A milestone on building the Banking Union for the Euro area is about to be reached: on 1 January 2016, the Single Resolution Mechanism will become fully operational. 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 taken significant steps to address the root causes of the financial crisis, to ensure that banks are now much better capitalised and more effectively supervised and to identify risks that may be building in the system. But despite closer supervision and a greater emphasis on crisis prevention, there may still be cases of banks getting into difficulty. The SRM Regulation establishes the framework for Member States participating in the Banking Union when banks need to be resolved.
Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union said: "The Banking Union already has the tools it needs to supervise the banks within the euro area. As of 1st January, the Single Resolution Mechanism will now also be in place. This means that we now have a system for resolving banks and of paying for resolution so that taxpayers will be protected from having to bail out banks if they go bust. No longer will the mistakes of banks have to be borne on the shoulders of the many."
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. 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 Member 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 Member States on November 29.
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 Single Resolution Mechanism was proposed by the Commission on 10 July 2013. (IP/13/674). It 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 applied from 1 January 2015.
The Single Resolution Mechanism works as follows:
- 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.
What benefits does the SRM bring to the Banking Union?
In the 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.
Single Resolution Board: http://srb.europa.eu/