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EBA Banking Stakeholder Group Summary on Consultation Paper EBA/CP/2014/24

Core Content

The EBA Banking Stakeholder Group (BSG) has provided detailed comments on two consultation papers related to the Bank Recovery and Resolution Directive (BRRD):

1. Draft Guidelines on the Determination of When the Liquidation of Assets or Liabilities Under Normal Insolvency Proceedings Could Have an Adverse Effect on One or More Financial Markets
2. Factual Circumstances Amounting to a Material Threat to Financial Stability and Elements Related to the Effectiveness of the Sale of Business Tool

The BSG supports the overarching objective of these guidelines, which is to establish a consistent and harmonised framework for the application of resolution tools in cases where an institution is failing or likely to fail. The focus is on balancing the efficiency of resolution actions with the protection of market stability and fairness.

Main Views

1. Specification of Elements for Material Threat and Effectiveness of Sale of Business Tool

• The BSG agrees that qualitative and quantitative indicators should be used to assess material threats to financial stability and the effectiveness of the sale of business tool.
• These indicators must be common and harmonised across EU Member States to ensure a level playing field and convergence in supervisory practices.
• However, it is acknowledged that each sale is unique, and some flexibility should be allowed, particularly in the context of market conditions and pricing.

2. Marketing Requirement and Sale of Business Tool

• The BSG believes that the guidelines are sufficiently comprehensive and does not foresee significant conflicts between marketing requirements and the effectiveness of the sale of business tool.
• They support the limitation of potential purchasers to ensure that the best buyer is selected, thereby promoting a quicker and more efficient sale.
• The use of the resolution fund to facilitate the sale is viewed positively, as it can help reduce tail risk and generate value for taxpayers. The resolution fund should be considered as a guarantee and the sale should be evaluated both with and without such a guarantee.

3. Convergence in Resolution Authorities' Judgment

• To ensure convergence in practices, resolution authorities should evaluate the perimeter of the sale and define clear elements and criteria for the sale of business tool.
• Previous agreements should be used to constrain the exercise of judgment, but the minimum list of services or facilities required for the business to operate must be guaranteed from the outset.
• The BSG suggests that compensation at market prices can be regulated as "fees at market" to influence future investments, but the legal service agreement and its deadlines should not be restricted.

4. Non-Core Assets in a "Bad Bank"

• The BSG recommends that the EBA should consider including non-core assets in a "bad bank" when applying the sale of business tool.
• These non-core assets could include business or geographic units, which are not essential to the core operations of the institution.
• When a bridging bank is created, the minimum number of services or facilities necessary for the recipient to operate the business should be operative from the outset.

5. Derivative Portfolios and Their Impact on Financial Markets

• The BSG suggests that specific considerations should be applied when dealing with the liquidation of derivative portfolios, as their unwinding can have significant market impacts.
• The assessment of impact should be practicable, and the BSG recommends that the EBA should consider ways to make the process more practical, such as using standardized methodologies or providing clear guidance on how to evaluate the market effects of derivative unwinding.

6. Assets and Liabilities Linked to Each Other

• The BSG refers to question 4 for further examples of assets and liabilities linked to each other, suggesting that such examples should be included in the guidelines to better understand the implications of the sale of business tool.

Key Information

• The BSG supports the harmonisation of resolution practices across the EU.
• The sale of business tool is seen as a critical resolution mechanism, especially in crises affecting asset value and liquidity.
• Market conditions and pricing are important factors in assessing the effectiveness of the sale of business tool.
• The resolution fund can be used as a guarantee to enhance the effectiveness of the sale.
• The perimeter of the sale and minimum operational requirements should be clearly defined to ensure convergence in resolution practices.

Conclusion

The BSG's comments highlight the importance of consistency, transparency, and fairness in the application of resolution tools. They advocate for the inclusion of qualitative and quantitative indicators, the use of resolution funds as guarantees, and the definition of clear criteria for the sale of business tool. The group also emphasizes the need for harmonised practices and converged standards across the EU to ensure the stability and integrity of financial markets.