July 9, 2014 / 3:00 PM / in 4 years

EU watchdog rolls out rules for closing failed banks

LONDON, July 9 (Reuters) - The European Union’s banking watchdog has set out guidance on how supervisors must determine from next year whether an ailing bank can be closed down without disrupting markets or calling on taxpayer money.

The European Banking Authority’s draft guidance, put out to public consultation, fleshes out one aspect of a new EU law on dealing with troubled banks without requiring government money as happened in the 2007-09 financial crisis.

Supervisors will have to make sure that a bank removes any obstacles to being closed down quickly so as to avoid the disruption to customers and markets that was seen after the collapse of U.S. bank Lehman Brothers in September 2008.

“The guidelines do not prescribe or privilege certain business models or organizational structures but allow for a case-by-case analysis of the impediments caused by the institution or group and of the best way to address them,” the EBA said in a statement.

The overall cost for the EU’s banking industry to apply the new requirements is estimated at 2.4-12.8 million euros, the EBA said.

Banks already have to write so-called living wills or recovery plans that set out how they would survive a market shock unaided.

The latest guidance covers the next stage, known as resolution, where a bank cannot be saved and needs to be closed.

The new EU law requires a resolution plan for each bank to be credible and feasible, with structural changes imposed if needed.

“This may involve changes to the legal, operational and financial structure of credit institutions or their business activities,” the EBA said.

Most banking assets are held at cross-border lenders whose supervisors operate collectively in colleges. Each college will have to agree that a bank’s resolution plan is workable in the heat of a crisis.

The guidance is likely to take effect from the middle of 2015 but there is no fixed deadline for banks to remove obstacles to resolution.

In the first instance, lenders would offer changes to satisfy regulators but if these are deemed to be inadequate then the EU law gives supervisors powers to impose changes.

The EBA will hold further consultations in the autumn on draft rules for determining when resolution is triggered.

There will also be a consultation on the amount of bonds a bank will have to hold for tapping if it collapses.

Under the EU law, it will be up to national supervisors to decide on how big the cushion of bonds should be, but the EBA will set parameters to constrain this discretion. (Editing by Mark Potter)

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