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Friday, 16 June 2017

EU Commission: Banking: Council agreement on creditor hierarchy, IFRS 9 and large exposures

Banking: Council agreement on creditor hierarchy, IFRS 9 and large exposures

On 16 June 2017, the Council agreed its stance on part of a package of proposals aimed at reducing risk in the banking industry, namely:

-           a draft directive on the ranking of unsecured debt instruments in insolvency proceedings (bank creditor hierarchy);

-           a draft regulation on transitional arrangements to phase in the regulatory capital impact of the IFRS 9 international accounting standard.

The draft regulation also contains a phase-out of provisions on the large exposures treatment of public sector debt denominated in non-domestic EU currencies.

Ministers asked the presidency to start talks with the European Parliament as soon as the Parliament has approved its own negotiating stance.

"These proposals set out to help make our banks more resilient to shocks in the light of new prudential standards agreed at international level. We have decided to make these texts a priority and hope the Parliament will be able to start negotiating by the end of this year", said Edward Scicluna, minister for finance of Malta, which currently holds the Council presidency.

Creditor hierarchy in insolvency proceedings

Directive 2014/59/EU on bank recovery and resolution subordinates uncovered deposits (above €100 000) to covered deposits in the event of insolvency proceedings. It establishes a preference for natural persons and SMEs. It does not provide, however, for subordination for senior unsecured debt securities versus other forms of unsecured debt claims.

Such a specification is now necessary in view of the Financial Stability Board's November 2015 'total loss-absorbing capacity' (TLAC) standard. To be implemented by global systemically important banks in 2019, the TLAC standard requires the holding of subordinated instruments ('subordination requirement').

The draft directive therefore requires member states to create a new class of 'non-preferred' senior debt, eligible to meet the subordination requirement.

It will thereby facilitate the application of EU bail-in rules in cross-border situations and avoid distortions of the EU single market. A number of member states have amended or are in the process of amending their insolvency laws. The absence of harmonised EU rules creates uncertainty for banks and investors alike.

The draft, which mainly amends article 108 of the bank recovery and resolution directive, has been made a priority amongst other banking proposals presented by the Commission in November 2016. The aim is to provide legal certainty for banks and investors.

IFRS 9 and large exposures

The regulation will mitigate the potential negative regulatory capital impact on banks of the introduction of International Financial Reporting Standard (IFRS) 9.

IFRS 9 was published by the International Accounting Standards Board in July 2014. Regulation 2016/2067 requires EU banks to use it in their financial statements for financial years starting on or after 1 January 2018.

IFRS 9 is aimed at improving the loss provisioning of financial instruments by addressing concerns that arose during the financial crisis. It responds to the G20's call for a more forward-looking model for the recognition of expected credit losses on financial assets.

Use of IFRS 9 by banks may however lead to a sudden increase in expected credit loss (ECL) provisions and a consequent sudden fall in their regulatory capital ratios. Transitional arrangements are needed from 1 January 2018, consistent with use of the new accounting standard. It was therefore decided to split and fast-track the entry into force of certain provisions from a broader November 2016 Commission proposal amending regulation 575/2013 on bank capital requirements.

The presidency prepared the resulting draft regulation, which would allow banks to add back to their 'common equity tier 1' capital a portion of the increased ECL provisions as extra capital during a five-year transitional period. That added amount will progressively decrease to zero during the course of the transitional period.

The draft regulation also provides for a three-year phase-out of an exemption from the large exposure limit for banks' exposures to public sector debt denominated in the currency of any other member state.

The exemption is used by banks in several non-eurozone member states for their euro-denominated holdings of those member states' public debt. Unless regulation 575/2013 is amended, the exemption will cease to apply after 31 December 2017. The phase-out is intended to soften the impact of its termination.

*          *          *

Agreement was reached at a meeting of the Economic and Financial Affairs Council.

The Council requires a qualified majority to adopt the two legal texts, in agreement with the Parliament. (Legal basis: articles 53(1) and 114 of the Treaty on the Functioning of the European Union).

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Economic and fiscal policies: Council approves 2017 country-specific recommendations

On 16 June 2017, the Council approved its 2017 draft recommendations and opinions on the member states' economic and fiscal policies.

Approval of the texts is a key stage in the 'European Semester', an annual policy monitoring process. Recommendations coving economic and fiscal as well as employment policies will be referred to the European Council for endorsement at its meeting on 22 and 23 June. The Council is expected to formally adopt them on 11 July 2017.

