Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on Cross-Border Financial Stability/Annexes

INTRODUCTION

This Memorandum is an extension and update of the 2005 Memorandum and is based on Council conclusions of 9 October 2007; and on the EFC Report of 5 September 2007 (doc. ECFIN/CEFCPE(2007)REP/53990) endorsed by the EU Finance Ministers and Central Bank Governors. The agreement of the Parties1 leading to this Memorandum is based on the following considerations:

(1) The integration of financial markets and financial infrastructures in the European Union (EU), together with the growing number of large and complex financial groups with cross-border operations, contributes to the efficiency and stability of the EU financial system. At the same time, financial integration increases the scope for cross-border and cross-sector contagion and thus the likelihood of a systemic crisis affecting more than one Member State. Financial stability is, therefore, a common concern for all Member States and the EU as a whole, and must be safeguarded on the basis of close cooperation among all Parties, taking also into account the wider international context.

(2) In order to limit the economic impact of a cross-border systemic financial crisis, the EU arrangements for crisis management and resolution must allow a timely and effective response. Crisis preparation in advance is necessary, while preserving sufficient flexibility to deal with the specific circumstances of any potential crisis. Accordingly, it is important to have in place at the EU level common principles, procedures and practical arrangements concerning cooperation among the authorities responsible for preserving financial stability.

(3) The Parties see this Memorandum as an appropriate instrument for setting out further arrangements, promoting cooperation between them and preparing for the management and resolution of a cross-border systemic financial crisis. The Parties will cooperate through appropriate procedures for sharing of information, views and assessments so as to facilitate the pursuance of their respective policy functions in the management and resolution of a crisis, and to preserve financial stability at a minimum cost. In particular, the Relevant Parties should at any time be in a position to timely engage in informed discussions amongst themselves at the cross- border level.

(4) Assessing the potential for systemic implications of a financial crisis is a necessary starting point for any coordinated action among the Relevant Parties. The Parties agree that such assessments should make use of a common analytical framework in order to enhance communication and facilitate agreement on a joint assessment. Responsibility for conducting these assessments lies with the Financial Supervisory Authorities and Central Banks. Finance Ministries should be kept fully informed of the process and the outcome of the assessments so as to ensure that a common systemic assessment can be promptly achieved among Relevant Parties at the national level.

(5) Cooperation between the Parties will take place on the basis of the existing institutional and legal framework for financial stability in Member States as well as the applicable Community legislation, fully respecting the roles and the division of responsibilities among the Parties. In The definitions to the words written in italics are found under "Key definitions used in the Memorandum". particular, in the context of this Memorandum, Financial Supervisory Authorities' responsibilities should be interpreted in accordance with the applicable Community directives, including the role of Group Supervisor, with regard to each authority's capacity to contribute to preserving the soundness of individual financial groups as well as of the financial system as a whole. Central banks’ responsibilities should be interpreted with regard to their functions relating to monetary policy and oversight of payment systems, as well as to their task to contribute to the financial stability. Finance Ministries’ responsibilities should be interpreted with regard to their overall political responsibility for the stability of the financial system and their role in the management and resolution of systemic financial crises, in particular regarding the involvement of public funds.

(6) Financial crisis situations may in practice involve a wider range of functions and authorities than those represented by the Parties, including deposit guarantee schemes, competition policy authorities or other public authorities. Certain financial crises may require cooperation with authorities whose jurisdiction lies outside the EU. In this context, the authorities of the European Economic Area (EEA) are invited to associate themselves to this Memorandum.

(7) The Parties emphasise that this Memorandum is designed to facilitate the management and resolution of cross-border systemic financial crises and will seek to facilitate private sector solutions, to minimise the economic and social costs, while promoting market discipline and limiting moral hazard. This Memorandum does not create any legal commitment for any of the Parties to intervene in favour of anyone affected by a financial crisis.

(8) Those Parties that have specific common financial stability concerns are encouraged to develop Voluntary Specific Cooperation Agreements with a view to provide for more specific and detailed, procedures and arrangements of crisis management and resolution for their respective countries and in relevant contexts. An example of a Voluntary Specific Cooperation Agreement is attached to the Common Practical Guidelines in Annex 1 to this Memorandum.

