The EU banking union was envisaged to rest on three pillars - the Single Supervisory Mechanism (“SSM”), the Single Resolution Mechanism (“SRM”) and a European Deposit Guarantee Scheme (read related reports and news here). The SSM has already “gone live”, but the other two pillars have not yet been fully erected.
The SRM, however, is well on the way to being a functioning regime. The SRM is based on the Bank Recovery and Resolution Directive 2014/59/EU (RRD) (read related reports and news here) and the core SRM Regulation No. 806/2014. It provides a supranational framework for the orderly liquidation of banks that are failing or likely to fail. The regime is applicable to all members of the SSM, i.e. members of the Eurozone plus those who join voluntarily. SRM (and RRD), drawing on the lessons from the financial crisis which broke out in 2007, reflect the principle that banks should be resolved without any reliance on the taxpayer, with shareholders and creditors suffering the first losses.
Initially, the European Commission was supposed to wield comparatively large decision-making power in the SRM. However, the final SRM Regulation allocates the central role in the institutional framework to the Single Resolution board (“SRB”). This means that SRB1 decisions on the resolution of a bank are effective unless the Commission or the Council (of the European Union) object. The SRM will be complemented by the (still to be established) Single Resolution Fund (“SRF”) which is intended to finance the restructuring of failing credit institutions.
How the SRM will work
The SRM will apply to all credit institutions (within the meaning of Capital Requirements Directive 575/2013/EC) in Member States participating in the SSM. This includes both (larger) banks directly supervised by the ECB, and also (smaller) banks still effectively supervised by national regulators under the aegis of the ECB. (The Council had previously considered limiting the SRM to the former banks only.) The SRM will also apply to any parent undertakings directly supervised by the ECB under the SSM. Furthermore, the SRM will apply to investment firms and financial institutions established in participating Member States when they are covered by the consolidated supervision of the parent undertaking carried out by the ECB.
The SRB itself will be directly in charge of the planning and resolution phases of larger, ECB-supervised banks, as well as cross-border institutions; the remainder will be left in practice to national resolution authorities (although Member States can opt to have all their banks dealt with by the SRB directly).
1. Assessment: ECB
Whenever the ECB (or, where the ECB is reluctant to act, the SRB acting on its own initiative) assesses that a bank:
- is failing or likely to fail; and
- there is no reasonable prospect that any alternative private sector or supervisory action (including the use of bail-in powers) would prevent its failure within a reasonable timeframe;
then the ECB “shall communicate that assessment without delay” to the SRB, the European Commission, and the relevant national resolution authorities.
2. Trigger: SRB
The SRB will then conduct its own assessment of whether those conditions are met, as well as whether resolution would be in the public interest (e.g. to protect financial stability or public funds). If so, the SRB will adopt a resolution scheme which places the respective entity under resolution, determines the application of the resolution tools (which include the sale of a business2) to the institution and determines the use of the SRF.
3. Veto: European Commission and Council of the EU
After the SRB has adopted a resolution scheme, the European Commission has 24 hours in which to endorse or reject the proposal. In the case of a rejection, the SRB will have to amend the resolution scheme accordingly. As mentioned above, the Council will also be able to reject a resolution scheme; however, the rejection may only be motivated by reasons of public interest, or reasons relating to the amount of the SRF to be used. Where the resolution of a bank involves a grant of state aid, the resolution scheme will not be adopted until the Commission has made a decision under the existing state aid rules.
The Single Resolution Fund
As noted above, under the RRD, banks should be resolved without any reliance on taxpayers’ monies. However, if necessary, temporary funding can be granted out of the SRF. The SFR will be built up over the course of 8 years (transition phase) and should amount to an estimated 55 billion Euro. The SRF will be funded by levies from banks in the SRM member states and will initially be based on a system of national compartments. In a complex process outlined in an intergovernmental agreement between most EU Member States (excluding the UK and Sweden), these compartments will then be transferred and mutualised to the SRF. Financing gaps which may come up during the 8 year build-up phase of the SRF shall be covered by bridge financing from the member states or through borrowings of the SRF on the market. The European Stability Mechanism (‘ESM’) may only serve as an ‘ultima ratio’ backstop. All of the bridge financing facilities shall subsequently be covered by ex post – as the case may be, additional – bank levies.
Interaction with non-SSM Member States
Under the rules proposed by RRD, where a multinational banking group needs to be resolved, which crosses both SRM- and non-SRM Member States, there will need to be a ‘resolution college’ set up, in which the SRM and national resolution authorities will participate. (The European Banking Authority will act as mediator in this case.) The Council’s proposal further suggested that the SRB, European Commission and the national resolution authorities of non-SRM Member States should prepare a memorandum of understanding beforehand on how they will co-operate. This is particularly important where a parent undertaking is based in an SRM Member State, but with branches and subsidiaries established in non-SRM Member States.
Entry into force
The SRM Regulation entered into force on 19 August 2014 following publication in the Official Journal and will apply from 1 January 2016. This is with the exception of the cooperation between the SRB and national resolution authorities for the preparation of resolution plans which has applied since 1 January 2015