Efforts to establish the Banking Union took an important step forward yesterday with provisional agreement reached between the European Parliament and Member States on the Single Resolution Mechanism (SRM), after months of difficult negotiations.
For banks in countries participating in the Single Supervisory Mechanism (SSM) – currently limited to the Eurozone – the SRM sets-out the governance and decision-making process for bank resolution, and establishes a resolution fund. The approach will be harmonised across the SSM, with decision-making centralised around a Single Resolution Board.
An immediate effect of the agreement is to provide a boost to the Banking Union initiative. It also clears the legislative path for the bank Recovery and Resolution Directive (RRD), which had been held back so that it could be considered by legislators alongside the SRM. Both the RRD and SRM should now be approved before the European Parliament elections in May. Together, they will re-cast the resolution landscape in the Eurozone.
For more information on the Banking Union visit www.Deloitte.co.uk/BankingUnion.
What are the implications for banks?
One of the ambitions of the SRM is to make resolution a reality for banks that were previously deemed too-big-to-fail. By centralising decision-making and information exchange across a large bank’s Eurozone operations the SRM will in principle be able to more easily plan and execute a resolution, certainly across the operations located within the Eurozone. Moreover, involving more decision-makers directly in the resolution process should increase the likelihood of being able to agree a coordinated strategy across Eurozone countries. At the same time, the governance and decision-making processes are ambitious, and inevitably complex. More decision-makers could mean less decisiveness, or the need for greater compromise.
For all banks, by harmonising rules and requirements, the changes will level the playing field across the Eurozone. Since there is only one process, it will be easier to build the understanding of resolution among customers, investors and regulators. By reducing these barriers, resolution is likely to become easier to apply. And if resolution becomes a common feature of (distressed) banking – as indeed regulators intend – there may be implications for banks’ credit ratings and cost of funding. Banks should also review their assumptions about contingency planning. Careful assessment of the risks is now required.
Inevitably, this new body will create new requirements for banks to share information, with supervisors and the Single Resolution Board. Over time, it may also add to the impetus for resolution planning and change expectations about how what actions banks should take to prepare for resolution.
What has been agreed?
- Scope: The SRM will apply to all banks supervised by the SSM. The Single Resolution Board will effectively become the resolution authority for banks designated as ‘significant’ by the ECB, as well as all cross border banks. The Board will also have direct powers in any resolution for which the Single Resolution Fund needs to be used. National resolution authorities will have responsibility for other banks.
- Fund: A Single Resolution Fund will be set up through contributions from all banks in participating Member States. The Fund has a target level of €55 billion, corresponding to at least 1% of covered deposits, to be reached over an eight year period. The resources, accumulated initially at the national level, will be progressively mutualised over the period. A reduced timing for the Fund build up and mutualisation is one of the main concessions made during the overnight negotiations.
- Decision-making: In most cases, the ECB would trigger resolution and notify the Board, the European Commission and the relevant national resolution authorities that a bank is failing. The Board would then assess whether there is a systemic threat and the feasibility of any private sector solution, and if not, adopt a resolution scheme. The Commission is also given additional powers – it has to assess the discretionary aspects of the Board’s decision and it can object to the resolution scheme proposed. In certain instances, the Council can object to the Commission’s decisions.
- Governance: The Single Resolution Board comprises a Chair, Executive Director, three permanent members and one representative from each participating Member State. The degree to which the full composition of the Board rather than just its executive should be involved in decision-making was a major point of concern for the European Parliament given the implications for the timeliness of decision-making. It was agreed that the full Board would take decisions of a general nature, and individual resolution decisions involving the use of the Single Resolution Fund above €5 billion (compared to 20% of paid-in funds proposed originally by Council, which would have brought the thresholds considerably lower in the first few years of the Fund).
The SRM Regulation will be voted on by the European Parliament in plenary session in April. Once it is approved, the EBA and the European Commission will be responsible for developing the detailed required, such as the level of contribution to the fund required by banks. The SRM implementing measures are likely to be considered in a package along with the implementing measures for the RRD.
Simon Brennan – Deloitte, EMEA Centre for Regulatory Strategy
Simon is a Senior Manager in the EMEA Centre for Regulatory Strategy, specialising in prudential regulation for banks. Simon joined Deloitte after 11 years at the Bank of England, where he worked in a number of areas covering macro and micro prudential policy, and financial institution risk assessment. LinkedIn.
Dea Markova - Deloitte, EMEA Centre for Regulatory Strategy
Dea is an Assistant Manager in the EMEA Centre for Regulatory Strategy. Her primary areas of focus are the Single Supervisory Mechanism and international, EU and UK insurance regulatory initiatives. She joined Deloitte in 2012. She has past experience in financial journalism and an academic background in financial regulation. LinkedIn
For more from the EMEA Centre for Regulatory Strategy, please visit: www.Deloitte.co.uk/Centre.