Photographer: Krisztian Bocsi/Bloomberg

BOE Says EU Bank-Failure Bill May Hinder Too-Big-to-Fail Fix

Updated on
  • EU bill foresees two payment-halt tools for bank supervisors
  • AFME’s Bannister says bill would undermine goals of resolution

The Bank of England took aim at a European Union plan to boost supervisors’ powers to stop cash leaving ailing lenders, adding its weight to mounting criticism of a bill intended to make sure big banks can be wound down without wreaking havoc on the economy.

The BOE warned of “very serious consequences” if lawmakers adopt an EU bill that sets out a five-day moratorium on payments from failed banks in the process of restructuring. The stay is out of sync with an existing industry agreement that stops banks from winding up derivatives contracts with a struggling firm for two days, according to a BOE working paper seen by Bloomberg News.

Industry groups are stepping up their lobbying campaign against the plan before lawmakers in Brussels return to work after the summer break. The Association for Financial Markets in Europe, whose members include Barclays Bank Plc and Deutsche Bank AG, said the proposed powers would disrupt markets and compound the woes of targeted firms.

The proposal “would undermine the objectives of resolution, it endangers financial stability and increases contagion risk,” Charlie Bannister, manager for recovery and resolution at AFME, said in an interview. “It challenges the effectiveness of existing powers and would be a backward step.”

The need to prevent counterparties from racing for the door when a financial firm gets into trouble was highlighted by the messy bankruptcy of Lehman Brothers Holdings Inc. in 2008, which contributed to a broader crisis in credit markets. In response, the industry agreed to rewrite standard financial contracts to allow certain securities and funding contracts to remain intact for as long as 48 hours after a bank fails.

‘Cross-Border Termination’

In its July 10 paper, the BOE said the proposed moratorium in resolution conflicts with existing market protocols, and this “threatens the international progress to address the risk of cross-border termination of contracts and could leave EU firms at a competitive disadvantage.”

The protocols developed by the International Swaps and Derivatives Association are a voluntary mechanism for the world’s biggest banks to recognize each other’s payment-stay rules. They also include an opt-out provision in case those rules are changed to lengthen the stay. The EU’s moratorium plan “would likely trigger this opt-out right,” the BOE said.

“This would be a step backwards in terms of resolvability and undermine the progress made towards addressing one of the main barriers to cross-border resolution,” according to the BOE.

A BOE spokeswoman declined to comment on the document.

‘Strong Advantages’

The European Commission, the EU’s executive arm, proposed the moratorium in November as part of an update of the Bank Recovery and Resolution Directive, the centerpiece of the bloc’s attempts to tackle too-big-to-fail lenders. Among its goals was to standardize national rules on supervisors’ powers to suspend banks’ payments to third parties.

Calls for broader moratorium powers have come from the European Central Bank, which oversees lenders in the euro area, and the Single Resolution Board, the currency bloc’s wind-down authority.

Elke Koenig, chair of the Single Resolution Board, said earlier this month that there are “strong advantages to a moratorium tool covering all liabilities to buy time if need be, or to take us to the weekend in case a bank is declared” failing or likely to fail by the ECB during the working week, as it did in the case of Banco Popular Espanol SA.

The commission proposed two tools, one for use in resolution and one in an “early intervention” stage, to facilitate the “quantification of available assets and liabilities,” allowing authorities to decide on a firm’s fate.

Banking Union

The proposal to give supervisors the power to declare a five-day moratorium before a bank is wound down enjoys little support among the EU’s 28 national governments, according to a July 10 working paper prepared by Estonia, which holds the EU’s rotating presidency. The paper, seen by Bloomberg News, concludes that it would be “reasonable to abandon the concept of pre-resolution moratorium,” and countries could look into applying this option at the national level.

A spokeswoman for the Estonian Finance Ministry declined to comment on the paper. A European Commission official said that work on the moratorium was part of the Roadmap to Complete the Banking Union which was agreed on by member states in mid-2016. In that document, the moratorium tool is foreseen as a way to help stabilize a bank in crisis.

Koenig said in March that halting payments before a bank fails could very well drive it over the cliff into resolution, a point also made by the lobbyists.

While the resolution moratorium has broad backing, views differ as to its duration, according to the Estonian paper. “Many delegations” accept the five-day period proposed by the commission, some want it shortened to three days and others want to extend it. As as compromise, the paper proposed a moratorium of 5 working days with the option to prolong to a maximum of 20 in exceptional circumstances.

That draft compromise is unlikely to win much support from the finance industry, in part because of the ramifications for derivatives trading. ISDA said in a July 12 paper that the proposed EU payment halts would knock the bloc out of step with other jurisdictions, including the U.S., increasing their costs and damaging competitiveness.

“We think the proposed moratoria would put EU banks at a significant competitive disadvantage in the derivatives market,” Rick Sandilands, ISDA’s senior counsel for Europe, said in an interview. “The associated impact on capital and margin provisions would make it more costly to trade with them than with their counterparts in other jurisdictions.”

— With assistance by Ott Ummelas

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