Brussels, 11/12/2013 (Agence Europe) - The Ecofin Council of Tuesday 10 December set the contours of the single resolution mechanism (SRM) for banks that will be set up in 2015.
Eurozone finance ministers will meet on Tuesday 17 December and EU28 finance ministers on Wednesday 18 December to try to reach agreement in principle on SRM, part of banking union in the eurozone, so that the ball can get rolling for talks with the European Parliament, whose economic and financial affairs committee will decide on its negotiating position on Tuesday 17 December. By that time, there will be a clearer idea of how the inter-institutional talks on the draft BRRD directive harmonising national bank resolution schemes are going. The BRRD talks have been heated (see related article). The new German government will be in place by then.
Unveiled in July, the European Commission's initial draft SRM legislation suggests the creation of a single resolution board as a European agency comprising national resolution authorities and five independent experts, along with a single resolution fund to pay for the winding up of failed banks.
Lithuanian Finance Minister Rimantas Sadzius said on Wednesday night, 11 December, that the ministers had not reached formal agreement because there had not been a legal document on the table, but they now had “general principles” and “clear legal bases” for the SRM. Italian Finance Minister Fabrizio Saccomanni said they had the key elements of an acceptable solution.
Drawn up by five eurozone nations (Germany, France, Italy, Spain and the Netherlands, along with the European Commission and the European Central Bank), a ten-page eurozone document sets out an overview of the new mechanism. A document on an intergovernmental agreement on how the European resolution fund would operate, and another document on the establishment of a backstop for the fund, are being prepared and will be published by March 2014, said French Economy Minister Pierre Moscovici. Ministers and experts agree that an enormous amount of legal work remains to be done to make the agreement hold water.
Sadzius said there was now virtually total agreement on the scope of application. As for the single supervisory mechanism (SSM), all 6,000 or so banks in the eurozone will be covered by the SRM. Moscovici said the resolution board would be granted the power of recall. The board will be directly responsible for planning and implementation for the 128 banks supervised directly by the future European supervisory board, the ECB, along with cross-border banks with at least one subsidiary in another member state. German Finance Minister Wolfgang Schauble and Internal Market Commissioner Michel Barnier said that would make 250 banks in total. National resolution authorities will replace the SRM for smaller banks unless cash from the single resolution fund is required. Member states will be able if they want to hand responsibility for winding up banks in their country to European level.
Any decision by the single resolution board would need to be formally validated by the European Commission. If it disagrees with a board decision, the Council of Ministers would get involved and may require changes to the decision to be made. It would then decide by a simple majority vote of eurozone countries; non-euro participating countries would comply but not have the power to vote. The Commission is not happy with this solution, Barnier saying it is over-complex and mixes up the role of the Commission and the Council of Ministers. He says the original idea of giving a single EU institution the power to validate board decisions was clearer, an idea backed by the vast majority of member states, but not Germany.
European Fund. The establishment of a resolution fund would be covered both by the proposal on the table (legal basis of Article 114 of the EU treaty, Single Market) and an intergovernmental agreement (outside the Community Method). This is demanded by Germany and would require unanimous decision making on details of bail-ins, how cash would be transferred from national resolution funds to the EU resolution fund and the gradual pooling of national contributions. Dutch Finance Minister Jeroen Dijsselbloem said it would be a single fund whose architecture still needs to be discussed, but he thought that everyone wants to ensure it is credible and that funds will be available when banks are wound up. Happily, he said, there are bail-in rules requiring investors to assume the first losses. Saccomanni said they had taken account of Germany's problems, but in exchange, it would become a common fund.
During the ten phase-in years (2016 to 2026), the European fund would be compartmentalised, with one SRM participating country, one compartment, as mooted by the Netherlands. If a bank is wound up, finance would only come from the compartment of the country or countries where the bank and its subsidiaries are based. In 2016, the national compartments would cover all of the wind-up costs, and the remainder of the fund would not pay anything. In 2017, the ratio would be 90%-10%, increasing until in 2027, the European side of the fund, which will be built up to €55 - €60 billion, will deal with all the resolution costs. Moscovici said that, right from the start, the cash would gradually be pooled so that a single fund was formed after ten years. He said the basic elements of the fund would have a “Community basis”, but Sadzius said the fund would be mostly based on the intergovernmental agreement.
The start of the SRM would be aligned with the roll out across the EU of bail-ins whereby private investors (shareholders, bondholders and savers, in that order) would have to contribute to the cost of winding up a failed bank before any public money is forthcoming. In other words, they would both start in 2016.
Backstops. The European resolution fund would have a public backstop, as required to be credible in the first ten years of operation. Moscovici said there would be a backstop available as a last resort, whatever the circumstances, including for direct bank recapitalisation, and it will be pooled within ten years. A lot of work remains to be done in this area. The European stability mechanism initially came to mind for the backstop. Germany refuses to countenance this, but France says the backstop will be based on the ESM. (MB/transl.fl)