EMU Roadmap Sheds Light on Future Resolution Initiatives

Introduction

On 6 December 2012, the EU Council published a report entitled “Towards a Genuine Economic and Monetary Union”, building on an interim report on the same topic published in October 2012.  It proposes a timeframe and a 3-stage approach to the completion of Economic and Monetary Union (EMU), describing the RRP-specific requirements which form part of this initiative, as detailed below.

Stage Timescale Description 
Stage 1 End 2012 – beginning 2013

Ensuring fiscal sustainability and breaking the link between banks and sovereigns.

From an RRP perspective, this would involve:

  •   The   establishment of a Single Supervisory Mechanism (SSM) for the banking sector;
  •   Agreement   on the harmonisation of national resolution and deposit guarantee frameworks;
  •   Ensuring   appropriate resolution funding from the financial industry; and
  •   Establishing   the operational framework for direct bank recapitalisation through the   European Stability Mechanism (ESM).
Stage 2 Beginning 2013 – end 2014

Completing the integrated financial   framework and promoting sound structural policies at national level.

RRP specific measures would include the establishment of:

  •   A   single resolution authority (SRA); and
  •   A   financial backstop, in the form of an ESM credit line to the SRA.
Stage 3 Post 2014

Establishing a mechanism to create the   fiscal capacity necessary to enable EMU members to better absorb future country-specific   economic and financial shocks.

Single Supervisory Mechanism

The Council regards it as imperative that preparatory measures with respect to the SSM commence at the beginning of 2013, so that the SSM can be fully operational from 1 January 2014 at the latest.  This will involve granting strong supervisory powers to the ECB.

Single Resolution Mechanism (SRM)

Measures to establish the SSM are to be complemented by an SRM, build around an SRA and established at the same time as the ECB assumes its supervisory responsibilities with respect to the SSM.  Whilst the SSM would provide a “timely and unbiased assessment of the need for resolution”, the SRA would ensure timely and robust resolution measures are actually implemented in appropriate cases.  In other words, the SRM would complement the SSM by making certain that failing banks are restructured or closed down swiftly.  The establishment of an SRM is regarded as an indispensable element in the completion of EMU as it would:

  • Promote a timely and impartial EU-level decision-making process: it is hope that this would mitigate many of the current obstacles to resolution, such as national interest and cross-border cooperation frictions;
  • reduce resolution costs;
  • break the link between banks and sovereigns; and
  • Increase market discipline by ensuring that the private sector and not the taxpayer bears the cost of bank resolution

The SRM would be financed via a European Resolution Fund.  In turn, the fund would be financed via ex-ante risk-based levies on all banks directly participating in the SSM.  As mentioned previously, the fund would be buttressed by an backstop in the form of an ESM credit line to the SRA.  However, any support provided via the ESM would be recouped in the medium term by way of ex-post levies on the financial sector.

Deposit Guarantee Schemes (DGS)

References to an EU-wide deposit guarantee scheme seem to have been dropped in favour of a proposal to ensure that sufficiently robust national deposit insurance systems are set up in each Member State.  This, it is hoped, will limit the contagion effect associated with deposit flight between institutions and across countries, and ensuring an appropriate degree of depositor protection in the EU.

Financial Shock absorption function (FSAF)

This stage 3 measure would likely take the form of a contract-based insurance system set up at an EU level. Whilst RRP-specific, the establishment of an FSAF is seen as contributing to macroeconomic stability and therefore providing important support to the effectiveness of bank resolution measures in stages 1 and 2.  However, the Council is keen to emphasise that the FSAF would not be an instrument for crisis management per se, as this is a role to be performed by the ESM.  Rather, the purpose of FSAF would be to improve the overall economic resilience of EMU and eurozone countries.  In other words, it would contribute to crisis prevention and make future ESM interventions less likely.

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