the single resolution mechanism (srm) and the …• the these are the ‘entities and entities...

The Single Resolution Mechanism (SRM) and

the Single Resolution Fund (SRF):

An introduction to the 2nd pillar of the

EBU

Christos Vl. Gortsos

Professor of International Economic Law at the

Panteion University of Athens,

Secretary General of the Hellenic Bank Association

EFDI Meeting, Athens

June 9, 2015

TABLE OF CONTENTS

A. Introductory Remarks- The three pillars of the EBU

B. A general overview of the SRMR framework

B.1 Basic provisions of the SRMR

B.2 Institutional arrangements: the Single Resolution Board

B.3 Power to impose penalties

C. Resolution planning and early intervention: some aspects

D. Resolution under the SRMR

E. The Single Resolution Fund

F. Concluding Remarks

2

3

Α. Introductory remarks

The three pillars of the EBU

Α. Introductory remarks- The three pillars of the EBU

The creation of a ‘European Banking Union’ (hereinafter the ‘EBU’) is a very ambitious political initiative, which was tabled at the Euro Area Summit of 29 June 2012, amidst the current fiscal crisis in the euro area, which became manifest in 2010.

The main rationale behind this initiative is summarized in the following sentence of the Summit’s Statement:

“We affirm that it is imperative to break the vicious circle between banks and sovereigns.”

This initiative aimed at establishing a European Banking Union without amending the European Treaties (thus far achieved).

4

Α. Introductory remarks (cont.)

‘Europeanised bank safety net’

a Single Supervisory Mechanism (SSM) for the micro-prudential

supervision of credit institutions (CIs) legally incorporated in euro

area Member States (MS),

a Single Resolution Mechanism (SRM) for unviable CIs (also

mainly incorporated in euro area MS), and a Single Resolution

Fund (SRF) to cover any resulting funding gaps,

a single deposit guarantee scheme, which coupled with the Single

Resolution Board (a part of the SRM) could form a ‘European

Deposit Insurance and Resolution Authority’, or EDIRA, and

a ‘single rulebook’ containing substantive rules on all the previous

aspects, aiming at a ‘total harmonisation approach’ for all EU MS

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6

TABLE 1

The key legal sources of the three main pillars of the European Banking Union

Prudential supervision and

regulation of CIs

Resolution of non-viable

CIs

Deposit guarantee

schemes

European

“Single”

Mechanisms

Single Supervisory

Mechanism:

Council Regulation (EU) No

1024/2013 (‘SSMR’)

ECB Regulation (EU) No

468/2014 (‘ECB Framework

Regulation’)

other ECB legal acts

Single Resolution

Mechanism and Fund:

Regulation (EU) No

806/2014 (‘SRMR’), and

Commission delegated and

implementing acts

Intergovernmental

Agreement (2014) (‘SRF’)

No initiatives as yet

Harmonization

of substantive

rules

(“Single

Rulebook”)

Regulation (EU) No 575/2013

(‘CRR’), and Commission

delegated and implementing

acts

Directive 2013/36/EU (‘CRD

IV’), and Commission


acts

Directive 2014/59/EU

(‘BRRD’), and Commission


acts

Directive

2014/49/EU, and a

Commission

delegated act

(‘DGSD’)

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TABLE 2

Addressees of and date by which the main provisions of the key legal sources pertaining to

the European Banking Union are applicable

A. Authorisation - prudential supervision - prudential regulation

Legal act Addressees Beginning of (full)

application

Regulation (EU) No 1024/2013 (‘SSM

Regulation’) 19+ MS 4 November 2014

ECB ‘SSM Framework Regulation’ 19+ MS 15 May 2014

Regulation 575/2013 (‘CRR’) 28 MS 1 January 2014

Directive 2013/36/EU (‘CRD IV’) 28 MS 1 January 2014

B. Recovery and resolution

Regulation (EU) No 806/2014 (‘SRM

Regulation’) 19+ MS 1 January 2016

Intergovernmental Agreement on the

‘SRF’ 19+ MS 1 January 2016 (upon

ratification by Contracting

Parties)

Directive 2014/59/EU (‘BRRD’) 28 MS 1 January 2015

C. Deposit guarantee

Directive 2014/49/EU on deposit

guarantee schemes 28 MS 4 July 2015

8

Β. A general overview of the SRMR

framework

B.1. Basic provisions of the SRMR

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1. Scope of application (Art. 1-2 SRMR)

The SRMR establishes uniform rules and a uniform procedure for the resolution of entities which are established in the participating MS.

