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Bank recovery and resolution – European Commission issues its legislative proposal

12 June 2012

To read the report, click on this link.

Under the Commission proposal, banks will be required, as a precautionary measure, to draw up recovery plans, in which they explain all the measures they intend to undertake in order to restore their viability (without state support), should their financial situation (solvency, liquidity) deteriorate below pre-defined thresholds. Supervisors will assess and approve such recovery plans, already in normal times (i.e. not during a crisis).

Beside such recovery plans worked out by the banks themselves, the national resolution authorities and/or the supervisors, will prepare resolution plans, already in normal times, which describe how banks can be orderly resolved under different scenarios, e.g. in a systemic crisis. The national resolution authorities will have the power to bail-in all the liabilities of the institution. Certain liabilities (e.g. secured liabilities, guaranteed deposits and liabilities with a residual maturity of less than one month) are excluded from the prospective bail-in regime.

This proposal, if implemented, would make private investors contribute to the bank restructuring, making government support for banks less likely. Some rating agencies have already signalled the possibility of negative implications on ratings for banks.