The ECB has published its legal opinion on the Single Resolution Mechanism (SRM), a short summary follows:
The SRM should include all EU credit institutions
Resolution should only be triggered by a supervisory assessment of “failing or likely to fail”
The SRM should not require new legislation, Article 114 of the Treaty should suffice as a legal basis
The ECB supports early implementation of the bail-in tool (currently 2018)
Resolution financing must be provided by the Single Bank Resolution Fund. The ECB proposes a “temporary, fiscally neutral backstop” to the SBRF in the form of a credit line supplied by Member States, but recoupable from the financial industry
The ECB seeks representation as an observer in all plenary and executive meetings of the Single Resolution Board
The opinion voices its full support for the SRM which it views as a necessary complement to the Single Supervisory Mechanism, although it considers it crucial that the responsibilities of supervisory and resolution authorities are kept distinct. The ECB regards a fully-functioning single supervisory mechanism as a vital precondition for the establishment of the SRM, it therefore strongly supports adoption of the SSM legislation during the Parliament’s current term. This being the case, the ECB voices its support for the SRM to become effective as of 1st January 2015.
The 32 page opinion contains little that is unexpected; it is notable though, for its bullish tone on scope and timing of implementation. Perhaps it may be unwise to rely on delay.
The SSM Regulation bestows supervisory powers over “significant” Eurozone banks on the European Central Bank (ECB). The assessment of whether or not a bank is “significant” will be based on:
Size – the presumption being that any bank which fulfils any of the following criteria will be regarded as significant:
the total value of its assets exceeds EUR 30 billion; or
its total assets represent over 20% of the GDP of the relevant participating Member State (unless the value of those assets is below EUR 5 billion); or
both the bank’s national competent authority (NCA) and the ECB confirm that the bank is to be regarded as “significant”;
Importance for the economy of the EU or any Member State participating in the SSM; and
Significance of cross-border activities.
Any bank which has received public financial assistance shall be regarded as “significant” as are the three most significant banks in each of the participating Member States. The assessment as to whether or not a bank is “significant” should not be conducted more often than annually.
Pursuant to the SSM Regulation, the ECB will have power over the authorisation (and withdrawal of authorisation) of banks, as well as authority in relation to early intervention and recovery planning (but not resolution). In addition, it can, inter alia:
require banks to hold own funds in excess of capital requirements;
restrict, limit or require the divestment of activities of a bank;
impose limits on variable remuneration;
impose additional reporting and liquidity requirements; or
remove members of the management body.
The ECB is due to publish a framework for the SSM by 4 May 2014, prior to assuming its supervisory role on 4 November 2014. In advance of this, it is empowered to require NCAs to provide it with relevant information from 3 November 2013, the same day on which the SSM Regulation enters into force.
On 23 October 2013, the European Central Bank (ECB) published a note, accompanying press release and transcript of a question and answer session regarding the comprehensive assessment of banks’ balance sheets and risk profiles it will carry out in advance of assuming full responsibility for supervision as part of the single supervisory mechanism (SSM) in November 2014.
The exercise will commence in November 2013 and take approximately 12 months to complete. It will involve approximately 130 “significant” credit institutions established in 18 EU Member States (listed in the annex to the note), covering approximately 85% of euro area bank assets which will be directly supervised by the ECB. It has three main goals:
Transparency – enhancing the quality of information available concerning the condition of banks;
Repair – identifying and implementing necessary corrective actions; and
Confidence building – assuring all stakeholders that banks are fundamentally sound and trustworthy.
The assessment will be carried out in collaboration with national competent authorities and will consist of:
A supervisory risk assessment – addressing key risks in banks’ balance sheets, including liquidity, leverage and funding;
An asset quality review – examining the asset side of bank balance sheets as at 31 December 2013; and
A stress test, building on and complementing the asset quality review by providing a forward-looking view of banks’ shock-absorption capacity under stress.
The outcome of the assessment may lead to a range of remedial action, including changes in a bank’s provisions and capital.
 A bank is “significant if:
the total value of their assets exceeds €30 billion;
the ratio of total assets to GDP of the participating Member State of establishment exceeds 20 per cent, unless the total value of their assets is below EUR 5 billion;
the institution is among the three largest credit institutions in a participating Member State.
On 14 October 2013, the European Central Bank (ECB) published a speech given by its President, Mario Draghi, on 12 October 2013 regarding the Euro area economic outlook, ECB monetary policy and current policy challenges.
The speech was wide-ranging, but touched upon progress made to date in establishing European banking union. Mr Draghi welcomed the approval of the single supervisory mechanism (SSM) by the European Parliament on 12 September and looked forward to its “urgent adoption” by the EU Council later this month, with a view to the ECB adopting its new supervisory role by November 2014. In addition, Mr Draghi supported the establishment of the single resolution mechanism (SRM), “a necessary complement to the SSM”, by the end of 2014.
The Single Resolution Mechanism (SRM) proposed by the EU Commission in July has suffered a fresh blow (see this blog for SRM background). On 7 October 2013, an opinion from the European’s legal service sheds serious doubt on the legality of giving a new agency wide discretion to close troubled banks under EU treaties, potentially undermining a key element of the resolution proposal.
The 26-page document warns of the pitfalls involved in giving a body too many powers and in particular states that “The legal service considers that the powers which would be conferred by the proposal of the board…need to be further detailed in order to exclude that a wide margin of discretion is entrusted to the board”. The legal opinion may cause the EU Commission to rethink the proposal, causing more delays. The first stage of the proposal which involves the European Central Bank directly supervising 130 top euro zone lenders has already been delayed to the end of 2014. The SRM which forms one of the building blocks of the EU Banking Union now needs backing of member states to become law.
On 12 September 2013, the European Parliament published a press release announcing the adoption of a package of legislative acts to set up a Single Supervisory Mechanism (SSM) for the Eurozone. The SSM legislation was adopted with very large majorities and will bring the EU’s largest banks under the direct oversight of the European Central Bank (ECB) from September 2014.
On 10 July 2013, the EU Commission proposed a Single Resolution Mechanism (SRM), a complement to the Single Supervisory Mechanism (SSM) and one of the building blocks of EU Banking Union. The SRM is designed to ensure that the resolution of a failing bank can be managed efficiently with minimal costs to taxpayers and the real economy.
The proposed SRM would apply the substantive rules of the Recovery and Resolution Directive (RRD). The EU’s Council of Finance Ministers reached agreement on a general approach to the RRD on 27 June and the EU Parliament’s Committee on Economic and Monetary Affairs adopted its report on 20 May. Negotiations between the Council and the European Parliament are due to start soon with the aim of reaching final agreement on the RRD in autumn 2013. At its recent meeting, the EU Council of Ministers set themselves the target of reaching agreement on the SRM by the end of 2013 so that it can be adopted before the end of the current European Parliament term in 2014. This would enable it to apply from January 2015, together with the RRD.
Under the SRM:
the European Central Bank (ECB) would signal when a bank in the euro area or established in a Member State participating in the Banking Union was in severe financial difficulties and needed to be resolved;
a Single Resolution Board, consisting of representatives from the ECB, the EU Commission and the relevant national authorities, would prepare the resolution of a bank;
a Single Bank Resolution Fund, funded by contributions from the banking sector and replacing national resolution funds, would be set up under the control of the Single Resolution Board;
on the basis of the Single Resolution Board’s recommendation, or on its own initiative, the EU Commission would decide whether and when to place a bank into resolution and would set out a framework for the use of resolution tools and the Single Bank Resolution Fund; and
under the supervision of the Single Resolution Board, national resolution authorities would be in charge of the execution of a resolution plan.