Single Resolution Mechanism

Infographic - How the Single Resolution Mechanism works

Infographics - How the Single Resolution Mechanism works

The Single Resolution Mechanism's (SRM) purpose is to ensure an orderly resolution of failing banks with minimal costs to taxpayers and to the real economy.

Scope 

When the entirety of the Single Resolution  Mechanism rules enter into force, they will apply to banks in the euro area member states and in those EU countries which choose to join the banking union.

Structure

A key element of Europe's banking union, the Single Resolution Mechanism consists of:

  1. An EU-level resolution authority -  the Single Resolution Board
  2. A common resolution fund, financed by the banking sector

Key objectives

  • to strengthen confidence in the banking sector
  • to prevent bank runs and contagion
  • to minimise the negative relationship between banks and sovereigns
  • to eliminate fragmentation in the internal market for financial services

1. The Single Resolution Board

The main decision-making body in the Single Resolution Mechanism, the Board:

  • decides on resolution schemes  for failing banks (which include the application of resolution tools and the use of the single resolution fund)
  • is directly responsible for the planning and resolution phases of the banking union's cross-border and large banks,  which are supervised directly by the European Central Bank
  • is responsible for all resolution cases, irrespective of the size of the bank, if resolution requires recourse to the Single Resolution Fund
  • bears ultimate responsibility for all banks in the banking union and may therefore at any time decide to exercise its powers in respect of any bank

Composition of the Single Resolution Board

The Board meets in either the executive or the plenary session.

Executive session of the BoardPlenary session of the Board
Members with voting rights
  • executive chairperson
  • 4 full-time members
  • representative from member states in which the troubled bank and its branches or subsidiaries are located
Members with voting rights
  • executive chairperson
  • 4 full-time members
  • representatives from national resolution authorities (1 from each member state participating in the banking union)
Observers
  • permanent: 1 representative from the ECB and 1 representative from the Commission
  • ad hoc invited observers
Observers
  • permanent: 1 representative from the ECB and 1 representative from the Commission
  • ad hoc invited observers

The Council appointed the chair, vice-chair and full-time members of the Single Resolution Board in December 2014.

The term of office of the first chairperson appointed after entry into force of the SRM regulation is three years, renewable once for a period of five years. The term of office of the vice-chairperson and the four other full-time members is five years.

Decision-making by the Single Resolution Board

The executive session prepares all resolution decisions. It adopts those decisions to the fullest extent possible for those banks for which the board is directly responsible. 

The plenary session takes decisions of a more general nature:

  • decisions on the rules of procedure  
  • on the annual budget of the board 
  • on investments and staff matters 

It also takes decisions relating to the use of the Single Resolution Fund above certain thresholds.

It authorises the Single Resolution Fund to borrow and raise extraordinary ex-post contributions.

2. The Single Resolution Fund (SRF)

The Single Resolution Fund is a fund established at supranational level.

It will be used for resolving the failing banks, after other options, such as the bail-in tool, have been exhausted.

The fund will be financed by contributions from the banking sector.

The SRF will be built up over a period of 8 years. It should reach at least 1% of the amount of covered deposits of all credit institutions authorised in all the banking union member states. Its estimated amount will be around €55 billion.

The individual contribution of each bank will be calculated pro-rata to the amount of its liabilities (excluding own funds and covered deposits) in respect of the aggregate liabilities (excluding own funds and covered deposits) of all the credit institutions authorised in the participating member states. Contributions will be adjusted in proportion to the risks taken by each institution.

Infographic - Single Resolution Fund

Infographics - Single Resolution Fund

How the Single Resolution Fund works

The banks' contributions raised at national level will be transferred to the Single Resolution Fund.

A precondition for accessing the Fund is the application of the bail-in rules and principles laid down in the bank recovery and resolution directive and in the single resolution mechanism regulation.

This is necessary in order to ensure observance of one of the main principles of the banking union: the cost of bank failures should be borne by the financial industry and not by taxpayers.

The 8-year transition period

The Fund will initially consist of 'national compartments'. These will gradually be merged over an 8-year transitional phase. This 'mutualisation' of the use of paid-in funds will start with 40% in the first year and 20% in the second year, and will then increase continuously by equal amounts over the remaining 6 years until the national compartments cease to exist.

The transfer and mutualisation of funds is provided for in a separate intergovernmental agreement between the member states joining the banking union. Such a decision was taken by the Council to provide maximum legal certainty, given the legal and constitutional concerns in certain member states.

26 member states (all EU countries, except for Sweden and the UK) signed the agreement on 21 May 2014. In a separate declaration the signatories stated their intention to complete the ratification process in time for the SRM to become operational by 1 January 2016.

As of 30 November 2015, a sufficient number of member states have ratified an intergovernmental agreement on the transfer and mutualisation of contributions to the SRF. The agreement enters into force on the first day of the second month following the date when instruments of ratification have been deposited by signatories participating in the banking union representing at least 90 % of the aggregate of the weighted votes of all participants.

The non-euro area member states that have signed the agreement will have to observe the rights and obligations stemming from it only when they have joined the Single Supervisory Mechanism and Single Resolution Mechanism.

Additional financing arrangements

In December 2013, the EU finance ministers adopted a statement specifying that during the initial build-up phase of the Single Resolution Fund, bridge financing would be available from national sources, backed by bank levies, or from the European Stability Mechanism in accordance with existing procedures.

This is necessary to ensure sufficient financial resources for the Single Resolution Fund during the transitional period.

