Following the European Commission’s publication of its proposed Crisis Management and Deposit Insurance Framework (CMDI) review today, Sahir Akbar, Head of Resolution Regulation at AFME said:
“Today’s targeted proposals are another step along the journey to completing the Banking Union. They will improve the resolution framework so that any possible bank failures are effectively managed, irrespective of size, model and location.
“In particular, we note the proposals for more harmonisation through amendments to the Public Interest Assessment (PIA) and Least Cost Test (LCT). This will increase predictability and credibility, ensuring a coherent application of rules across Member States. We therefore consider this essential for ensuring a level playing field.
"Nevertheless, we note that the proposal broadens the framework to enable wider use of the Deposit Guarantee Scheme (DGS). Here we would caution that such funds should not be used in a way that creates moral hazard. It is also important that internal loss-absorbing capacity remains the first line of defence. Furthermore, in keeping with the ‘polluter-pays’ model, the wider use of DGS compounds the need for contributions to the scheme to be proportionate with the risk a bank poses to the fund.
“Other elements of the proposals, such as changing the creditor hierarchy, will need to be considered carefully to ensure they do not give rise to any unintended consequences, and to ensure that any reforms to the resolution framework do not prejudice the extensive progress made so far.
“At AFME we have always supported the development of effective recovery and resolution framework in Europe and look forward to actively engaging with the European Commission and the co-legislators on these latest proposals.”
AFME believes that the co-legislators should focus, in particular, on the following elements in the upcoming negotiations:
Enhancing the credibility, predictability and consistency of the CMDI framework, further enhancing financial stability, without adversely impacting the progress made to date on resolution.
Not increasing contributions to mutualized funds, but better aligning contributions with the risk that an individual institution poses to the fund.
Minimizing risk to taxpayers and moral hazard by ensuring a consistent, harmonized and careful approach across EU member states to the use of common or mutualized funds to absorb losses, subject to the Least Cost Test, supporting market discipline and avoiding competitive distortions.
Being consistent in the tools and application of the framework at EU level in order to ensure that all banks regardless of their size or country of origin can fail in an orderly manner, have a plan in place to provide for this and have the resources to support it.
Supporting strong cross-border cooperation and minimize fragmentation both within the EU and with third countries.
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