Memorandum of Understanding on Cooperation between the Financial Supervisory Authorities, Central Banks and Finance Ministries of the European Union on Cross-Border Financial Stability/Annex 1

Introduction

The common practical guidelines for crisis management provide detailed operational guidance and reflect a common understanding between the Parties of their respective role as well as of the steps and procedures to be taken in relation to a cross-border systemic financial crisis situation.

The guidelines describe what processes should be activated for:

1) strengthening crisis preparedness in normal times;

2) crisis alert;

3) crisis assessment;

4) crisis management network;

5) crisis management; and

6) external communication.

These processes should involve the cooperation and coordination among the Parties to enhance their preparedness in normal times to deal with the different stages of the crisis. The main objective of the coordination is to ensure that information is shared and that decisions, policy measures and related external communications of the Relevant Parties are coordinated and consistent.

The Parties with common financial stability concerns stemming from the presence of one or several financial groups are encouraged to develop Voluntary Specific Cooperation Agreements (VSCA) which are consistent with the MoU and which defines more detailed procedures to be put in place in normal times and to be activated in a crisis situation. As outlined in the example in attachment to these guidelines, these agreements will, in greater detail, describe the operational cooperation between Parties in the relevant countries and in relevant contexts. Well-defined governance, oversight and crisis management arrangements are also needed for systemically important financial infrastructures operating across borders.

In the VSCAs, in order to enhance crisis preparedness, the Relevant Parties may agree inter alia:

- to establish and utilise a Cross-Border Stability Group (CBSG) as a cooperation forum for the Parties of the VSCA;
- to develop procedures for regular exchange of information and assessments regarding the common components of the respective financial systems of the countries concerned;
- to develop and conduct assessments of various systemic problems and their interactions based on a common terminology and a common analytical framework using the agreed systemic assessment framework (summarised in Annex 2 of the Memorandum);
- to design practical procedures and arrangements for coordinated decision-making and to check the availability of tools and their interoperability for cross-border crisis management;
- to develop procedures that facilitate the evaluation of costs and the possible sharing of a potential fiscal burden;
- to address public communication issues; - to develop contingency arrangements for managing crisis situations, including by developing and conducting crisis management simulation exercises and stress testing.

1. Strengthening crisis preparedness in normal times

1. In order to be able to act timely and effectively when a potential crisis situation occurs, the Relevant Parties will enhance their preparedness in normal times in order to comply with the processes covered in these guidelines, i.e. crisis alert, crisis assessment, crisis management network, crisis management and external communication.
   
2. Parties will have in place contact lists of persons with sufficient seniority and communicate them to the other Parties in order to facilitate the prompt activation of the relevant coordination arrangement. Each Party is responsible for updating details of its members on the contact list on a continuous basis and for communicating them to the Cross-Border Coordinator who is responsible for distributing the list to the Parties regarding each particular financial group or financial infrastructure.
   
3. Finance Ministries, or other Ministry in accordance with national law, should establish procedures to prepare for financial facilities and possible sharing of fiscal burden and to initiate decision-making procedures in this regard at a national level by involving Relevant Parties and Other Relevant Bodies.
   
4. In order to allow communication among Relevant Parties to take place promptly whenever needed, secure means of communication (i.e. video-conferencing, tele-conferencing, e-mails) shall be established in normal times to allow confidential exchange of information and conference calls to take place. If a crisis breaks out, adequate processes and devices should be in place for exchanging information securely. The communications facilities should be tested in crisis simulation exercises.
   
5. Relevant Parties are expected to exchange information within their respective competencies both in normal times and in a crisis situation and to ensure that all relevant data is available rapidly in a crisis situation. Where Parties have common financial stability concerns, a common database consisting of publicly available actual data and a template for confidential up-to date data could be developed as described in Annex B to the example of a Voluntary Specific Cooperation Agreement. In order to ensure preparedness in a crisis situation, the Relevant Parties should consider, in normal times, sharing and reflecting upon the following information items that are likely to be needed in a crisis:
   
   (i) Qualitative assessments on the emergency situation;
   (ii) Systemic implications of a potential crisis for the domestic financial system and the systemic impact on other countries' financial systems as well as on the EU’s financial markets as a whole, in line with the framework for systemic assessments outlined in Annex 2;
   (iii) Specific channels of contagion of the potential crisis to financial groups, financial infrastructures or the functioning of financial markets;
   (iv) Consideration of other relevant economic and budgetary implications of a crisis situation;
   (v) Constraints to the implementation of policy measures;
   (vi) Updates of relevant developments.
   
