European banking risk reforms ‘need proportionality for co-ops and other small players’

‘Pragmatic and flexible approaches’ should consider ‘available tools, practical implications, cooperation between stakeholders, execution speed and financial resources’

As the European Commission continues work to reform the Bank Crisis Management and Deposit Insurance framework (CMDI), a committee has called for “a pragmatic and flexible approach” which reflects the needs of smaller players – including banking co-ops.

The European Economic and Social Committee (EESC) – an advisory body which includes employers, trade unionists and representatives of social, occupational, economic and cultural organisations – has looked at the plans and provided policy recommendations to the co-legislators and the Spanish Presidency of the Council, which requested its input.

The EESC’s rapporteur is Giuseppe Guerini, who is also president of CECOP-CICOPA Europe, the European Confederation of Industrial and Social Cooperatives, and board member of Cooperatives Europe. 

“The EESC acknowledges the importance of speed, flexibility and co-operation in responding to bank crises while protecting depositors and taxpayers”, he said. “The Commission’s proposal is a step towards the completion of the Banking Union, which is crucial for achieving full consolidation of the EU financial system and reducing market fragmentation.”

In its response, the EESC said the recent banking crises had shown the importance of speedy and flexible action, as well as the need to quickly organise the transfer of a troubled bank to another bank. The committee also expressed its support for expanding the public interest assessment (PIA) to include regional banks – but suggested refining its formulation and harmonising its application across the EU.

“Pragmatic and flexible approaches should be adopted, considering the regulatory approach, available tools, practical implications, cooperation between stakeholders, execution speed and financial resources,” it said.

It argued there was a need for “a pragmatic and flexible approach for each crisis in terms of the regulatory approach, selection of tools, implications of the response, co-operation between stakeholders, execution speed, and nature of the financial resources used” and said that “when resolution may be more expensive than liquidation, an insolvency procedure should be triggered”.

EESC also encouraged the co-legislators “to find solutions that minimise legal uncertainty, striking a balance between flexibility and predictability”.

The committee said it was necessary “to strike a balance between an enhanced formulation of the public interest assessment and the proportionality of its application to small, medium-sized and local banks, to minimise uncertainty and the potential harm to their interest”.

EESC added that the CMDI package should be coordinated with the expected revision of the 2013 Communication on State Aid to avoid potential inconsistencies and warned inefficiencies will persist until the Banking Union is complete despite the enhanced transfer tool using Deposit Guarantee Schemes and the Single Resolution Fund.

The principle of proportionality was also emphasised in a position paper published by the European Association of Co-operative Banks (EACB) in April.

EACB, which is the voice of Europe’s co-op banks, said that while there was room for improvement in the current legislation, the review should be weighed and analysed carefully having regard to the diversity of the national legal systems where the EACB members operate.

In particular, EACB warned that size should not be the only criterion to differentiate between banks, with the business model, funding structure and risk profile also being relevant. The apex also argued that small and mid-size banks with a retail-oriented business model and a relatively low risk profile should not be subject to disproportionate resolution preparation and resolution requirements, and that proportionality should be taken into account.