Which entities?

Credit institutions

Parent undertakings, including (mixed) financial holding companies, if they are subject to consolidated supervision carried out by the ECB in accordance with Art. 4(1)(g) of the SSMR

Investment firms and financial institutions, if covered by the consolidated supervision of the parent undertaking carried out by the ECB

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1. Scope of application (cont.)

Participating Member States:

MS whose currency is the euro (in the ECB Framework Regulation

also called ‘euro area participating Member States’), and

MS with a derogation (including the UK and Denmark) which have

established a close cooperation (art. 7 SSMR).

If a close cooperation between a MS and the ECB is suspended or terminated:

• entities established in that MS cease to be covered by the SRMR

• the SRMR continues to apply to ongoing resolution proceedings

• contributions to the SRF are recouped

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2. The Mechanism (Art. 1(2) SRMR)

The uniform rules and procedure established by the SRMR shall

be applied by:

the Single Resolution Board (“Board”) established in

accordance with Art. 42, together with

the Council and the Commission and

the national resolution authorities (NRAs)

The SRM is supported by a single resolution fund (SRF).

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2. The Mechanism (cont.)

Single Resolution Board

operational since January 2015,

EU agency with a specific structure corresponding to its tasks,

has legal personality and enjoys the most extensive legal

capacity accorded to legal persons under national law in each

MS,

may acquire or dispose of movable and immovable property

and be a party to legal proceedings

represented by its Chair

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2. The Mechanism (cont.)

Entry into force

Provisions on the preparation of resolution planning, the collection

of information and cooperation with national resolution authorities

apply as of 1 January 2015

Provisions relating to resolution planning, early intervention,

resolution actions and resolution instruments, including the bail-in of

shareholders and creditors, will apply as of 1 January 2016, provided

that the conditions for the transfer of contributions to the SRF have

been met

The SRF Agreement will enter into force once ratified by member

states participating in the SSM/SRM that represent 90% of the

aggregate of the weighted votes of all participating member states.

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3. Relation to the BRRD and applicable national law (Art.5)

(a) If the Board performs tasks and exercises powers, which, according

to the BRRD, are to be performed or exercised by the NRAs, the

Board is considered to be the relevant national resolution

authority.

(b) Decisions taken within the context of the SRM are subject to and must be

in compliance with:

• relevant EU law and any legislative and non-legislative acts, including

those referred to in Articles 290 and 291 TFEU (delegated and

implementing acts, respectively)

• relevant binding regulatory and implementing technical standards

developed by the EBA

• EBA decisions in accordance with the EBA Regulation

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4. General principles governing the operation of the SRM (Art. 6)

• no discrimination,

• full regard and duty of care to the unity and integrity of the

internal market,

• due consideration to the resolution objectives,

• due consideration to resolution actions on non-participating

Member States,

• ‘fiscal neutrality’, and

• NRAs’ specification rights

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5. Division of tasks within the SRM (Art. 7)

• the These are the ‘entities and entities groups to in Article

7(2)’.

(c) If the ‘resolution action’ requires the use of the SRF, the Board

must adopt the resolution scheme.

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Board NRAs

Draws up the resolution plans and

adopts all resolution decisions

for designated entities that are not

part of a ‘group’, and groups which:

i. either are considered to be

significant (Art. 6(4) SSMR), or

ii. in relation to which the ECB has

decided (Art. 6(5)(b) SSMR) to

exercise directly all of the

relevant powers, and

iii. other ‘cross-border groups’.