6. Consideration should be given beforehand on how to deal with publicly listed financial groups and infrastructure in the context of public intervention. In particular, a crisis situation affecting a publicly listed financial group should be addressed rapidly enough to allow legally required transparency rules to be fulfilled in the light of legal obligations of the institutions and the Parties. The EU regulation or national laws include provisions on the public disclosure that should be carefully interpreted before a crisis emerges. The provisions of the EU Market Abuse Directive provide the basis for disclosure in such occasion, including circumstances when the public disclosure of information may be delayed for a limited period of time.^[1]
   
7. The Domestic Standing Groups (DSG) should beforehand look into possible problems that may arise in the management of a crisis in order to avoid any conflicts in a crisis situation between the Relevant Parties. As part of the preparedness in normal times, the DSGs should be formed in a manner that provides a clear mandate, reflects a representation of the Parties at an sufficient level of seniority, ensures effective functioning and provides for accountability at a national level so as to be in a position to contribute to the formulation of policy proposals on the management and resolution of a crisis.
   
8. While recognising that the specific issues can most effectively be dealt with in small groupings of Relevant Parties, each Party may use in normal times, as appropriate, their usual channels for the exchange of information at a cross-border level. The Financial Supervisory Authorities may use the Level 3 committees (CEBS, CESR, CEIOPS) or Colleges of Supervisors (where they are in place) to facilitate coordination between Supervisory Authorities; Central Banks may use, inter alia, the ESCB Committees (Banking Supervision Committee, Market Operations Committee, Payment and Settlement Systems Committee); and the Financial Ministries may use the Financial Services Committee to foster cooperation in normal times. Financial Supervisory Authorities, Central Banks and Finance Ministries should, as much as possible, cooperate with their respective counterparts in other countries.
   
9. The DSG of the home country is responsible for deciding to involve Other Relevant Bodies from 3rd countries.
   

   2. Crisis alert

10. Crisis alert should ensure that: (i) relevant information is transmitted without delay to the Cross- Border Coordinator; and that (ii) the Cross-Border Coordinator disseminates without delay the relevant information to the other Relevant Parties.
    
11. Concerning actions to be taken on a cross-border basis, the Cross-Border Coordinator should activate the subsequent steps and procedures as outlined in these guidelines. The activation may be requested by any Relevant Party. When the procedures are activated, all Relevant Parties shall be involved at an early stage.
    
12. To the best of its ability, it is the responsibility of each Party to share, with the Cross-Border Coordinator, the necessary information needed by the Relevant Parties to fulfil their responsibilities.
    
13. Any Party which is aware of facts or events that may give rise to significant problems for a financial group, financial infrastructures or the functioning of financial markets, will share that information, as soon as possible, with the Cross-Border Coordinator, with the corresponding Party in the home country and with the members of its Domestic Standing Group and with the Eurosystem/ECB where appropriate.^[2] The Cross-Border Coordinator, the Group Supervisor, the Central Bank of the home country or the Eurosystem/ECB will disseminate the information as soon as practicable to the other Relevant Parties.
    
14. Following a crisis alert, at least three actions should be launched without delay by the National Coordinator in the home country, namely:
    
    (i) conduct a crisis assessment as described in section 3;
    (ii) activation of crisis management networks as described in section 4; and (iii) coordination of communication among authorities as well as with the financial group or financial infrastructure concerned as described in section 6.
    

    3. Crisis assessment

    • After a crisis alert, the Group Supervisor or the home country Central Bank or, the Eurosystem/ECB, where appropriate, will immediately assess the systemic implications. The other counterparts, namely Financial Supervisory Authorities or Central Banks informed as outlined in Section 2 will do likewise.
      
    • The Parties commit to employ a common terminology and a common analytical framework in assessing the systemic nature of the financial crisis and its cross-border implications, as outlined in Annex 2. For this purpose, they will use the template for a systemic assessment framework which may be further developed as agreed among the Parties.
      