Key definitions used in the Memorandum

Parties: Signatories of this Memorandum, i.e. Financial Supervisory Authorities, Finance Ministries and other Ministries according to national competencies, Central Banks in Member States and the European Central Bank;

Relevant Parties: A sub-set of signatories whose policy-making functions may be significantly affected by a specific financial crisis situation;

Other Relevant Bodies: Public/private entities who are not signatories of this Memorandum, but whose involvement in the procedures may be necessary (i.e. competition authorities, Deposit Guarantee Schemes, authorities in third countries);

Financial Supervisory Authority: Authority in charge of the supervision of banks and/or, insurance companies and/or investment firms and/or occupational pension funds and/or financial markets, as well as the supplementary supervision of the regulated entities in a financial conglomerate. There can be more than one Financial Supervisory Authority in a given country;

Domestic Standing Group: A group which consists of the Financial Supervisory Authorities (or a sub-set thereof), Central Banks, Finance Ministries at the national level, with the objective to enhance preparedness in normal times and facilitate the management and resolution of a financial crisis. Such a group could be extendable to also include Other Relevant Bodies.

National Coordinator: An Authority designated by the Parties of the Domestic Standing Group which, taking into account its legal competencies, is responsible for the overall coordination of activities in order to enhance preparedness in normal times and facilitate the management and resolution of a crisis at the national level in a particular crisis situation; The Party assuming the role of National Coordinator may vary according to the nature and stage of the crisis.

Cross-Border Stability Group: A group which involves all Relevant Parties from different Member States with the objective to enhance preparedness in normal times and which may facilitate the management and resolution of a cross-border financial crisis. A Cross-Border Stability Group is chaired by a Cross-Border Coordinator designated by the Group.

Cross-Border Coordinator: The Party from the home country which is responsible for the overall coordination of actions in a particular cross-border context, and which may vary according to the nature and stage of the crisis.

Group Supervisor: The supervisory authority, responsible for the supervision on a consolidated basis of an EU cross-border financial group, as defined in the current Community legislation;

Financial group: A bank, banking group, insurance undertaking or insurance group, financial conglomerate and investment firm, which is important in several Member States due to significant subsidiaries or branches in host countries;

Financial Infrastructure: Payment systems, trading and post-trading systems and other market infrastructure which may be important in several Member States.

Home country: The country of Group Supervisor responsible for the supervision on a consolidated basis.

Host country: The country which hosts relevant subsidiaries or branches.

Cooperation arrangements: Arrangements agreed among Parties, possibly involving also Other Relevant Bodies, for the purpose of preserving financial stability as defined in the MoUs or corresponding engagements between authorities which specify the content of such agreements. Cooperation arrangements typically specify details of the functioning of the Domestic Standing Groups and may define Cross-Border Stability Groups.

College of Supervisors: A permanent, although flexible, structure for cooperation and coordination among supervisors responsible for and involved in the supervision over the different components of a cross-border financial group.

THE PARTIES TO THIS MEMORANDUM OF UNDERSTANDING AGREE TO THE FOLLOWING:

1. Objective and scope of the Memorandum

1.1. Building on the existing national and EU legislation, the objective of the Memorandum is to ensure cooperation in financial crises between Financial Supervisory Authorities, Central Banks and Finance Ministries through appropriate procedures for sharing of information and assessments, in order to facilitate the pursuance of their respective policy functions and to preserve stability of the financial system of individual Member States and of the EU as a whole.
1.2. This Memorandum applies both (a) in normal times to enhance the preparedness of the Parties to deal with a cross-border systemic financial crisis; and (b) in a crisis situation regardless of its origin, affecting the stability of the financial system in at least one Member State with a potential cross-border systemic impact in other Member States and involving at least one financial group or affecting the financial infrastructure or the functioning of financial markets.
1.3. A cross-border systemic crisis, having its origin in individual financial groups, is most likely to involve banks or banking groups, due to the specific features of banks balance sheets. In view of their relevance for the stability of the financial system, this Memorandum will also apply with regard to the possible cross-border and systemic implications of events originating in or propagating across sectors of the financial system other than banking, and involving financial conglomerates, insurance groups or investment firms.
1.4. The Parties commit themselves to open, full, constructive and timely cooperation; and to prepare and search for jointly acceptable solutions. Cooperation between the Parties both in normal times and financial crises will involve:

1. setting up an appropriate framework for cooperation with the aim to prepare common solutions and actions to manage potentially detrimental effects of a crisis;
2. exchanging information relevant for the preparation, management and resolution of a cross- border systemic financial crisis, including assessments of the situation in order to allow the Relevant Parties to promptly assess the systemic nature and cross-border implications of the crisis, making use of the common framework for systemic assessments on the basis of the agreed template (summarised in Annex 2);
3. coordinating public communication; and,
4. establishing contingency plans, including stress testing and simulation exercises.


