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06/12/2016

Largest banks to pay most in resolution plan

Euro & Finance

Largest banks to pay most in resolution plan

Dublin, 2010. [William Murphy/Flickr]

The European Commission Tuesday (21 October) issued rules for calculating the contributions of banks to national resolution funds and a proposal for banks contributing to the banking union’s Single Resolution Fund that would see largest banks hardest hit.

The proposal, which must now be agreed with the Parliament, foresees banks paying contributions in proportion to their size and risk profile, sparing smaller lending banks from large contributions.  

Under the new rules, credit institutions will pay a fixed contribution to their national resolution authorities, based on the institution’s liabilities, meaning that larger banks will pay a higher fixed contribution.

This would then be adjusted in accordance with the risk posed by each institution. The proposal includes a number of risk indicators against which the risk level of each institution will be assessed.

Single Resolution Fund phase-in

In addition, a special lump-sum regime will apply for small banks, reflecting the fact that – in most cases – such institutions have a lower risk profile and are less likely to use resolution funds.

The proposals will mean that smaller banks representing 1% of the total EU banking assets would pay 0.3% of the total contributions.

Meanwhile, the Commission has proposed applying the same contribution calculus to banks in the banking union, to set up the new Single Resolution Fund.

This draft text foresees the Single Resolution Fund being built by bank contributions over an eight-year transitional period during which it will be composed of national compartments.

“We have worked hard to improve the financial system so that banks pay for themselves if they have problems, and not the taxpayers,” said Vice-President Michel Barnier, responsible for Internal Market and Services.

He added that “detailed rules on resolution funds financed by the banking sector, adopted today, are an important step to making that a reality.”

Greens not favourable to proposal

However the European parliament’s Greens group claimed that the proposal does not differentiate enough between the largest riskiest banks and medium sized banks not included within the favourable provisions for the smaller banks.

German MEP Sven Giegold, the Greens spokesman, said: “In the US, the equivalent fund sees banks with the riskiest portfolios contributing by a factor of 18 times more than the safest banks, but in the Commission’s proposal the highest factor is twice as much.”

Background

Under the Bank Recovery and Resolution Directive (BRRD), the Commission is empowered to adopt delegated acts to specify detailed rules for all 28 Member States so that their resolution authorities can calculate the contributions of banks to the resolution funds.

In the banking union, the national resolution funds set up under the BRRD as of 1 January 2015 will be replaced by the Single Resolution Fund (SRF) as of 1 January 2016 and those funds will be pooled together gradually.

Timeline

  • Jan. 21st 2015: Council and Parliament have right to object to the new rules within three months extendable by a further three month

Further Reading

European Commission

Press articles