ECB Wants Beefed-Up SRM

On 12 February 2014, the European Central Bank (ECB) published a speech by Mario Draghi, ECB President, on financial integration and EU banking union.

Mr Draghi conceded that there were improvements that could be made to elements of the Council’s proposal on the Single Resolution Mechanism Continue reading

Parliament Offers Olive Branch Over Resolution Funding?

On 4 February 2014, the EU Parliament published a press release on the latest negotiations over bank resolution.

As previously reported (see this blog post for more detail), negotiations over resolution funding seemed largely to have reached an impasse.  However, yesterday’s tone seems somewhat more conciliatory in nature. Continue reading

ECB Launches Bank Assessment Exercise

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”[1] 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.

[1] 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.

SSM to Come Into Force by End of 2014

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.

Council Deals Blow to SRM

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.

European Parliament Votes to Adopt SSM

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.

The SSM legislation consists of a proposed regulation conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions and a proposed regulation amending Regulation 1093/2010 (see this blog post for more details).  The European Parliament has also published a document containing the provisional texts adopted which can be found on pages 105 and 50 respectively.

The Regulations will come into force following approval by the EU Council and publication in the Official Journal of the EU.  The ECB will assume its supervisory role 12 months later.

EU Commission proposes Single Resolution Mechanism

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.