On Wednesday 10 July, the European Commission announced its proposals to establish the Single Resolution Mechanism as part of the Banking Union.
Please click here for the text of the Commission’s announcement. The text of the proposed Regulation will be made available by the Commission “in the coming days”.
- The Commission suggests the creation of a Single Resolution Board to direct resolution actions in the Banking Union, while the Commission gains sole power to trigger a resolution.
- A Single Bank Resolution Fund would be created by pooling national resolution funds.
- Balancing the need for clear and rapid decision-making in the heat of a crisis while staying within the current Treaty, and respecting legitimate national interests, will be a tricky task.
- The Commission aims to have the framework operational by 2015.
The Single Resolution Mechanism (SRM) is a crucial pillar of the Banking Union, and together with the Single Supervisory Mechanism (SSM) is part of efforts to break (or more recently “dilute”) the links between banks and sovereigns. The SSM, one of the other four pillars of the Banking Union, is expected to become operational in the second half of 2014, with the European Central Bank (ECB) set to assume ultimate responsibility for the prudential supervision of banks within the SSM. However, an EU resolution framework is significantly further behind, as the political and fiscal implications of dealing with bank failures make it a trickier problem to solve. Work also remains to be done on the Recovery and Resolution Directive (RRD), which the Commission is hopeful will be finalised this autumn.
So how will it work?
Scope: The SRM will apply to all of the roughly 6,000 banks established in member states participating in the SSM.
The mechanism itself: The Commission proposes to create a Single Resolution Board (SRB), comprising the ECB, the European Commission, and the national authorities of member states participating in the Banking Union. The ECB, in its role in the SSM, would then signal when a bank established in a member state participating in banking union is in “severe financial difficulties and needs to be resolved”. The SRB would “prepare” the resolution of a bank, with “broad preparatory powers,” and would be “responsible for the key decisions on how a bank would be resolved”, with national resolution authorities “closely involved in this work”.
It would then fall to the Commission to make the decision on whether to enter a bank into resolution, as this decision cannot rest with the SRB “for legal reasons” – this is due to the fact that within the existing Treaty, only an EU institution can take such a decision at the European level, precluding an agency (such as the European Banking Authority (EBA)) from fulfilling this role. The Commission would, however, take recommendations from the SRB, and the Commission says its role will be “limited to the decision to trigger the resolution of a bank following a proposal” of the SRB. National resolution authorities would retain responsibility for executing the resolution actions, with the SRB having an oversight role, monitoring the implementation by national authorities. In case national authorities do not comply with SRB decisions, the SRB would have the power to “directly address executive orders to the troubled banks”.
A Single Bank Resolution Fund (SBRF) would also be set up under the control of the SRB “to back its decisions and ensure the availability of medium-term funding support while the bank is restructured”. It is envisaged that this fund would be created from contributions from the banking sector, through the pooling of the resources of national funds of participating countries. While these funds are being built up, however, the Commission intends that it should be able to borrow from the markets.
The proposals are not as far reaching as some have argued is necessary, with no proposals for the creation of a true Single Resolution Authority, which would likely require a Treaty revision. Rather than a single, independent institution taking decisions and executing them, responsibilities will be split between several layers. The Commission will make the ultimate decision over whether or not to initiate a resolution; the SRB will be tasked with directing such resolutions; and national authorities will be tasked with executing resolutions and liquidating assets as necessary under national law.
The actions of the SRB will also be contingent on the decision of the ECB signalling that a bank within the SSM is in difficulty, implying that the SSM’s internal decision making structure and its interaction with national authorities will form a further layer within the SRM.
Decision making – scope for disagreements: The Commission says that this arrangement has benefits over a “mere network” of national authorities, providing for “strong central decision-making”, a central body with expertise and experience, and a pool of resources built from contributions by banks, protecting taxpayers “more effectively than national funds.” But with so many layers of decision making, there are multiple places for disagreement over what are almost always contentious decisions. Experience with the current crisis has shown that clarity and speed in decision-making are critical to successful crisis management.
For instance, within the SSM, a national authority may disagree with the ECB’s view that a bank is in straits dire enough to warrant intervention. The SRB will also have to coordinate all the relevant stakeholders in its preparatory work, and there may be scope for disagreement between SRB staff, Commission staff, ECB staff, and the involved national authorities. The Commission will have sole decision-making power over whether or not to actually trigger a resolution, but given the national interests in such a decision, it is questionable whether it will be able to take such decisions in isolation from other stakeholders. There is then the relationship between the SRB and the national resolution authority to consider. While the proposals suggest that non-compliance by national resolution authorities can be countered by the imposition of directives from the SRB to the bank in question, this is yet another place where disagreements may cost time.
The Commission notes that EU leaders set themselves the target of agreeing the mechanism by the end of 2013, with a view to adopting the legislation by the end of the current parliamentary term in 2014, and applying the regime from January 2015 in line with the RRD.
The EU has shown its intention to expedite proposals relating to Banking Union by the progress it has made with the SSM. However, with the RRD yet to be finalised, and given the tricky politics of bank failure, particularly in relation to funding, the Commission’s stated timeline appears ambitious.
David Strachan - Partner, Co-Head EMEA Centre for Regulatory Strategy
David focuses on regulatory issues related to systemic risk, including the Independent Commission on Banking’s work in the UK and the international tools deployed in relation to crisis management. David joined Deloitte after 12 years at the FSA, where in his last role, Director of Financial Stability, he worked on the division of the FSA into the PRA and the FCA.
For more information on the EMEA Centre for Regulatory Strategy, please visit: www.deloitte.co.uk/centre.