    • The first goal of the assessment phase is to assess the systemic implications of the crisis. Furthermore, the assessment phase should:
      
      (i) consider the link between the financial group and its shareholders in order to facilitate a potential private sector solution of the crisis; and the possibilities offered by the available tools such as possible preventive role of the deposit guarantee schemes;
      (ii) gather and update data that could be used as a basis for possible public interventions at a later stage so as to assess the possibilities to utilise various tools; and, if intervention requiring public funds is considered, as an input for objective criteria for burden sharing. As an example, for each country affected by the crisis, the following indicators could be used in a crisis situation and made available at the latest during the assessment phase:
      
      - the share of deposits of the relevant bank and of other directly affected institutions in each country;
      - the share of assets (in terms of accounting values/market values/risk-weighted values) of the relevant bank and of other directly affected institutions;
      - the share of revenue flows of the relevant bank and of other directly affected institutions banks; and
      - the share of payment system flows of the relevant bank and of other directly affected institutions.
      
      The nature of the crisis will eventually determine the specific indicators needed.
      
    • The Members of the Domestic Standing Group are responsible for reaching, at the national level, a common view on the systemic assessments conducted by the Financial Supervisory Authority and the Central Bank. The initial assessments should reach without delay the members of the Domestic Standing Group^[3] and shared assessment should be made available to all Relevant Parties. Further assessments will be made as required. These assessments are used to identify the severity of the crisis, the need for policy actions and the need to involve other Relevant Parties or Bodies.
      
    • Based on the results of the assessments made by the Relevant Parties regarding the systemic implications of the crisis, the Cross-Border Coordinator is responsible for working towards a common understanding about the severity of the crisis on a cross-border basis and keep the Relevant Parties informed of the crisis situation; and propose which level of involvement is required by the Relevant Parties in the decision making process in the particular circumstances. In parallel, it is the responsibility of each host country to assess the significance of problems in their domestic markets. If necessary according to the impact assessment, the involvement of other Relevant Bodies from 3rd countries will be initiated by the Cross-Border Coordinator.
      

    4. Establishing a crisis management network

15. The management of a cross-border crisis requires close cooperation between the Relevant Parties, and well structured coordination based on procedures and processes agreed upon in normal times, taking into account the responsibilities of the Parties as set out in the MoU.
    
    Domestic Standing Group
    
    
16. The Domestic Standing Groups (DSGs) shall operate according to their national mandates and contribute to the efficient cooperation among Parties at a national level as well as to the functioning of the cross-border cooperation. In a crisis situation affecting the stability of the domestic financial system, the DSG facilitates the management and resolution of the emerging crisis situation at a national level. The Parties of the DSG shall designate a National Coordinator which is responsible for facilitating the coordination of actions at a national level and the exchange of information at a cross-border level. The National Coordinator may be any of the Relevant Parties in line with their legal competencies and depending on the specific features of the crisis. The National Coordinator(s) will communicate the national assessment(s) to the Cross-Border Coordinator.
    Where a financial conglomerate is involved, the coordinator of the specific conglomerate will need to be involved (see FCD art. 11a 2002/87/EC)
    
    Cross-Border Stability Group
    
    
17. The Cross-Border Stability Group (CBSG) is a voluntary structure typically composed of the relevant Financial Supervisory Authorities, the relevant Central Banks and the relevant Finance Ministries from the countries that share financial stability concerns. The CBSG may be developed between Relevant Parties in different countries with a focus on one or several financial groups.
    
18. The functioning and composition of the CBSG should be flexible and correspond to particular needs. CBSGs should engage in regular cooperation to enhance crisis preparedness in normal times and convene both in 'restricted composition(s)' (i.e. small groups involving Relevant Parties according to needs and competences) and in 'full composition' (all Relevant Parties represented). In a crisis situation CBSG should contribute, depending on the specific crisis, to the resolution and management of a crisis. Meetings should take place regularly but their sequence depends on particular needs, for example in the context of crisis simulation exercises and stress testing in normal times.
    
19. While the CBSG could form an integral part of cooperation and coordination of actions in crisis situation, it can also enhance preparedness to deal with crisis in normal times taking into account the work undertaken in other fora (e.g. Domestic Standing Groups, Colleges of Supervisors and networks of Central Banks). In a crisis situation, the CBSG can support the planning of effective policies for the management of cross-border financial crisis. The CBSG will coordinate the sharing of assessments of the crisis situation provided by the countries involved.
    
