News
BackThis week, Michel Barnier, EU Commissioner for Internal Market and Services presented the long-awaited proposal on the Single Resolution Mechanism, SRM. This, besides the Single Supervisory Mechanism, SSM, second central pillar of the future Banking Union shall ensure that in future failing banks, which have been monitored by the SSM, can be efficiently resolved resp. restructured - without having to draw on funds of national budgets, which means the tax payer. The aim of the Banking Union is a less fragmented financial market, strict supervision, overcoming the credit crunch and a clear regulation of a possible recovery or resolution of failed European banks. Being in the fifth year of the financial and economic crisis, it is definitely time for something to happen, even if there are still some large question marks over the Banking Union.
The Commission proposal on the resolution of banks represents the last key component of the Banking Union. Now all elements are on the table; a Banking Union, based on which the financial sector can be put on a sounder and better supervised footing towards an integrated and single system for European banks. The danger, coming from negative chain reactions when individual banks fail and the current institutional weakness of the Union to react, would, so the argumentation, make a single supervisory and resolution mechanism necessary. It is the main objective to separate the coupling between sovereign national states resp. their budgets and the banks: public funds should no longer or only in extreme exceptions be used to stabilise and/or rescue failing banks. “Too big to fail” must no longer be an option. What was needed were clear rules and competencies, which shall apply to all banks. By guaranteeing centrally coordinated supervision and resolution, said Barnier at the press conference, and introducing a mechanism for financing resolutions, handling banking crises would become more efficient and “the link between public debt crises and failing banks would be broken”.
Key elements of the mechanism
From the end of 2014, the European Central Bank (ECB) will directly supervise banks in the eurozone and other Member States, provided these also make a decision in favour. This Single Supervisory Mechanism (SSM) shall, together with the new strict supervisory requirements (CRD IV; in particular in trilogue negotiations), reduce the danger of banks getting into trouble. However, as this cannot be completely excluded, a resolution mechanism is required, which can operate on the same level as the SSM. The scenario in case a bank is experiencing problems will be as follows:
The ECB assumes its future role as a supervisor and notifies when a bank is getting into trouble and shall be resolved. A future committee, consisting of representatives of the ECB, the European Commission and the national banking authority, which is also responsible for this bank, prepares the resolution. This committee has comprehensive powers in respect of analyses and laying down the resolution concept, whereby the national authorities will be closely involved. Based on this concept, the Commission decides and determines how the resolution tools and the fund (see below) will be used. The respective national supervisory authority will then resolve the bank under supervision of the collective committee.
The SRM Committee now has a restructuring and resolution fund, which shall ensure that funds are available in case a bank is restructured. Over the coming decade, this fund shall be successively built up by the banks themselves. All 6,400 banks of the eurozone shall pay into the fund. This is not tax money; the fund is more a less a special fund, which installs a liability and insurance principle between credit institutions to minimise the risk for the general public, which otherwise - as has happened in the past - “had to” step in when banks had to be restructured or resolved, as much as possible. The fund shall be equal to an amount, which corresponds to one percent of protected savings all Euro banks. This would be 60 to 70 billion Euros. Should the fund make payments, banks are obliged to replenish it. The intention is to simplify and centralise the national resolution funds of the Member States, which are currently provided by the European structure.
No amendment to Agreement required
It would not be the European Union if this attempt of centralised supervision and resolution of banks would not trigger national worries about the loss of power. The German Finance Minister Wolfgang Schäuble particularly distinguished himself, when he pleaded for a “network” consisting of national supervisory authorities, apart from voicing his concerns this week in respect of the legitimacy of a Single Mechanism; a real Banking Union would require - so the frequently voiced criticism - amending the Primary Agreement. However, this does not correspond with the legal view of either the Commission or the Council. The legal opinion of René Repasi (Heidelberg University Institute for German and European Company and Corporate Law) on the legal feasibility of the SRM, which was commissioned by Sven Giegold (MEP, Greens) also comes to the conclusion that the Resolution Mechanism can be created on the basis of Art. 114 Section 1 of the Lisbon Treaty: the envisaged regulation concerning the resolution and restructure of banks would aim at removing obstacles to fundamental freedoms resp. unfair competition; hence, it would aim towards a working Single Market. Apart from that, the Bank Restructuring Fund did not involve (bank) taxes, but was a bank internal “insurance principle” under supervision. In addition - so the Study - the SRM would not interfere in the national autonomy of Member States and it was not permitted to use the funds of the European Stability Mechanism (ESM) for the Bank Restructuring Fund. This all the more significant as the Euro Group itself (the Finance Ministers of the Euro states) are currently discussion a direct recapitalisation of banks by the ESM. Barnier commented that he himself was of course in favour of amending the Agreement to install the Banking Union, but this would take too much time and was therefore hardly realistic. The financial and economic crisis had taken up too much time already. That is why the attempt was being made to legitimize the SRM via already existing Agreements.
