Opinion of the European Central Bank of 20 July 2015 on recovery and resolution of credit institutions and investment firms (CON/2015/25)

OPINION OF THE EUROPEAN CENTRAL BANK of 20 July 2015 on recovery and resolution of credit institutions and investment firms (CON/2015/25) Introduction and legal basis

On 19 July 2015 the European Central Bank (ECB) received a request from the Greek Ministry of Finance (MoF) for an opinion on a draft law on the recovery and resolution of credit institutions and investment firms (hereinafter the ‘draft law’). The MoF asked for the adoption of the ECB’s opinion on an urgent basis. The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and on the third and sixth indents of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to the Bank of Greece and to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. For elements of the draft law the exclusive purpose of which is the transposition of Union law, the ECB’s competence to deliver an opinion is based on Article 25.1 of the Statute of the European System of Central Banks and of the European Central Bank. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The purpose of the draft law is to implement into Greek law Directive 2014/59/EU of the European Parliament and of the Council (the Bank Recovery and Resolution Directive, or ‘BRRD’) , thereby aligning the Greek legal framework for the recovery and resolution of certain types of entities active in financial markets, including credit institutions, investment firms, and financial holding companies that have their head office in Greece with the existing Union legislation in this field. 1.2 Greece has enacted comprehensive legislation that introduced mechanisms to resolve failing 4 5 institutions since 2011, prior to the adoption of the BRRD , on which the ECB has been consulted .

This framework authorised the Greek resolution and supervisory authorities to take action in order to prevent systemic crises, protect depositors, safeguard public confidence in the banking system and promote financial stability. Following the establishment of the new European framework for the recovery and resolution of credit institutions and investment firms it was necessary to replace the existing Greek legislation with a new framework addressing in a uniform manner all issues associated with the potential failure of financial sector entities. 1.3 The draft law comprises 20 chapters which in particular regulate the preparation of recovery and resolution plans, the provision of intragroup financial support, the exercise of early intervention powers, the adoption of resolution measures and their objectives, the powers of the resolution authorities, the provision of public financial support, the protection of the rights of shareholders and creditors in the context of resolution, and the use of resolution financing arrangements. The draft law also introduces necessary amendments to relevant existing legislation in order to ensure its compatibility with the new framework. 1.4 The main provisions of the draft law are as follows: - The Bank of Greece, which is the national competent authority for supervising Greek credit institutions, in accordance with Regulation (EU) 575/2013 (the Capital Requirements Regulation, or ‘CRR’) and Council Regulation 1024/2013 (the ‘SSM Regulation’), is designated as the national resolution authority for those institutions; and the Hellenic Capital Markets Commission, which is the competent authority for supervising Greek investment firms, is designated as the national resolution authority for those firms. The Greek resolution authorities shall exercise their resolution tasks separately and independently from their supervisory tasks . - The MoF is designated as the competent ministry under the draft law. The resolution authorities are required to inform the MoF of their decisions pursuant to the draft law and have its consent before adopting any decision: (a) to transfer to a purchaser shares or other ownership instruments issued by an institution under resolution, or all or any assets, rights or liabilities of an institution under resolution under the sale of business tool ; (b) to transfer to a bridge institution shares or other ownership instruments issued by an institution under resolution, or all or any assets, rights or liabilities of an institution under resolution under the bridge institution tool ; (c) to transfer assets, rights or liabilities and contractual arrangements of an institution under resolution or a bridge institution to one or more asset

another upon request with all the information relevant for the other authority to carry out its tasks. - The Resolution Branch of the Deposit Guarantee Scheme is designated as the resolution financing arrangement for credit institutions. The Resolution Branch of the Investment Guarantee Fund is designated as the resolution arrangement for investment firms. - Competent authorities and resolution authorities are authorised to impose administrative measures and administrative sanctions. - With regard to the appointment of a commissioner , as outlined above, where the removal of the senior management or the executive board of an institution is deemed to be insufficient to restore that institution’s financial situation, the competent authority may appoint one or more commissioners to the institution. This complements the framework under which the commissioners are appointed . - The civil liability of resolution authorities towards third parties for actions or omissions in the performance of their duties under the draft law is limited to gross negligence and wilful misconduct. Resolution authorities are liable for damages suffered as a result of a decision that was annulled . The civil liability of the governor, the deputy governors, all members of collective bodies and members of staff of the Bank of Greece towards third parties for actions or omissions in the performance of their duties related to any competence exercised by the Bank of Greece in its capacity as a public authority has been amended. The new provision will expose these officers and staff of the Bank of Greece to liability not only for wilful misconduct, but also for gross negligence . - The ranking of creditors in the context of any future special liquidation of credit institutions has been amended so as to rank claims in the following order : (a) preferential claims arising out of insolvency proceedings and claims in case the public equity support tool or the temporary public ownership tool are exercised ; (b) claims arising out of deposits guaranteed under the deposit guarantee scheme; (c) general claims of the State; (d) the following claims will be satisfied on a pro-rata basis: (i) claims of the Resolution Fund, (ii) deposits above the guaranteed threshold for private individuals and micro, small and medium-sized enterprises; and (e) claims arising out guaranteed investment services.