In December 2015 the member states participating in the banking union agreed to put in place a system of bridge financing arrangements: from 2016 each participating member state enters into a harmonised loan facility agreement with the Single Resolution Board, providing a national individual credit line to the Board to back its own national compartment in the Single Resolution Fund. This is necessary to ensure that the Fund functions properly in the case of possible funding shortfalls following the resolution of banks in a member state concerned.

The agreed maximum aggregate amount of the credit lines of euro area member states is set at 55 billion.

The national credit lines are to be used as a last resort, once all other financing sources available under the banking union rules are exhausted. 

The system of national credit lines aims to ensure the protection of taxpayers and will not have significant impact on member states' finances over medium term, because the amounts drawn under the credit lines will have to be repaid by the banking sector of each country.

The system will also ensure equal rights and obligations for all participating member states and will not incur any costs for countries that are not participating in the banking union.

Temporary transfers between national compartments will also be possible.

During the transitional phase a common backstop will be developed. It will facilitate borrowing by the Single Resolution Fund and will ultimately be reimbursed by contributions from the banking sector.

How the Single Resolution Mechanism works

The mechanism consists of the following steps:

1. The European Central Bank, the supervisory authority, notifies the Single Resolution Board that a bank is failing or likely to fail.

Such a decision can also be taken by the executive session of the Single Resolution Board on its own initiative, if, after having been informed, the ECB does not react within 3 days.

2. The executive session decides whether a private solution is possible and whether the resolution is necessary in the public interest.

3. If the conditions for resolution are not met, the bank is wound up in accordance with national law.

4. If the conditions for resolution are met, the Single Resolution Board adopts a resolution scheme. The scheme determines the resolution tools and the use of the Single Resolution Fund. The Board transmits the resolution scheme to the Commission immediately after it adopts it.

5. The scheme enters into force within 24 hours of its approval by the Board. During this time, the Commission can either adopt the scheme or:

  • object to the discretionary aspects of the resolution scheme adopted by the Single Resolution Board
  • propose to the Council to object to the scheme on the grounds that the resolution is not necessary in the public interest. In such a case the Council acts by simple majority
  • propose to the Council to approve a material modification of the amount of the Fund provided for in the resolution scheme or to object to it (a change of 5% or more to the amount of the fund proposed by the Board is considered to be material)

If the Commission decides to propose that the Council objects, the Commission has to do so within 12 hours of the Board's approval of the resolution scheme, enabling the Council to take a decision within the next 12 hours.

If the Council objects to the placing of an institution under resolution, that institution is wound up in accordance to the applicable national law.

6. The Board then ensures that the necessary resolution action is taken by the relevant national resolution authorities

Other actors in the Single Resolution Mechanism

Council of the EU

  • appoints the members of the Single Resolution Board
  • determines how the ex-ante contributions to the Single Resolution Fund are to be made by the banking sector (by adopting an implementing act)
  • may, in certain cases, object to a particular resolution scheme

European Commission

To comply with EU case law, an EU institution must endorse the resolution scheme adopted by the Board.

In practice this means that it will be for the European Commission to endorse the resolution scheme, or to object to the discretionary aspects of the resolution schemes adopted by the Single Resolution Board.

The Commission may also propose that the Council object to a resolution scheme in cases where the public interest criterion is not met or where there has been a material modification to the amount that is to be used from the Single Resolution Fund. 

European Central Bank

As the supervisor of the banks that belong to the banking union, it notifies the Single Resolution Board if a bank is failing or likely to fail.

National resolution authorities

The national authorities of participating member states are responsible for planning and adopting resolution plans in respect of those banks for which the Single Resolution Board is not directly responsible.

In addition, they implement all decisions addressed to them in accordance with the Single Resolution Board's instructions.

If a national resolution authority fails to comply with a decision of the Single Resolution Board, the Board has the power to address executive orders directly to the troubled bank.

Why Single Resolution Mechanism?

The single rulebook has harmonised to a certain extent the member states' national law and provides for common resolution tools and powers for the national authorities. However, it also allows the national authorities a degree of discretion in how those tools should be applied and how national financing arrangements should be used for resolution procedures.

The SRM was therefore designed to ensure a common approach for dealing with failing banks and thus increase the stability of the financial sector in the participating member states.

In addition, it is designed to  prevent the spill-over of crises to non-participating member states and thus to facilitate the functioning of the internal market.

Having a Single Resolution Mechanism was also needed to eliminate the risk of having separate and potentially inconsistent decisions by member states for the resolution of cross-border banking groups which may affect the overall costs of resolution.

The Single Resolution Fund is designed to prevent banks from being dependent on support from national budgets and from member states' differing approaches to the use of the financing arrangements. This will also help to avoid situations in which bank resolution at national level would have a disproportionate impact on the real economy.

Finally, the supranational resolution system was necessary to complement the EU-level supervisory system - the Single Supervisory Mechanism. This helps avoid possible tensions between the ECB and national resolution authorities.

The purpose of the Single Resolution Mechanism is thus to strengthen confidence in the banking sector, prevent bank runs and contagion, minimise the negative relationship between banks and sovereigns and eliminate fragmentation in the internal market for financial services.

Entry into force

Provisions on the preparation of resolution planning, the collection of information and cooperation with national resolution authorities apply from 1 January 2015.

Provisions relating to resolution planning, early intervention, resolution actions and resolution instruments, including the bail-in of shareholders and creditors, apply from 1 January 2016.

The intergovernmental agreement on the transfer and mutualisation of contributions to the single resolution fund enters into force on the first day of the second month following the date when instruments of ratification have been deposited by signatories participating in the SSM/SRM representing 90% of the aggregate of the weighted votes of all participating member states.