The European Banking Authority (EBA) has set out clear circumstances that determine whether a financial institution can be considered to be ‘failing or likely to fail' – a situation that would trigger some intervention. The EBA's guidelines – available here – aim to enhance the coordination of supervisory and resolution practices.
Improved coordination between various bank supervisory bodies is part of the EU's attempt to create a more stable and safe banking environment, which should ease the minds of corporate treasurers who rely on their banking partners to provide a range of services, from financing to managing cash surpluses. It should assist corporates in assessing their banking partners and in managing their own risk exposures.
The guidelines have been developed under the Bank Recovery and Resolution Directive (BRRD), of May 2014, which is part of the 'single rulebook', or raft of EU legislation that governs the financial sector in the whole of the EU.
Issuing these guidelines was necessary because determining whether an institution is failing or likely to fail is the start of any resolution process. This assessment is usually carried out by bank industry supervisors or resolution authorities. However, these entities may follow different procedures when determining whether an institution is failing or likely to fail.
The EBA's guidelines set out how the decisions should be based on the same criteria and objective elements. In fact, the guidelines list all the objective elements for determining whether an institution is failing or likely to fail.
The guidelines also provide additional guidance on the consultation and exchange of information between these authorities when deciding if an institution is failing or likely to fail. They will apply from 1 January 2016.
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