For more information on the Banking Union, the SSM, and pre-existing system of EU financial supervision, please see our RegZone report ‘The European System of Financial Supervision after the Banking Union’
The EU Banking Union was first formally proposed in the June 2012 report ‘Towards a Genuine Economic and Monetary Union’, which called for an “integrated financial framework” – later renamed a ‘Banking Union’ – consisting of:
- a Single Supervisory Mechanism (‘SSM’) for banks;
- a pooled European deposit insurance scheme; and
- a Single Resolution Mechanism (‘SRM’) (or, to be precise, a “European resolution scheme […] under a common resolution authority”).
On 12 September 2012 the European Commission published a legislative proposal for the SSM on 12 September 2012. Political agreement between the Commission, the European Parliament and the Council of the EU was not reached until March 2013.
The SSM will come into force on 3 November 2014, although the ECB may begin to carry out some tasks before then.
On 10 July 2013 the European Commission published a legislative proposal for the SRM. This was not uncontroversial, as it reserved a great deal of power for the Commission itself, which would have held the “trigger” of deciding whether or not to resolve a bank “on the basis of the Single Resolution Board’s [‘SRB’] recommendation, or on its own initiative”.
News reports suggested that the proposals might not find favour with France and Germany, which had previously proposed a “single resolution board involving national resolution authorities”; or the European Central Bank (‘ECB’), which had previously seemed to favour an SRM without necessarily a ‘single resolution authority’.
The first ‘presidency compromise’ proposal prepared by the Council of the EU (27 September 2013) kept a central role for the Commission’s as “trigger”, but removed its “own initiative” powers; it also emphasised that the Commission must take into account the SRB’s recommendations. The second (15 October) and third (28 November) compromise proposals allowed the Commission to act on its “own initiative” only where the SRB had ignored a request to prepare a decision, and where the ECB had agreed that the conditions for intervention were made out.
On 6 December 2013 a new compromise proposal was issued featuring a radically different system: now the SRB itself would be able to “adopt a resolution scheme […] [that] shall place [an] entity under resolution”; the Commission’s role was reduced to a limited power of objection.
It was a similar proposal to this that was finally agreed by the Council of the EU on 19 December following a meeting of ECOFIN. The agreed ‘general approach’ actually reduces the Commission’s role even further: “Decisions by the [SRB] would enter into force within 24 hours of their adoption, unless the Council [of the EU], acting by a simple majority on a proposal by the Commission, objected or called for changes.”
European Commissioner Barnier responded that the “Commission does not agree on every point in the general approach, but real progress has been made in very little time. Many of you are asking if I am disappointed that the Commission is no longer the trigger. I am now. I always made clear the trigger should be a European institution, but I was open as to which one…”
The European Parliament raised concerns that the (overly-)complicated SRM proposals could lead to slow and inefficient decision making in practice; it also complained that important aspects of how the Single Resolution Fund (‘SRF’) would operate were being dealt with behind closed doors at the Council of the EU.
Nevertheless, political agreement was reached on 20 March 2014, and the Parliament duly adopted the agreed text on 15 April 2014.
The Bank Recovery and Resolution Directive
The Bank Recovery and Resolution Directive (‘BRRD’) , which was also adopted by the European Parliament on 15 April 2014 following previous political agreement, is an important part of the SRM background.
The BRRD will harmonise the rules for bank resolution across the entire single market (i.e. not just the SSM/SRM-participating Member States ). The SRM would apply BRRD rules in SRM-participating Member States, while non-SRM Member States would appoint ‘national resolution authorities’ to do so.
The BRRD broadly enshrine the principle that banking losses should be borne by private investors and the wider banking sector, rather than government bail-outs. Key elements of the BRRD include new ‘bail-in’ powers, allowing resolution authorities to convert certain kinds of bonds into shares (which would be liable to losses should a bank get into difficulties); a requirement for Member States to establish national ex ante resolution funds; and a requirement for banks and resolution authorities to prepare detailed resolution plans.
As a Directive, it will need to be transposed into national law by each Member State by 31 December 2014. The BRRD will then come into force on 1 January 2015; except for the bail-in provisions, which will apply from 1 January 2016.
How the SRM will work
The SRM will apply to all credit institutions 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.
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).
The SRB would also be responsible for any use of the SRF.
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 the SRB agrees, it “shall [then] adopt a resolution scheme. The resolution scheme shall:
(a) plae the entity under resolution;
(b) determine the application of the resolution tools to the institution […];
(c) determine the use of the Fund to support the resolution action”
When preparing the resolution scheme, the SRB should co-operate with the national resolution authority concerned. The latter will be responsible for carrying the scheme out in practice – although, in case the national resolution authority fail to comply with the plan, the SRB would reserve the power to address executive orders to the troubled bank directly.
3. Veto: European Commission and Council of the EU
After the SRB has adopted a resolution scheme, the European Commission then has 24 hours in which to endorse or reject the proposal. In the case of a rejection, the SRB will then have to incorporate the reasons given for the rejection into its resolution scheme.
The Council of the EU will also be able to reject a resolution scheme, but only for the following reasons: that resolution is not in the public interest; or if it involves a “material modification” of 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 BRRD, banks should be resolved without any reliance on the taxpayer, with shareholders and creditors suffering the first losses. However, if needs be, temporary funding can be granted out of the SRF. This fund will be built up over the course of 8 years by an ex ante levy on SSM-area banks. Although, to begin with, there will be “national compartments” in the SRF, corresponding to the currently-separate resolution funds of different Member States, this will be followed by “progressive mutualisation” and there will ultimately be a single, pooled fund for the entire SSM area.
Details of the transfer and mutualisation of funds in the SRF will be set out in an inter-governmental agreement between SSM-area Member States; although the final compromise between Council and Parliament agreed on 40% mutualisation in the first year, 60% in the second, and the rest equally thereafter.
The SRF will also be able to borrow on the market, when necessary. The Commission expected to use the European Stability Mechanism (‘ESM’) as an ultimate, public backstop to SRM, albeit with any use of the ESM later recouped through additional ex post levies on SSM-area banks. The Council had agreed to the use of the ESM as backstop, along with bridge-financing from national sources backed by bank levies – but only during the initial 10-year build-up period. The final text of the Regulation calls for co-operation between the SRB and the board of the ESM, and suggests ESM members may attend the SRB as observers “where appropriate”; but there is otherwise no other suggestion of how the ESM might be used by the SRM.
The Regulation states that the decisions of the SRM “should not impinge on the fiscal responsibilities” of Member States, a reference to requiring extraordinary public financial support. This reflects the Commission’s earlier assurances that the SRM would not be able to force a Member State to provide extraordinary public support to a bank resolution”.
The Commission’s original proposal to allow the SRF to lend its funds to national deposit guarantee schemes (which would have to be subsequently repaid) has apparently been removed.
Interaction with non-SSM Member States
Under the rules proposed by BRRD, 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.
The SRM cannot come into force before the finalisation of the intergovernmental agreement. The Council originally set a deadline for itself of March 2014, but later suggested that it could only take place after the Parliament formally adopted the Regulation (which happened on 15 April 2014).
Once the intergovernmental agreement has been finalised, however, it then needs to be ratified by the various Member States involved. In a statement issued on 23 April 2014, the Council confirmed that the signatories to the agreement “declare that they will strive to complete its process of ratification […] in due time so as to permit the Single Resolution Mechanism to be fully operational by the 1st January 2016'."
Previously, the Council wrote in December 2014 (prior to the political agreement) that it anticipated the SRM to enter into force on 1 January 2015, with the bail-in powers coming into force 1 January 2016.