weary electorates are wreaking vengeance on discredited mainstream political parties. The general election in Greece on 17 June may yet see the demise of the traditional center right New Democracy Party or the center left PASOK as polls show that the staunchly anti-austerity Coalition of the Radical Left (Syriza) led by Alexis Tsipras may indeed win an outright majority. Tsipras may be flattered by his new-found sobriquet in the European media as “the man who may bring down the Euro”, but an over-tolerant German electorate have already started baying for the exit of Greece from the euro zone, albeit an ordered one. The danger of further contagion is real. While Greece pales into insignificance when compared to Spain, Cyprus is the latest euro zone country to join the queue for a bailout of its banking system, which has heavy exposure to Greek banks. But Spain will be “the mother of all tests” for the European leaders. Madrid needs an urgent €80 billion to shore up its banks that lost billions after a real estate boom in Spain went bust. In the above circumstances, any pre-emptive mechanism to ensure the stability and soundness of EU banks in the future and taxpayer exposure to them, albeit belated, should be welcome. In a statement, the European Commission stressed that “in order to maintain essential financial services for citizens and businesses, governments have had to inject public money into banks and issue guarantees on an unprecedented scale.” In fact, between October 2008 and October 2011, the European Commission approved €4.5 trillion (equivalent to 37 percent of EU GDP) of state aid measures to financial institutions. This averted massive banking failure and economic disruption, but has contributed to damaging public finances and failed to settle the question of how to deal with large cross-border banks in trouble. EC President José Manuel Barroso maintains that “the EU is fully delivering on its G20 commitments. Two weeks ahead of the summit in Los Cabos, the Commission is presenting a proposal which will help protect our taxpayers and economies from the impact of any future bank failure. Today's proposal is an essential step towards Banking Union in the EU and will make the banking sector more responsible. This will contribute to stability and confidence in the EU in the future, as we work to strengthen and further integrate our interdependent economies.” Similarly, Internal Market Commissioner Michel Barnier stressed that “the financial crisis has cost taxpayers a lot of money. Today's proposal is the final measure in fulfilling our G20 commitments for better financial regulation. We must equip public authorities so that they can deal adequately with future bank crises. Otherwise citizens will once again be left to pay the bill, while the rescued banks continue as before knowing that they will be bailed out again.” The Commission's proposals are divided into powers of “prevention”, “early intervention” and “resolution”. In terms of prevention, the new proposals require: Banks to draw up recovery plans setting out measures that would kick in in the event of a deterioration of their financial situation in order to restore their viability. Regulatory Authorities to prepare resolution plans with options for dealing with banks in critical condition which are no longer viable (such as details on the application of resolution tools and ways to ensure the continuity of critical functions). Recovery and resolution plans are to be prepared both at group level and for the individual institutions within the group. Regulatory Authorities can ask a struggling bank to change its legal or operational structures to ensure that it can be resolved with the available tools in a way that does not compromise critical functions, threaten financial stability, or involve costs to the taxpayer. Financial groups may enter into intra-group support agreements to limit the development of a crisis and quickly boost the financial stability of the group as a whole. Subject to approval by the supervisory authorities and the shareholders of each entity that is party to the agreement, institutions which operate in a group would thus be able to provide financial support (in the form of loans, the provision of guarantees, or the provision of assets for use as collateral in transactions) to other entities within the group that experience financial difficulties. The Commission also stresses that early supervisory intervention will ensure that financial difficulties are addressed as soon as they arise. “Early intervention powers are triggered when an institution does not meet or is likely to be in breach of regulatory capital requirements,” stress the proposals. Regulatory Authorities could require the institution to implement any measures set out in the recovery plan, draw up an action program and a timetable for its implementation, require the convening of a meeting of shareholders to adopt urgent decisions, and require the institution to draw up a plan for restructuring of debt with its creditors. In addition, supervisors will have the power to appoint a special manager at a bank for a limited period when there is a significant deterioration in its financial situation and the tools described above are not sufficient to reverse the situation. The primary duty of a special manager is to restore the financial situation of the bank and the sound and prudent management of its business. The proposals stress the importance of harmonized resolution tools and powers, which “will ensure that national authorities in all Member States have a common toolkit and roadmap to manage the failure of banks”. The interference in the rights of shareholders and creditors which the tools entail, stressed the Commission, “is justified by the overriding need to protect financial stability, depositors and taxpayers, and is supported by safeguards to ensure that the resolution tools are not improperly used.” Resolutions kick in if the preventive and early intervention measures fail to redress the situation from deteriorating to the point where the bank is failing or likely to fail. If the authority determines that no alternative action would help prevent failure of the bank, and that the public interest is at stake, authorities should take control of the institution and initiate decisive resolution action. The main resolution tools include: a) the sale of the business tool whereby the authorities would sell all or part of the failing bank to another bank; b) the bridge institution tool which consists of identifying the good assets or essential functions of the bank and separating them into a new bank (bridge bank) which would be sold to another entity, and the old bank with the bad loans would be liquidated under normal insolvency proceedings; c) the asset separation tool whereby the bad assets of the bank are put into an asset management vehicle, which will clean the balance sheet of a bank. This tool may be used only in conjunction with another tool (bridge bank, sale of business or write-down); and d) the bail-in tool whereby the bank would be recapitalized with shareholders wiped out or diluted, and creditors would have their claims reduced or converted to shares. The proposals strongly stress cooperation between national authorities and with the participation of the European Banking Authority (EBA), which will also act as a binding mediator if necessary. This lays the foundations for an increasingly integrated EU-level oversight of cross-border entities, to be explored further in the coming years in the context of the review of Europe's supervisory architecture. To be effective, the resolution tools will require a certain amount of funding, which can be sourced through the creation of a bridge bank; or through supplementary funding; or national resolution funds; and finally funding already available in the 27 Deposit Guarantee Schemes (DGS) of the euro zone countries. __
