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Start of a recovery process

The announcement on 26 June 2013 that a single European regime for bankrupt banks, the Bank Recovery and Resolution Directive (BRRD), has been proposed, is demonstrative of the challenge that Europe faces in delivering new rules. It is clearly behind the US in terms of pace.

The US regime was set out in 2010 as part of the Dodd-Frank Wall Street Reform Act. Having recently been named as systemically important financial institutions (SIFI) by the Financial Stability Oversight Council (FSOC), a division of the US Treasury, even non-banks like insurer AIG and GE Capital will now have to hold additional capital reserves as buffers, and must provide resolution plans called ‘living wills’ to the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) every year. These must detail the company's strategy for a “rapid and orderly resolution in the event of material financial distress or failure of the company.”

For banks of over US$250billion in assets, the US regime had been enforced since 1 July 2012; for those of between US$100 billion and US$250 billion it was 1 July 2013. Clearly the challenge for getting rules in place is not uniquely European as Tim Geithner, US treasury secretary, had singled out both AIG and GE out as SIFIs in 2010 but they have not been formally designated until now.

Although individual European countries have established systems for tying up banks, for example the UK set up a Special Resolution Regime under the Banking Act of 2009, for Europe to provide confidence in its capital markets for investors, it must demonstrate that it has established a consistent and reliable safety net.

The European plan still has some way to go before it is enshrined in the rulebook. The BRRD may be contentious – it is moving the lender of last resort away from being central banks and on to the commercial banks without explicitly saying so – but knowing Europe can put rules in place in a timely manner will create a sense of confidence, as much as the rules themselves.


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