In March, the European Council endorsed policy priorities for the 2017 European Semester, as identified by the Commission in its annual growth survey:

  • boosting investment;
  • pursuing structural reforms;
  • responsible fiscal policies.

An annual process

The European Semester involves simultaneous monitoring of the member states' economic, employment and fiscal policies during a six-month period every year.

In the light of policy guidance given by the European Council annually in March, the member states present each year in April:

-        National reform programmes for their economic policies. These set out a macroeconomic scenario for the medium term, national targets for implementing the EU's "Europe 2020" strategy for jobs and growth, identification of the main obstacles to growth, and measures for growth-enhancing initiatives in the short term;

-        Stability or convergence programmes for their fiscal policies. Euro area countries present stability programmes, whereas non-euro member states present convergence programmes. The programmes set out medium-term budgetary objectives, the main assumptions about expected economic developments, a description of fiscal and economic policy measures, and an analysis of how changes in assumptions will affect fiscal and debt positions.

The Council then approves draft country-specific recommendations and opinions (CSRs), for endorsement by the European Council. It provides explanations in cases where the recommendations do not comply with those proposed by the Commission.

The 2017 CSRs are addressed to 27 of the EU's 28 member states. To avoid duplication there is no CSR for Greece, as it is subject to enhanced policy surveillance under an economic adjustment programme.

In March 2017, the Council adopted a specific draft recommendation on the economic policies of the euro area. It did so at an earlier stage so that eurozone issues be taken into account when approving the country-specific recommendations.

Next steps

The draft recommendations and opinions were approved at a meeting of the Economic and Financial Affairs Council. They will now be referred to the European Council.

The 2017 European Semester is due to conclude with adoption of the country-specific recommendations on 11 July.

The draft recommendations can be found in the following documents: Austria; Belgium; Bulgaria; Croatia; CyprusCzech Republic; Denmark; Estonia; FinlandFrance; Germany; Hungary; Ireland; Italy; Latvia; Lithuania; Luxembourg; Malta; The Netherlands; Poland; Portugal; Romania; Slovakia; Slovenia; Spain; Sweden; United Kingdom.

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Croatia and Portugal: Deficits below 3% of GDP, procedures closed

On 16 June 2017, the Council closed excessive deficit procedures for Croatia and Portugal, confirming their deficits have dropped below the EU's 3% of GDP reference value.

The Council thereby abrogated its decisions on the existence of excessive deficits in the two countries.

As a consequence, only four of the EU's 28 member states remain subject to excessive deficit procedures, continuing the positive trend since 2011. A peak was reached during a 12-month period in 2010-11 when procedures were open for 24 member states.

Member states are required by article 126 of the Treaty on the Functioning of the European Union to avoid excessive government deficits. The procedure is used to support a return to sound fiscal positions.

Following an exit from the procedure, member states remain subject to the preventive arm of the Stability and Growth Pact, the EU's fiscal rulebook.

Croatia

Croatia has been subject to an excessive deficit procedure since January 2014, when it was found to be in breach of both deficit and debt criteria. The Council issued a recommendation calling for the deficit to be corrected by 2016.

The Council noted that Croatia planned a general government deficit of 5.5% of GDP for 2014, above the 3% of GDP reference value. It planned a general government gross debt reaching 62% of GDP in 2014, thus exceeding the EU's 60% debt-to-GDP reference value for government debt.

The Council set deficit targets of 4,6 % of GDP for 2014, 3,5 % of GDP for 2015 and 2,7 % of GDP for 2016.

Croatia's general government deficit amounted to 0.8% of GDP in 2016, down from 3.4% of GDP in 2015. The Commission's 2017 spring economic forecast projects the deficit to rise to 1.1% of GDP in 2017, and to fall back to 0.9% of GDP in 2018. The deficit is thus set to remain below the 3% of GDP reference value over the forecast horizon.

Croatia's gross government debt-to-GDP ratio peaked at 86.7% in 2015 and fell to 84.2% in 2016. The spring forecast projects it to decrease further to 79.4% in 2018, backed by strong nominal GDP growth. In that manner, the 2016 debt ratio fulfils the forward-looking element of the EU's debt reduction benchmark.

The Council concluded that Croatia's deficit has been corrected.