If use of the SRF is required, adopts

the resolution scheme

Same tasks with regard to entities and

groups not covered by the Board.

When adopting a resolution decision,

the NRAs must take into account and

follow the resolution plan, unless they

assess that the resolution objectives

can be achieved more effectively by

taking other actions

Inform the Board of the measures to

be taken and closely coordinate

Submit to the Board the resolution

plans, and any updates thereof,

accompanied by a reasoned

resolvability assessment


5. Division of tasks within the SRM (cont.)

Notwithstanding the above, participating Member States may

decide that the Board exercises all relevant powers and

responsibilities conferred on it by the SRMR in relation to

entities and groups, other than those referred to in Article 7(2),

established in their territory.

In such a case, Art. 7(3)-(4), 9, 12(2), and 31(1) SRMR do not

apply.

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B.2 Institutional arrangements:

the Single Resolution Board

19

20


1. Composition:

the Executive Director,

four additional full-time members,

a member appointed by each participating Member State,

representing the national resolution authorities

a designated representative with permanent observer status by the

ECB and the Commission respectively

On 19 December 2014, the Council formally appointed the members of the Single

Resolution Board: Elke König (Chairperson), Timo Löyttyniemi (Vice-Chair), Mauro

Grande (Strategy and Coordination Director), and Antonio Carrascosa, Joanne

Kellermann and Dominique Laboureix (Resolution Planning Directors).

2. Each member has one vote

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3. Administrative and management structure

• a plenary session performing the tasks referred to in Art. 50,

• an executive session performing the tasks referred to in Art. 54,

• a Chair performing the tasks referred to in Art. 56, and

• a Secretariat, which provides the necessary administrative and

technical support on the performing of the tasks assigned to the

Board.

Participation in the SRB

Plenary session Executive session

• executive Director,

• four additional full-time members,

• a member appointed by each participating

MS, representing the NRAs

• a designated representative with permanent

observer status by the ECB and the

Commission respectively

• Chair and the four (4) full-time members,

must meet as often as necessary

• the Board members from NRAs participate

under specific conditions

Prepares the decisions to be adopted by the

Board in its plenary session


4. Appeal Panel for the purposes of deciding on appeals

submitted in accordance with Art. 85(3)

5. Independence

• institutional independence (Art. 47),

• operational independence is guaranteed by Art. 8, 10-16 and

28-41, which lay down the Board’s necessary powers in order

to fulfil its objectives,

• personal independence (Art. 56), and

• financial independence is stipulated in Art. 57-65.

22


6. Accountability

i. vis-à-vis EU institutions, inter alia, comprises:

• the submission of an Annual Report to the EU institutions

• the duty of the Chair to present that report in public to the EU

Parliament, and to the Council, and

• the duty of the Chair, at the request of the EU Parliament, to

participate in an annual (at least) hearing by the competent committee

on the performance of the resolution tasks by the Board

ii. vis-à-vis national parliaments, inter alia, comprises:

• the submission of the Annual Report to national parliaments

• the Board’s duty to reply in writing to requests, observations or

questions by a national parliament in respect of the Board’s functions

• the Chair’s obligation to respond to invitations by national

parliaments to exchange views in relation to the resolution of

designated entities

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24


Fines

designated entity has intentionally or negligently committed

one of the infringements listed in Art. 38(2),

imposed when designated entities: i. do not supply the information requested (under Art. 34),

ii. do not submit to a general investigation (under Art. 35) or an

on-site inspection (under Art. 36),

iii. do not comply with a decision addressed to them by the Board

the Board may recommend to NRAs to impose penalties in

accordance BRRD and national law

Fines applied may not exceed 1% of the annual turnover of

the entity concerned in the preceding business year.