1.5. The Common Practical Guidelines in Annex 1 of the Memorandum provide more detailed operational guidance on the steps and procedures to be taken by the Parties in normal times and during a crisis to manage a cross-border systemic financial crisis. The guidelines serve as a useful tool to further develop the procedures for cooperation between different Parties with common interests and reflect the common understanding about their respective roles.

2. Common principles for cross-border financial crisis management ^[1]

2.1. The Parties agree to follow a set of common principles in the management of any cross-border financial crisis, which involves at least one banking group which (i) has substantial cross-border activities and (ii) is facing severe problems which are expected to trigger systemic effects in at least one Member State; and (iii) is assessed to be at risk of becoming insolvent. The common principles are the following:

1. The objective of crisis management is to protect the stability of the financial system in all countries involved and in the EU as a whole and to minimise potential harmful economic impacts at the lowest overall collective cost. The objective is not to prevent bank failures.
2. In a crisis situation, primacy will always be given to private sector solutions which as far as possible will build on the financial situation of a banking group as a whole. The management of an ailing institution will be held accountable, shareholders will not be bailed out and creditors and uninsured depositors should expect to face losses.
3. The use of public money to resolve a crisis can never be taken for granted and will only be considered to remedy a serious disturbance in the economy and when overall social benefits are assessed to exceed the cost of recapitalisation at public expense. The circumstances and the timing of a possible public intervention can not be set in advance. Strict and uniform conditions shall be applied to any use of public money.
4. Managing a cross-border financial crisis is a matter of common interest for all Member States affected. Where a bank group has significant cross-border activities in different Member States, authorities in these countries will carefully cooperate and prepare in normal times as much as possible for sharing a potential fiscal burden. If public resources are involved, direct budgetary net costs are shared among affected Member States on the basis of equitable and balanced criteria, which take into account the economic impact of the crisis in the countries affected and the framework of home and host countries’ supervisory powers.
5. Arrangements and tools for cross-border crisis management will be designed flexibly to allow for adapting to the specific features of a financial crisis, individual institutions, balance sheet items and markets. Cross-border arrangements will build on effective national arrangements and cooperation between authorities of different countries. Competent authorities in the Member States affected by a crisis should be in a position to promptly assess the systemic nature of the crisis and its cross-border implications based on common terminology and a common analytical framework.
6. Arrangements for crisis management and crisis resolution will be consistent with the arrangements for supervision and crisis prevention. This consistency particularly refers to the division of responsibilities between authorities and the coordinating role of home country supervisory authorities.
7. Full participation in management and resolution of a crisis will be ensured at an early stage for those Member States that may be affected through individual institutions or infrastructures, taking into account that quick actions may be needed to solve the crisis.
8. Policy actions in the context of crisis management will preserve a level playing field. Especially, any public intervention must comply with EU competition and state-aid rules.
9. The global dimension will be taken into account in financial stability arrangements whenever necessary. Authorities from third countries will be involved where appropriate.


2.2. The common principles include references to banks and banking groups, reflecting their specific role in the financial system. To the extent that some of the principles may be of relevance to

financial markets or other types of financial groups, they also apply to them, in case the stability of the financial system is at risk with a potential cross-border systemic impact.

3. Cooperation arrangements

3.1. Cooperation among the Parties at a national level is based on the Domestic Standing Groups. In line with the ECOFIN conclusions of 9 October 2007, these Groups facilitate the operation of this Memorandum at a national level, including by: determining which Party is the National Coordinator in particular situations, in line with its legal competencies; reaching common views on systemic assessments at a national level; developing tools for crisis management; setting out contingency plans in case of a potential national or cross-border systemic financial crisis; organising crisis simulation exercises; and taking decisions on the practicable ways of organising cross-border contacts.
3.2. Those Parties with common financial stability concerns stemming from the presence of at least one financial group are encouraged to develop as soon as possible Voluntary Specific Cooperation Agreements (VSCA), providing for more specific and detailed crisis management procedures taking into account the particular circumstances and contexts relevant for those Parties. For illustrative purpose, to facilitate their development by the Relevant Parties, an example of such an agreement for financial groups is attached to the Common Practical Guidelines.
3.3. Relevant Parties sharing specific common financial stability concerns should consider the establishment of Cross-Border Stability Groups, building on the Domestic Standing Groups and existing cross-border networks of Supervisory Authorities (Colleges of Supervisors) and Central Banks. Such groups will have a flexible and practicable set-up consistent with the existing networks, reflecting the particular needs of the Relevant Parties with the objective to enhance crisis preparation in normal times so as to facilitate the management and resolution of a cross- border crisis.

