Banks, EU – Baltic States, Financial Services

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Single Resolution Mechanism: preserving EU’s financial stability

Eugene Eteris, from the BC’s Scandinavian Office, 05.01.2016.

The Single Resolution Mechanism (SRM) becomes fully operational from January 2016. A milestone on building the Banking Union for the euro area has been reached. The SRM will bolster the resilience of the financial system and help avoid future crises by providing for the timely and effective resolution of cross-border and domestic banks.

The EU has already taken significant steps during last two-three years to address the roots of the financial crisis, to ensure that banks are much better capitalised and more effectively supervised while identifying possible risks in the financial system. But despite closer supervision and a greater emphasis on crisis prevention, there may still be cases of banks getting into difficulty.

SRM’s short history

The SRM Regulation established the framework for the EU states participating in the Banking Union when banks need to be resolved.

The Single Resolution Mechanism was proposed by the Commission on 10 July 2013 (see IP/13/674). The regulation entered into force on 19 August 2014.

The provisions relating to the cooperation between the Single Resolution Board and the national resolution authorities for the preparation of the banks’ resolution plans has been applied from the start of 2015.

The SRM implements the EU-wide Bank Recovery and Resolution Directive (BRRD) in the euro area. The full resolution powers of the Single Resolution Board (SRB) have been also intended to apply from January 2016 (see IP/14/2784).

Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union underlined that the EU banking union has had already the tools to supervise the banks within the euro area. The Single Resolution Mechanism will make a system for resolving banks and of paying for resolution so that taxpayers would be protected from having to bail out banks if they go bust.

He stressed that “no longer would the mistakes of banks be borne on the shoulders of the many”.

http://europa.eu/rapid/press-release_IP-15-6397_en.htm

The SRM and the banking union

The SRM provides that the Single Resolution Fund (SRF) will be built up over a period of 8 years with 'ex-ante' contributions from the banking industry. EU member states agreed to define some of the rules, particularly relating to the transfer of those contributions from National Resolution Authorities to the SRF, and for the progressive mutualisation of their use over time, in an inter-governmental agreement (IGA).

The IGA was part of the overall compromise reached by the EU states and the European Parliament on the SRM in March 2014, and sits alongside the SRM Regulation (IP/15/6258). It was ratified by a sufficient number of participating states in November 2014.

The Banking Union is mandatory for all euro area states and consists of 19 members: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. If Member States chose to join the Banking Union, they need to join the three parts: supervision, resolution, EDIS.

The SRM’s functions

The Single Resolution Mechanism works in the following manner:

· The Single Supervisory Mechanism (SSM), as the supervisor, would signal when a bank in the euro area or established in a Member State participating in the Banking Union is in severe financial difficulties and needs to be resolved.

· The Single Resolution Board (SRB), consisting of representatives from the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries), the SSM and the European Commission, will carry out specific tasks to prepare for and carry out the resolution of a bank that is failing or likely to fail. The SRB decides whether and when to place a bank into resolution and sets out, in the resolution scheme, a framework for the use of resolution tools and the Single Resolution Fund (SRF).

· The resolution scheme can then be approved or rejected by the Commission or, in certain circumstances, by the Council within 24 hours.

· Under the supervision of the SRB, national resolution authorities will be in charge of the execution of the resolution scheme.

· The SRB oversees the resolution. It monitors the execution at national level by the national resolution authorities and, should a national resolution authority not comply with its decision, directly addresses executive orders to the troubled banks.

· An SRF was set up under the control of the SRB. It will ensure the availability of funding support while the bank is resolved. It is funded by contributions from the banking sector. The SRF can only contribute to resolution if at least 8% of the total liabilities of the bank have been bailed-in.

SRM’s benefits for the EU banks

In the EU banking union, the Single Resolution Mechanism (SRM) allows for:

· More uniform financing conditions for individuals and businesses, thanks to a single mechanism to deal with the failure of banks irrespective of the Member State of origin, reducing the interdependence between credit supply and the health of public finances;

· Enhanced preservation of financial stability, with a more predictable environment for consumption and investment decisions, through centralised crisis management for large and cross-border banks, whose disorderly failure could otherwise cause contagion and panic;

· Reinforced protection of taxpayers via the bail-in tool and if necessary a single resolution fund pooling financial resources for crisis management, to be provided by banks ex-ante, across all participating Member States.