Portugal

Portugal has been subject to an excessive deficit procedure since December 2009, when the Council issued a recommendation calling for its deficit to be corrected by 2013.

In April 2011 however, after several months of market pressure on its sovereign bonds, Portugal requested assistance from international lenders. It obtained a €78 billion package of loans from the EU, the euro area and the IMF. In October 2012, the Council extended the deadline for correcting the deficit by one year to 2014, given the recession at that time in Portugal.

Economic prospects deteriorated further, and the general government deficit reached 6.4% of GDP in 2012. In June 2013, the Council extended the deadline for correcting the deficit by another year, to 2015.

Portugal exited its economic adjustment programme in June 2014.

However, its general government deficit came out at 4.4% of GDP in 2015 and it thereby missed the deadline set by the Council. Portugal's fiscal effort fell significantly short of what the Council had recommended.

In July 2016, the Council concluded that Portugal's response to its June 2013 recommendation had been insufficient.

A month later, following a reasoned request from Portugal, the Council decided not to impose a fine. It stepped up the excessive deficit procedure, calling for the deficit to be corrected by 2016 and giving notice of measures to be taken. It called on Portugal to reduce its general government deficit to 2.5% of GDP in 2016 and to implement consolidation measures amounting to 0.25% of GDP during the year.

Portugal's general government deficit amounted to 2.0% of GDP in 2016. The Commission's 2017 spring economic forecast projects deficits of 1.8% of GDP in 2017 and 1.9% of GDP in 2018, thus remaining below the 3% of GDP reference value over the forecast horizon. The potential deficit-increasing impact of bank support measures should not put at risk the durable reduction of the deficit.

Portugal's gross government debt-to-GDP ratio reached 130.4% in 2016. The spring forecast projects it to decrease to 128.5% in 2017 and 126.2% in 2018, due to primary surpluses.

The Council concluded that Portugal's deficit has been corrected.

*         *         *

The decisions were taken at a meeting of the Economic and Financial Affairs Council.

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Indicative programme - Environment Council meeting of 19 June 2017

Place:        European Convention Center Luxembourg (ECCL)
Chair:        Dr Jose A. Herrera, Minister for sustainable development, environment and climate change of Malta 

All times are approximate and subject to change

+/- 08.00
Arrivals

+/- 09.00
Doorstep by Minister Herrera  

+/- 10.00      
Beginning of Council meeting
(Roundtable)
Adoption of the agenda
Adoption of non-legislative A Items 

+/- 10.10      
Non-ETS sectors (public session)
- Effort sharing
- Land use, land use change and forestry
+/- 12.10      
Latest developments on the Paris Agreement (public session)
+/- 13.10      
Other business
- Project on "Development of Urban Adaptation Plans for cities with more than 100.000 inhabitants in Poland"
- Ratification of the Kigali Amendment to the Montreal Protocol 

+/- 13.20
Working lunch: Preparations for 3rd session of the UN Environment Assembley
(Guest: UNEP Executive Director, Erik Solheim)   

+/- 15.00      
EU Action Plan for nature, people and the economy
+/- 15.30         
Other business
- Waste legislative package (public session)
- Recent international meetings (Triple COPs to Basel, Rotterdam and Stockholm Convention and MOPs to the Espoo Convention)
- International Conference on the Role of Women in Mountain Regions (Alpbach, Tyrol, 18-19 April 2017)
- Outcome of the Ocean Conference (New York, 5-9 June 2017)
- Vienna Declaration: 11th Nano-Authorities Dialogue (Vienna, 29-30 March 2017)
- Work programme of the Estonian presidency 

+/- 16.30       Press conference (live streaming

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Council conclusions to contribute towards halting the rise in childhood overweight and obesity

The Council adopted conclusions on halting the rise in childhood overweight and obesity. The Council considers the large numbers of cases of childhood obesity in many member states to be a major health challenge, for two reasons: 

  • overweight persons are at increased risk of suffering from a range of medical problems such as diabetes, asthma, hypertension and cardiovascular disease
  • overweight children are likely to remain  overweight into adulthood

The Council calls for tackling childhood obesity by addressing both the lack of physical activity and unhealthy diets. Member states are invited to promote physical activity in schools and leisure clubs. They should also reduce the advertisement and sponsorship of sugary and fatty foods which are targeted at children and adolescents.

Read the full text of the Council conclusions on halting the rise in childhood overweight and obesity

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