European Resolution and Recovery Framework for Financial Institutions

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On 6 January 2011, the European Commission (the “Commission”) published a consultation paper on the technical details of a possible EU framework for bank recovery and resolution (the “Consultation Paper”). The paper follows the communication from the Commission dated 20 October 2010 on an EU framework for crisis management in the financial sector (the “Communication”).

The need for jurisdictions to ensure they have adequate frameworks to deal with failing institutions at an early stage, in particular to address some of the “moral hazard” issues arising in relation to institutions regarded as “too big to fail,” has been a key issue in the international response to the financial crisis. The G-20 leaders’ summit in Seoul in November 2010 endorsed the Financial Stability Board’s proposals in its report on reducing the moral hazard risk posed by systemically important financial institutions, dated 20 October 2010. The Basel Committee on Banking Supervision (“BCBS”) also published a report and recommendations in relation to cross-border resolution issues in March 2010, and its October 2010 report to the G-20 noted it had discussed conducting an evaluation of different legal and policy changes to assist authorities in addressing future needs for crisis management and resolution of financial institutions. The BCBS is continuing a review assessing the systemic importance of financial institutions at global level and a review on going concern loss absorbency that could be provided by financial instruments. Its proposals are likely to be published during 2011 and will inevitably have an impact on the EU Commission’s proposals as set out in the Consultation Paper.

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