ECONOMY

European Commission to give Single Resolution Board power to shut down failing banks

BRUSSELS – The European Commission proposed on Wednesday a Single Resolution Mechanism (SRM) for all the EU member-states participating in the Banking Union. Despite German objections, the proposal provides for the establishment of a powerful Single Resolution Board, which will be able to recommend to the Commission to “push the button” on a Friday afternoon, and shut down any of the continent’s 6,000 banks, even if the home state’s authorities disagree.

Also, according to the proposal, the costs of resolutions will be covered by a Single Bank Resolution Fund, which will be under the control of the Single Resolution Board. This Fund will be capitalized by contributions from the banks, “pooling together the national resolution funds of the euro area Member States and of Member States participating in the Banking Union”. In other words, contributions from German banks will be used as a financial backstop to cover the costs of potential bankruptcies in Italy, Greece, and elsewhere. Berlin has repeatedly cited concerns about the legal basis of such Fund. A senior Commission source told reporters in Brussels, on Tuesday, that the Fund’s total resources will reach up to 70 billion euros in the next decade (1% of total covered deposits). In the meantime, if the Fund’s resources are not sufficient to cover the costs of a resolution, then the SRM could ask to borrow from the European Stability Mechanism (ESM).

The Board will consist of representatives from the ECB, the European Commission and national resolution authorities, while the chairman and the vice-president of the Board will be appointed by the Council. The proposal envisages that “the Board will have broad preparatory powers and be responsible for the key decisions on how a bank would be resolved”. If the proposal is adopted, then on the basis the Board’s recommendations, the Commission will decide whether and when to place a bank into resolution. The board will also oversee the process of resolution, which will be implemented by national authorities.

The Commission hopes that all legislative work will be completed until next May and, hence, the new authority will be operational from January 2015, together with the Bank Recovery and Resolution Directive. Before the proposed rules enter into force, any bank crises will continue to be managed on the basis of national regimes. However, these regimes are set to converge increasingly towards agreed principles of resolution, namely the allocation of bank losses to shareholders and creditors instead of taxpayers. “This is achieved on the one hand by the revised guidelines on state aid to banks also to be adopted on Wednseday, and on the other, the possibility of direct recapitalisation of banks by the European Stability Mechanism”, according to the summary of the proposals. Public resources will only be used as a last resort, “almost never”, Commission sources said on Tuesday.

If the legislation passes through the EU Council and the Parliament, then the new mechanism will complement the Single Supervisory Mechanism (SSM) which, once operational in late 2014, will see the European Central Bank (ECB) directly supervise banks in the euro area and in other Member States which decide to join the Banking Union. The Commission hopes that the reinforced supervisory framework of the SSM, as well as enhanced capital requirements, already adopted, will bolster the safety of banks.