20. If a Cross-Border Stability Group is not in place, the National Coordinator designated by the home country Domestic Standing Group in line with the paragraph 3.1 and 4.4 of the Memorandum will assume the role of Cross-Border Coordinator and shall establish the relevant contacts in order to manage the situation. Delegation of tasks of Cross-Border Coordinator to a Party other than home country in the case of a financial group is possible. In case where a potential crisis situation may affect a cross-border financial group, the Cross-Border Coordinator will alert the Relevant Parties without delay and activate contacts to the relevant National Coordinators or to the members of the Cross-Border Stability Group, where established.
    

    5. Crisis management

    • All Relevant Parties should assess the use of possible remedial measures and take part in the implementation of the agreed actions. Depending on the crisis situation, the Cross-Border Coordinator can be changed between the Parties of the home country, yet continued close coordination between the Parties will be required.
      
    • In the design of actions, the first priority is given to private sector solutions. The Cross-Border Coordinator is responsible for establishing contacts with the private sector and the coordination of subsequent policy actions that follow the initial assessment, unless otherwise agreed.
      
    • All Relevant Parties shall cooperate actively and closely in order to identify possible solutions to manage and resolve the crisis, either private or public, or a mix of them, and they shall assess the cost of various options to the extent possible.
      
      Supervisory functions
      
      
    • In a crisis, the Group Supervisor will plan and coordinate the supervisory activities and will, in close cooperation with the home country Central Bank, coordinate the management of the situation, with a view towards:
      
      (i) specifying the assessment of the situation based on more detailed information provided by the Relevant Parties;
      (ii) reaching a common understanding of the crisis situation among relevant Financial Supervisory Authorities; and
      (iii) identifying possible remedial measures. Each Financial Supervisory Authority and Central Bank is responsible for assessing the systemic nature of the crisis.
      
      

    Central banking functions
    
    

21. If there is a liquidity crisis, the home country Central Bank, in close cooperation with the Group Supervisor and the other relevant Financial Supervisory Authorities and other Central Banks concerned, will manage the situation, including a possible Emergency Liquidity Assistance (ELA) intervention. The Eurosystem/ECB will be involved in accordance to its responsibilities. The assessment of the financial condition of the financial group will rely to a large extent on the supervisory assessments prepared on the basis of the pertinent supervisory arrangements for such a group, possibly under the coordination of the Group Supervisor. The Central Banks involved are expected to inform Finance Ministries at the national level in line with the existing national legal framework in the case of provision of Emergency Liquidity Assistance.
    
22. Without prejudice to the competences of financial markets supervisors, regardless of the domicile of the different parts of the distressed financial group, if a crisis materialises through an event relating to the liquidity conditions of the markets or to the functioning of payment or securities settlement systems, or resulting in a disruption to a particular financial market, the home country Central Bank and the host country Central Banks overseeing those markets and systems, and the Eurosystem/ECB where appropriate, will be responsible for managing the situation and will coordinate action among Central Banks in close cooperation with Financial Supervisory Authorities in line with the existing cooperation agreements in this field.
    
    Public sector functions
    
    
23. In the light of the possible need to use public funds to resolve a crisis, Finance Ministries will be closely involved, at an early stage, in the process of crisis management and resolution. The Finance Ministries should consider the public sector actions^[4] available for managing and resolving a crisis, assess the possible fiscal burden to be shared and launch the necessary procedure to initiate decisions taking into account that timely decision must be taken at a high political level to resolve the crisis.
    
24. If public resources are likely to be needed to resolve the crisis, the Finance Ministry of the home country will coordinate the process of deciding on whether, to what extent and how public funds will be used, with the relevant Finance Ministries in other countries; and involve relevant Financial Supervisory Authorities and Central Banks.
    
25. In this context, agreement should be reached on the sharing of the direct budgetary net costs among the affected countries on the basis of equitable and balanced criteria. ^[5] If needed, the Finance Ministry of the home country will make a proposal for the sharing of financial burden among the affected Member States. These criteria will be guided by the principles defined in section 2 of the MoU and take into account the economic impact of the crisis in the countries affected and the framework of home and host countries’ supervisory powers. They will also take into account the indicators set up during the assessment phase, while recognising the specificities of crisis situations. To this end, Finance Ministries of the home and host countries should reach a common understanding on ex-post burden and how it will be shared. If public resources will be needed, state aid rules pursuant to the EU Treaty shall be respected. The Finance Ministries will, as early as possible, establish contacts with the DG Competition of the European Commission on a confidential basis and at a high level to ensure a smooth and timely decision-making process.
    