Hence the coming weeks will remain interesting: what direction will the discussions take? How, if at all, will ESM and Banking Union interact at institutional level? What compromises will be negotiated between Central European and national perspective? The Commission hopes that the Council will give its blessing to the SRM before the end of the year and that it can come into force on 1.1.2015. However, there are still a few obstacles to overcome until then. Had the Banking Union been in place before the financial and economic crisis, told Barnier the press conference on Wednesday, states would “have to” come to the rescue with tax money “only” in the case of ca. five, mainly Irish banks . In view of the 1.6 trillion Euros, which European states used to bail out their banks since the crisis, this of course leaves a bitter taste in the mouth.
Further Information:
Single Resolution Mechanism (SRM) - FAQs
Proposal for a Regulation for establishing uniform rules and a uniform procedure for the resolution of credit
Feasibility study in respect of a “Single Resolution Mechanism” (SRM) (DE)
Key elements of the mechanism
From the end of 2014, the European Central Bank (ECB) will directly supervise banks in the eurozone and other Member States, provided these also make a decision in favour. This Single Supervisory Mechanism (SSM) shall, together with the new strict supervisory requirements (CRD IV; in particular in trilogue negotiations), reduce the danger of banks getting into trouble. However, as this cannot be completely excluded, a resolution mechanism is required, which can operate on the same level as the SSM. The scenario in case a bank is experiencing problems will be as follows:
The ECB assumes its future role as a supervisor and notifies when a bank is getting into trouble and shall be resolved. A future committee, consisting of representatives of the ECB, the European Commission and the national banking authority, which is also responsible for this bank, prepares the resolution. This committee has comprehensive powers in respect of analyses and laying down the resolution concept, whereby the national authorities will be closely involved. Based on this concept, the Commission decides and determines how the resolution tools and the fund (see below) will be used. The respective national supervisory authority will then resolve the bank under supervision of the collective committee.
The SRM Committee now has a restructuring and resolution fund, which shall ensure that funds are available in case a bank is restructured. Over the coming decade, this fund shall be successively built up by the banks themselves. All 6,400 banks of the eurozone shall pay into the fund. This is not tax money; the fund is more a less a special fund, which installs a liability and insurance principle between credit institutions to minimise the risk for the general public, which otherwise - as has happened in the past - “had to” step in when banks had to be restructured or resolved, as much as possible. The fund shall be equal to an amount, which corresponds to one percent of protected savings all Euro banks. This would be 60 to 70 billion Euros. Should the fund make payments, banks are obliged to replenish it. The intention is to simplify and centralise the national resolution funds of the Member States, which are currently provided by the European structure.
No amendment to Agreement required
It would not be the European Union if this attempt of centralised supervision and resolution of banks would not trigger national worries about the loss of power. The German Finance Minister Wolfgang Schäuble particularly distinguished himself, when he pleaded for a “network” consisting of national supervisory authorities, apart from voicing his concerns this week in respect of the legitimacy of a Single Mechanism; a real Banking Union would require - so the frequently voiced criticism - amending the Primary Agreement. However, this does not correspond with the legal view of either the Commission or the Council. The legal opinion of René Repasi (Heidelberg University Institute for German and European Company and Corporate Law) on the legal feasibility of the SRM, which was commissioned by Sven Giegold (MEP, Greens) also comes to the conclusion that the Resolution Mechanism can be created on the basis of Art. 114 Section 1 of the Lisbon Treaty: the envisaged regulation concerning the resolution and restructure of banks would aim at removing obstacles to fundamental freedoms resp. unfair competition; hence, it would aim towards a working Single Market. Apart from that, the Bank Restructuring Fund did not involve (bank) taxes, but was a bank internal “insurance principle” under supervision. In addition - so the Study - the SRM would not interfere in the national autonomy of Member States and it was not permitted to use the funds of the European Stability Mechanism (ESM) for the Bank Restructuring Fund. This all the more significant as the Euro Group itself (the Finance Ministers of the Euro states) are currently discussion a direct recapitalisation of banks by the ESM. Barnier commented that he himself was of course in favour of amending the Agreement to install the Banking Union, but this would take too much time and was therefore hardly realistic. The financial and economic crisis had taken up too much time already. That is why the attempt was being made to legitimize the SRM via already existing Agreements.
Hence the coming weeks will remain interesting: what direction will the discussions take? How, if at all, will ESM and Banking Union interact at institutional level? What compromises will be negotiated between Central European and national perspective? The Commission hopes that the Council will give its blessing to the SRM before the end of the year and that it can come into force on 1.1.2015. However, there are still a few obstacles to overcome until then. Had the Banking Union been in place before the financial and economic crisis, told Barnier the press conference on Wednesday, states would “have to” come to the rescue with tax money “only” in the case of ca. five, mainly Irish banks . In view of the 1.6 trillion Euros, which European states used to bail out their banks since the crisis, this of course leaves a bitter taste in the mouth.
Further Information:
Single Resolution Mechanism (SRM) - FAQs
Proposal for a Regulation for establishing uniform rules and a uniform procedure for the resolution of credit
Feasibility study in respect of a “Single Resolution Mechanism” (SRM) (DE)