2. General observations

2.1 The draft law arises out of the Euro Summit Statement of 12 July 2015, pursuant to which the Greek authorities committed to enact a series of measures by 22 July, including the transposition of

the BRRD, with support from the European Commission. 2.2 The ECB would like to stress that, given the very short time in which it has considered this important legislation, it has not been possible to assess all of the many legal and regulatory issues which this draft law undoubtedly raises. 2.3 The ECB welcomes the draft law, as it strengthens the tools and procedures available to the Bank of Greece to carry out effective preventive, early intervention and effective resolution measures in line with the common framework of intervention powers, rules and procedures laid down in the BRRD. 2.4 The ECB stresses, however, that it does not opine on whether the draft law effectively discharges the obligations of the Greek State to implement the BRRD in Greek law. Rather, the ECB focuses primarily on those provisions that may impact on the role and tasks of the Bank of Greece as a central bank and as a member of the European System of Central Banks (ESCB). 2.5 It is worth noting that the ECB has developed guidance, in the form of general and specific considerations, on the basis of which it may decide whether a new task conferred on an ESCB national central bank (NCB) is to be considered a central banking task or a government task for the purposes of assessing such conferral against the prohibition of monetary financing under Article 123 of the Treaty . This guidance applies to genuinely new tasks that either did not exist in the past or did not form an integral part of the central banking tasks assigned to the NCB in the past. The tasks currently discharged by an NCB as central banking tasks are not reviewed and recategorised, but may be reassessed if they are subject to legislative amendments of substance. The ECB has clarified that resolution tasks can be considered central banking tasks, provided that they do not undermine an NCB’s independence in accordance with Article 130 of the Treaty . In this respect, it is noted that the Bank of Greece has already been conferred with extensive powers to take specific resolution measures vis-à-vis credit institutions since 2011 . Hence, the draft law does not constitute a substantive change in the supervisory, financial stability, and resolution tasks carried out by the Bank of Greece and is expected to have a limited impact on the overall functions carried out by it. 2.6 It is clear that the draft law does not authorise the Bank of Greece to provide any loan or financing under any circumstance to the Resolution Fund . The provision of such financing to the Resolution Fund would constitute a government task, and any such loan or financing by the Bank of Greece would therefore breach the prohibition of monetary financing under the Treaty .

3. Specific observations

3.1 Consent of the MoF 3.1.1 The ECB notes that the Resolution Committee of the Bank of Greece is required, before deciding to take a resolution measure, to obtain the prior consent of the MoF in a broad range of circumstances. This provision purports to implement Article 3(6) of the BRRD. However, by requiring the MoF’s prior consent for all decisions pertaining to the sale of a business, the settingup of a bridge bank, asset separation, bail-in, write down or conversion , regardless of whether they have a direct fiscal impact or systemic implication, the draft law seems to go beyond Article 3(6) of the BRRD. Further, it is important that the Bank of Greece should have ultimate control over any decision related to a resolution matter that could affect the Bank of Greece’s financial independence . 3.1.2 Moreover, in requiring the Bank of Greece as the resolution authority to obtain the MoF’s prior consent before taking resolution actions in a broad range of circumstances, the question arises as to whether the MoF may be considered to be a second resolution authority alongside the Bank of Greece. The consulting authority is invited to consider whether the MoF’s prior consent should be more appropriately limited to those cases in which the resolution measures have a direct fiscal impact or systemic implications, as required by Article 3(6) of the BRRD. This would avoid the MoF acting de facto as a joint resolution authority alongside the Bank of Greece, since if this were the case the MoF would need to ensure the operational independence of its resolution function . 3.2 Conflicts of interests with other tasks of the Bank of Greece 32 33 3.2.1 The ECB has repeatedly noted that, in line with the BRRD , staff involved in carrying out the functions of a resolution authority in accordance with the Directive must be structurally separate and subject to separate reporting lines from those involved in carrying out prudential banking supervision tasks pursuant to applicable EU legal acts or with regard to the other functions of the relevant authority. The BRRD ‘exceptionally’ allows one authority to carry out both resolution and supervisory functions on the condition that adequate structural arrangements are put in place in order to ensure operational independence and to avoid conflicts of interest between that authority’s resolution function and its other functions. For example, the BRRD envisages structural separation being achieved by keeping the reporting lines for staff involved in carrying out resolution tasks separate from those used by staff involved in supervision activities . That separation should not, however, prevent the resolution function from having access to any necessary information which is available to the supervisory function .