4. Activation of procedures and responsibility for co-ordination in a cross-border crisis

4.1. The Party who becomes aware of the emergence of a potentially serious financial disturbance will inform as soon as practicable the National Coordinator or the Cross-Border Coordinator. The National Coordinator or the Cross-Border Coordinator will ensure that information will be shared among the Relevant Parties. Similarly, a request for information or assessment from one Relevant Party to another will be promptly considered and fulfilled to the maximum extent possible without delay.
4.2. Any Relevant Party may request the Cross-Border Coordinator to activate the crisis procedures. When the cross-border crisis cooperation procedures are activated, all Relevant Parties shall be informed at an early stage.
4.3. Financial Supervisory Authorities and Central Banks are responsible for assessing the systemic nature of the financial crisis and its cross-border implications. All members of the Domestic Standing Groups shall be kept fully informed of the process and outcome of the assessments. They are responsible for facilitating a common systemic assessment among Relevant Parties at national level. Cross-Border Stability Groups may help to reach a common understanding among the Relevant Parties of the systemic nature of the crisis in the cross-border context.
4.4. As a rule, the National Coordinator of the home country assumes the task of Cross-Border Coordinator in the management of a cross-border financial crisis. The Cross-Border Coordinator may delegate tasks to authorities in a host country. The Party assuming the role of coordinator may vary according to the nature and the stage of the crisis, reflecting the division of responsibilities between the home country Parties which is as follows:

- In the case of a crisis affecting a cross-border financial group, the Group Supervisor shall coordinate the gathering and dissemination of information and alert the Relevant Parties. It shall also plan and coordinate supervisory activities, including the assessment of the systemic nature of the crisis and its cross-border implications as well as possible corrective actions towards individual institutions within the supervisors' competencies. Where supervisory functions are performed in separate entities at a national level, the Group Supervisor will be responsible for establishing contacts to insurance, occupational pensions' and investment firms' and financial markets' supervisors.
- Without prejudice to the responsibilities of the supervisors of financial markets and financial infrastructures, in a crisis situation potentially affecting the performance of central banking functions, the relevant Central Banks shall coordinate actions among themselves in addressing the situation, and shall cooperate with Financial Supervisory Authorities and other Central Banks. Where a liquidity crisis could affect a cross-border financial group with a potential for systemic implications, the Central Bank in the home country will coordinate actions among relevant Central Banks. The ECB and the Eurosystem will be involved in accordance with their responsibilities. The Central Banks involved will cooperate closely with the banking supervisory authorities and are expected to inform the Finance Ministries in the case of provision of Emergency Liquidity Assistance at the national level in line with the existing national legal framework.
- Where a solvency crisis could affect a cross-border financial group with a potential for systemic implications which may imply the use of public funds, the Finance Ministry in the home country will coordinate the process of deciding on whether, to what extent and how public funds will be used. The Finance Ministry of the home country shall identify in normal times procedures to be applied and Parties to be involved with a view: to propose solutions respecting state aid rules pursuant to the EC Treaty in a crisis situation and to ensure timely decisions on the use of public funds, including by reaching agreements on burden sharing based on equitable and balanced criteria.


4.5. The Parties undertake to co-ordinate any policy measures that may be required in the context of the crisis situation, without prejudice to any urgent decision by a Relevant Party as it fulfils its

responsibility according to Community and national legislation.

