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Additional Separation Conditional on the Recovery and Resolution Plan

A credible recovery and resolution plan implies that the bank stakeholders bear the costs of a possible bank failure and that there is no significant harm to the real economy, even in a crisis situation when many banks are in trouble at the same time. This would imply that no taxpayer money is under threat of being used in a bailout. A solid plan will also enhance the bank’s own risk management and potentially increase transparency of the bank to outsiders. The European Banking Authority (EBA) plays a central role as a standard-setter in ensuring that the recovery and resolution plans and their supervisory assessments are applied uniformly across the EU member states. The group proposed that if a bank’s recovery and resolution plan, assessed by the supervisor, is not acceptable, a more comprehensive separation of activities can be required than under the proposed mandatory separation.

Facilitating the Use of Bail-in Instruments

The European High-Level Expert Group on reforming the structure of the EU banking sector strongly promotes the European Commission’s proposal to use bail-in instruments to further increase the loss-absorbing capability of banks. In order to limit interconnectedness within the banking system, it is preferable that the bail-in instruments should not be held by investors within the banking sector. In order to create a liquid market for the bail-in instruments, it would be essential to carefully define their contractual properties in order to reduce uncertainty and ambiguity and hence facilitate their efficient market pricing. Therefore the Group of experts is of the opinion that the bail-in instruments should be applied to particular debt instruments and to make sure that investors know the eventual treatment of the respective instruments in a crisis situation.

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