very difficult topic where much work will have to be done.
My view is that resolution should be funded by the industry ex-ante, since ex-post solutions probably will not be feasible when all banks are hit by a systemic crisis Also, it would imply that the still viable banks, i.e. those who have proven to be the most properly managed, will have to make up for the mistakes of others. This would be wrong for two reasons; first, it is a form of collective punishment otherwise not accepted in our societies; and two, it would indeed pose a significant moral hazard risk if others are to mop up the mess one self’s excessive risks have created.
An ex-ante scheme does not, however, imply that there must be a resolution fund in the true meaning of the word. Considering the investment strategy problem arising from the fact that this fund in many Member States would be very big, even if the Commission’s proposal of one per cent of eligible deposits was to be kept, an alternative could be to pay down public debt instead of piling the contributions into a fund then investing in specific assets.
The logic would then be that of an insurance scheme whereby the industry makes annual contributions and that the State provides the funds needed for resolution when so warranted. Since these funds would only be available for banks in resolution, i.e. as gone concerns where shareholders and creditors take the first hit, eventual moral hazard risks should be mitigated. A specific target level would then be irrelevant.
What would pose a moral hazard risk, on the other hand, is an automatic right to borrow from other Member State’s resolution funds. Whilst burden-sharing will be needed for cross-border institutions, I have clarified that for standard resolution, i.e. not a cross-border institution, there should be no obligation for one Member State to lend to another, but rather an opportunity to do so if the former Member State so concurs.
Those are the main areas where I have proposed changes and amendments to the Commission’s proposal.
Work has already started among the shadows and I am very pleased by the first sessions we have had as I think they have been very constructive and fruitful indeed!
So I look forward to continue the work with Elisa, Wolf, Philippe, Vicky and Marisa as well as all other colleagues who wish to engage themselves in this dossier.
I now look forward to learn your reactions.