5. Information exchange

5.1. The Relevant Parties stand ready to share available information and assessments necessary to fulfil their respective role in the preparation and the management of a cross-border systemic financial crisis.
5.2. In normal times, in order to enhance their preparedness for a crisis, the Relevant Parties will engage, within their respective competences, in the regular sharing of information and assessments relating to issues of common interest and of information needed for assessing the systemic implications of financial crises, and will create efficient cooperation procedures for information sharing, timely planning and joint crisis management.
5.3. The Cross-Border Coordinator shall ensure, in light of the particular features of the potential crisis, that information will be shared among Relevant Parties in view of the possible effects of the crisis on financial groups, financial infrastructures or the functioning of financial markets within the competence of those Parties.
5.4. At the cross-border level, the Relevant Parties will share information with, as a rule, their respective counterparts in other countries. Only in exceptional cases, where necessary, information may be transmitted directly at the cross-border level between different types of authorities with concurrent transmission to the corresponding counterpart authority in the country concerned.
5.5. In the cross-border context, each Party is expected to use its normal channels of cooperation where in place, namely the Colleges of Supervisors and the networks of Central Banks or other authorities.
5.6. In cases where wider multilateral cooperation among the Parties needs to be activated, such as in major disturbances that may affect the EU as a whole, existing committees in the EU may provide a platform for exchange of information and assessments with a view towards facilitating the timely actions and decisions by the Relevant Parties.
5.7. The Common Practical Guidelines in Annex 1 present examples of concrete items of information that are likely to be needed, shared and assessed between the Parties, without prejudice to specific information needs to be determined by the Relevant Parties in a potential or particular crisis situation. The analytical framework in Annex 2 is the base to be used in the systemic assessment of a crisis.

6. Public communication

6.1. The Relevant Parties in a crisis situation will, to the maximum extent possible, co-ordinate public communications relating to the specific circumstances, and avoid making announcements to the public on their own. Public statements are issued after consulting the other Relevant Parties. Only in exceptional circumstances with an overriding and sudden public need, the Parties may issue separate statements. The Parties commit to share with each other, before releasing, any written statement to the public.
6.2. The Parties agree to discuss the challenges and propose solutions, in advance, related to the communication strategies. Members of the Domestic Standing Groups should work in advance towards addressing the practical and legal issues related to communication in their respective countries.
6.3. The National Coordinator is in charge of managing the communication process to the public between the Relevant Parties at a national level. The Cross-Border Coordinator is in charge of coordinating the public communication process at a cross-border level.

7. Contingency planning

7.1. The Parties will endeavour to conduct, as part of contingency arrangements for managing crisis situations, stress-testing and simulation exercises. The primary goal of such exercises would be to enhance the preparedness of authorities for handling potential financial crisis situations with cross-border systemic implications. The Parties should share, by utilising the existing EU committees, the methods and assumptions used in organising and conducting such stress-testing and crisis simulation exercises.

8. Confidentiality

8.1. Any information exchanged and received by virtue of the application of the provisions of this Memorandum is subject to conditions of confidentiality and professional secrecy as provided in Community and national legislation.
8.2. The Parties will maintain, vis-à-vis third parties, the confidentiality of any request for information made under this Memorandum, the contents of such requests, the information received, and the matters arising in the course of cooperation without prejudice to relevant Community and national legislation.
8.3. The Parties will ensure that all persons dealing with, or having access to, such information are bound by the obligation of professional secrecy.

9. Implementation and review of the Memorandum

9.1. The relevant EU committees bringing together the Parties to this Memorandum shall exchange views on the main features of this Memorandum and contribute to its full implementation at the EU level and report to the Economic and Financial Committee on a regular basis.
9.2. The functioning of this Memorandum shall be tested in an EU wide crisis simulation exercise. The Economic and Financial Committee and the Parties shall review this Memorandum within three years of its entry into effect and propose, if deemed necessary, amendments.
9.3. After its entry into effect, Other Relevant Bodies may sign this Memorandum if agreed by the Parties. The Economic and Financial Committee shall coordinate this process.

10. Nature of the Memorandum

10.1. As the provisions of this Memorandum are not legally binding on the Parties, they may not give rise to any legal claim on behalf of any Party or third parties in the course of their practical implementation.
10.2. The provisions of the Memorandum do not prejudge or assume any particular decisions or remedies to be taken in crisis situations.
10.3. This Memorandum complements other present and future arrangements on cooperation between Relevant Parties. In this context, the Parties commit to reviewing their existing arrangements in order to bring them in line with this Memorandum. They also commit to keep consistency with this Memorandum when developing Voluntary Specific Cooperation Agreements illustrated in the example attached to the Common Practical Guidelines in Annex 1.

11. Entry into effect

11.1 This Memorandum shall enter into effect on 1 June 2008 and replace the Memorandum of Understanding on Cooperation between the Banking Supervisors, Central Banks and Finance Ministries of the European Union in Financial Crisis Situations, which entered into force on 1 July 2005.

Note

1. 2 The common principles endorsed by the ECOFIN Council of 9 October 2007.