3.2.2 Pursuant to existing law and the draft law, the Bank of Greece is required to ensure the operational and organisational independence of the department carrying out resolution functions and its staff to ensure there is no conflict of interest and to provide for the separation of tasks relating to the resolution function from the Bank of Greece’s other tasks. The ECB welcomes these provisions, as they appear to adequately address potential conflicts of interest between the resolution function and the Bank of Greece’s other tasks and functions. 3.3 Liability of the Bank of Greece 3.3.1 With regard to the provisions in the draft law on the liability of the Bank of Greece , the ECB notes that the Bank of Greece, as resolution authority, will now be held liable for gross negligence and wilful misconduct. It is not obvious why the Bank of Greece should assume the burden of those potential liabilities when the draft law requires it to obtain prior consent from the MoF before taking resolution actions in a broad range of circumstances . Against this backdrop, the ECB notes that, under the prohibition of monetary financing laid down in the Treaty, national legislation may not require an NCB to finance the public sector’s obligations vis-à-vis third parties . Given that potential liability issues represent substantial financial risks for the Bank of Greece , this should be taken into account in determining the entity that is liable to pay damages to third parties and in assessing the Bank of Greece’s ability to recover its resolution-related expenses. 3.3.2 The draft law contains provisions on the personal liability of the members of the decision-making bodies and the staff of the Bank of Greece. There may be concerns as to the proportionality of such liability, in particular, given that staff of other Greek public authorities are not subject to such personal liability in relation to third parties . 3.4 Ownership of bridge institutions and asset management vehicles 3.4.1 With regard to the bridge institution tool and the asset separation tool, the draft law sets out that the bridge institution or asset management vehicle must be wholly or partially owned by one or more public authorities which may include the resolution authority or the Resolution Fund. 3.4.2 While this provision implements the BRRD , where a central bank acts as resolution authority, it should be clarified, for the avoidance of doubt, that the central bank will in no event assume or finance any obligation of these entities. A central bank’s role as owner of such an entity must remain consistent under all circumstances with the prohibition on monetary financing under Article 123 of the Treaty, as supplemented by Council Regulation (EC) No 3603/93 . This prohibits, inter alia, any financing by a central bank of the public sector’s obligations vis-à-vis third parties. Moreover, this role must be performed without prejudice to central bank independence, in particular

its financial and institutional independence . The principle of financial independence requires NCBs to have sufficient means to carry out not only their ESCB-related tasks from an operational and financial point of view, but also their national tasks . For that reason, it should be ensured that if the Bank of Greece, as resolution authority, decides to become owner of such an entity, it is provided with sufficient financial and human resources to address the operational burden associated with it. 3.4.3 It is also worth noting that under the existing law, the HFSF is conferred with the role of shareholder of bridge institutions, and may be best placed in terms of expertise and resources to exercise the role of shareholder of bridge institutions and asset management vehicles under the draft law. 3.5 Cooperation and exchange of information between the Bank of Greece and other relevant authorities, including the Hellenic Capital Markets Commission 3.5.1 The ECB notes that the draft law provides for cooperation between the Bank of Greece, which is the resolution authority for credit institutions, and other relevant authorities, including the Hellenic Capital Markets Commission, which is the resolution authority for investment firms, in performing their respective tasks, each keeping in mind the impact of their performance on the other. 3.5.2 The ECB welcomes these provisions as they will enable the relevant entities to perform their statutory tasks in a coordinated fashion. In particular, they will facilitate the Bank of Greece’s performance of its financial stability mandate. Such arrangements are also in line with current ECB doctrine and the requirements under the BRRD, pursuant to which Member States must ensure that, where the central bank is not itself the resolution authority, the competent authority (i.e. the authority responsible for the prudential supervision of institutions) and the resolution authority engage in an adequate exchange of information with the NCB . 3.6 Resolution planning The draft law provides that recovery plans and resolution plans drawn up and maintained by an institution shall not assume any access to or entitlement to extraordinary public financial support beyond that granted by the Resolution Fund. However, they shall include, where applicable, a forward-looking analysis of how and when an institution may apply for the use of central bank liquidity in stressed conditions and what collateral is to be used in respect of such . While these provisions appear to be in line with the requirements of the BRRD, the ECB emphasises that they do not in any way affect the competence of the Eurosystem to decide independently and in its full discretion on the provision of central bank liquidity, based on the existing legal framework and within the limitations imposed by the monetary financing prohibition under the Treaty .

3.7 Withdrawal of authorisation With regard to Article 32(5) of the draft law, the SSM Regulation confers on the ECB the power to withdraw a credit institution’s authorisation. This applies both to institutions under the ECB’s direct supervision and to institutions under the supervision of the Bank of Greece. The drafting of Article 32(5) of the draft law should be clarified to reflect this.

This opinion will be published on the ECB’s website.

Done at Frankfurt am Main, 20 July 2015.

[signed]

The President of the ECB

Mario DRAGHI