    Monitoring
    
    
    • As part of the crisis management functions, National Coordinators in each country involved should endeavour that appropriate procedures are in place to ensure the necessary monitoring, governance and follow-up of the actions and the continuity of crisis management functions in various stages of a crisis.
      
      

    Involvement of other bodies or authorities
    
    

26. The Cross-Border Coordinator should endeavour at an early stage to involve other Relevant Bodies that are likely to be involved in the management of the cross-border crisis, including especially the deposit guarantee schemes in some countries.
    
    

    6. External communication

27. Communication towards the public will, to the maximum extent possible, be handled in a coordinated fashion at all stages of the crisis (alert, assessment, management), taking into account the possibility of exercising discretion regarding the information that should (or should not) be disclosed in order to maintain market confidence in specific cases referred to in paragraph 6 of the Guidelines.
    
28. The Relevant Parties should prepare joint public statements even in the case where only one Party has to make such a statement, if the interests of the other Parties may be at stake. The Relevant Parties will share “terms of references" (that are not released to the public) so as to facilitate the consistency of communication.
    
29. As a general rule, the Cross-Border Coordinator is in charge of coordinating the public communication process at each stage of the crisis. It should ensure that the communication (or non communication) of the Relevant Parties is consistent with the communication of the financial group or the financial infrastructure to the public.
    
30. It is essential to identify at an early stage, the legal obligations or constraints of the financial group or the financial infrastructure to communicate to the public. In particular, the financial group or the financial infrastructure may become under pressure to disclose information or, if its shares are listed in a stock exchange, face legal requirements for disclosure.
    
31. In the case when one Party is obliged to make a separate public statement, it should
    
    (1) coordinate as much as possible ex ante with all the other Relevant Parties, which must be in a position to respond promptly;
    (2) ensure, to the maximum extent possible and practicable, that all Relevant Parties are informed about the statement before its release; and
    (3) ensure that no use of information delivered by one Party to another will be made without the consent of this authority.

Notes

1. The EU Market Abuse Directive (Directive 2003/6/EC), Article 6.1, obliges issuers of financial instruments to inform the public as soon as possible of inside information: “Member States shall ensure that issuers of financial instruments inform the public as soon as possible of inside information which directly concerns the said issuers”. Hence, the issuers of financial instruments are in principle submitted to the obligation to disclose inside information, but there are exceptions. In case of emergency liquidity assistance, Article 6(2) of the same Directive is relevant: “An issuer may under his own responsibility delay the public disclosure of inside information, as referred to in paragraph 1, such as not to prejudice his legitimate interests provided that such omission would not be likely to mislead the public and provided that the issuer is able to ensure the confidentiality of that information”. In case of emergency liquidity assistance, there is a legitimate interest not to disclose information immediately. This is confirmed in Article 3.1 of Commission Directive 2003/124/EC of 22 December 2003 implementing the Market Abuse Directive as regards the definition and public disclosure of inside information and the definition of market manipulation: “For the purposes of applying Article 6(2) of Directive 2003/6/EC, legitimate interests may in particular relate to the following non-exhaustive circumstances: (a) … In particular, in the event that the financial viability of the issuer is in grave and imminent danger, although not within the scope of the applicable insolvency law, public disclosure of information may be delayed for a limited period where such a public disclosure would seriously jeopardise the interest of existing and potential shareholders by undermining the conclusion of specific negotiations designed to ensure the long-term financial recovery of the issuer.”
2. In this regard, article 132.1 of the Capital Requirement Directive (CRD) establishes that supervisors shall share the essential
   information that can materially influence the assessment of the Financial Supervisory Authorities of a credit financial institution in another Member State
3. Where a financial conglomerate is involved, the coordinator of the specific conglomerate will need to be involved (see FCD art. 11a 2002/87/EC)
4. 6 Options have been discussed in the EFC Report (ECFIN/CEFCPE(2007)REP/53990).
5. 7 Final costs and sharing of burden can be defined at a much later stage only. At this stage, broad picture on possible cost is needed to ensure decision making.