Following G-20 recommendations about the need to establish common frameworks for prevention and crisis management, the Commission has published a Communication outlining its plans for an EU framework for crisis management in the financial sector. The plan foresees preparatory and preventive measures, as well as powers for remedies and resolution tools for authorities to apply in crisis situations.

The new framework described in the Communication will be broad-ranging and aims to equip authorities with common and effective tools and powers to tackle bank crises at the earliest possible moment, and avoid costs for taxpayers. This text sets out the main elements that will be part of the Commission's legislative proposals next year, and is the result of extensive consultations over the past months.

Beyond the immediate priority of putting in place efficient crisis management arrangements in all Member States, the Communication also includes a "roadmap" providing a longer term view of some of the major challenges which will need to be overcome in order to ensure smooth handling of crises.

Financial crisis management: Key types of measures

• Preparatory and preventive measures such as a requirement for institutions and authorities to prepare for recovery (i.e. dealing with serious difficulties faced by a bank) and resolution plans to ensure adequate planning for financial stress or failure, (such plans are called "living wills");
• Powers to take early action to remedy problems before they become severe such as powers for supervisors to require the replacement of management, or to require an institution to implement a recovery plan or to divest itself of activities or business lines that pose an excessive risk to its financial soundness;
• Resolution tools, such as powers to effect the takeover of a failing bank or firm by a sound institution, or to transfer all or part of its business to a temporary bridge bank, which would enable authorities to ensure the continuity of essential services and to manage the failure in an orderly way.

Implications of cross-border activities of European Banks

One of the key elements of Commission's Plan is the proposal to build on existing supervisory colleges to set up resolution colleges where supervisors and national authorities in charge of resolution would meet for the purposes of crisis preparation and management, to coordinate and cooperate as fully as possible in order to minimise any harmful effects of a cross-border bank failure. The Commission will also propose that the new European Supervisory Authorities and in particular the European Banking Authority, should have coordination and support roles in crisis situations, without impinging on the fiscal responsibilities of Member States.

The overriding objective will be to ensure that banks can fail without jeopardising wider financial stability. That means banks can be resolved in ways which minimise the risks of contagion and ensure continuity of essential financial services, providing a credible alternative to bank bail-outs such as those made since the beginning of the economic turmoil.

As previously set out in its Communication on bank resolution funds from May 2010, the Commission is also proposing that national funds should be set up, on the basis of contributions paid by banks, to fund the cost of future resolution measures and ensure that resolving a bank is a credible option.

This would prevent the present situation where moral hazard is pervasive across the system as no alternative to government bail-outs exist. The existence of common financing mechanisms which avoid use of taxpayer funds should enhance cross-border cooperation and facilitate advance planning of how the costs of resolving a cross-border institution should be shared.

The Commission also intends to examine the need for further harmonisation of bank insolvency regimes with a report by the end of 2012 and, alongside the review of the European Banking Authority in 2014, will assess how a more integrated framework for the resolution of cross-border groups might best be achieved.