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Periodic penalty payments

imposed either on a designated entity or a person

to compel compliance with a request under the Articles

governing the Board’s investigatory powers (Art. 34-36) to:

i. supply information,

ii. submit to an investigation,

iii. submit to an on-site inspection

must be effective and proportionate

imposed on a daily basis

the amount of a periodic penalty payment must be 0.1% of the

average daily turnover in the preceding business year

26

C. Resolution planning and early intervention

under the SRMR - some aspects-

27

C. Resolution planning and early intervention under the SRMR - some aspects-

1. General provisions

NRAs national resolution authorities must submit to the Board all

information necessary

The Board draws up the resolution plans after consulting the ECB or

the relevant NRAs.

The Board may require the NRAs to prepare and submit to it draft

resolution plans.

For the revision or update of the resolution plans, the institutions,

the ECB or the national competent authorities must promptly

communicate to the Board any change necessitating them.

28


2. Contents of resolution plans (art. 8-9 SRMR)

Inter alia, the resolution plans:

• set out options for applying the resolution tools and exercising

the resolution powers to the entities and groups referred to in

Art. 7(2) (and, if the conditions for their application are met,

in Art. 7(4)(b) and 7(5)), and

• provide for the resolution actions which may be taken if such

an entity or a group meets the conditions for resolution

29


3. Assessment of resolvability (art. 10 SRMR)

If the Board determines that there are substantive impediments to the

resolvability of that entity or group, NRAs are instructed to take

measures to remove such impediments (Art. 10(11) SRMR).

An entity is deemed resolvable, if it is feasible and credible for the

Board to:

either liquidate it under normal insolvency proceedings

or to resolve it by applying to it resolution tools and exercising

resolution powers, while avoiding, to the maximum extent

possible, any ‘significant adverse consequences’ for the

financial system, and

with a view to ensuring the continuity of critical functions

carried out by the entity. 30


3. The minimum requirement for own funds and eligible liabilities

(MREL) (Art. 12)

Calculated as the following ratio:

i. the amount of own funds and ‘eligible liabilities’ of the

institution,

ii. as a percentage of own funds and total liabilities of the

institution.

May not exceed the amount sufficient to ensure that, if the bail-in

tool were to be applied:

• the sustained losses could be absorbed, and

• the CET 1 ratio could be restored to the necessary level under

the CRD IV.

31


4. Early intervention (Art. 13)

The ECB or national competent authorities must inform the

Board of any measure they require an institution or a group to

take or that they themselves take under specific provisions of

the SSMR, the BRRD and CRD IV.

From the date of receipt of this information, and without

prejudice to the powers of the ECB and national competent

authorities under other EU legal acts, the Board must

prepare for the resolution of the institution or group

concerned.

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D. Resolution under the SRMR -some aspects-

33


1. Resolution Objectives (Art. 14)

i. Ensure the continuity of ‘critical functions’.

ii. Avoid significant adverse effects on financial stability (by

preventing contagion, including to market infrastructures, and by

maintaining market discipline).

iii. Protect public funds by minimising reliance on extraordinary

public financial support.

iv. Protect depositors covered by the DGSD and investors covered

by Directive 97/9/EC “on investor-compensation schemes”.

v. Protect client funds and client assets.

Also:

seek to minimise the cost of resolution and avoid destruction of value,

subject to different provisions of the SRMR, the resolution objectives are of

equal significance

34


2. General Principles governing resolution (Art. 15)

The shareholders bear first losses.

Creditors bear losses after the shareholders, in accordance with the

order of priority of their claims (Art. 17 SRMR, unless otherwise

provided)

Creditors of the same class are treated in an equitable manner (unless

otherwise provided)

No creditor may incur greater losses than would have been incurred

if a designated entity had been wound up under normal insolvency

proceedings

Replacement of management & liability of natural and legal

persons, subject to national law, for their responsibility for the

failure of the institution

35


2. General Principles governing resolution (cont.)

When deciding on the application of resolution tools and the

exercise of resolution powers, the Board, the Council and the

Commission must act in a way that minimizes the impact on:

other group entities and on the group as a whole, and

the adverse effect on financial stability in the EU and

its Member States, in particular in the countries where

the group operates.

36


3. Resolution procedure (Art. 18)

(a) Conditions for resolution are met Conditions:

i. the CI is failing or is likely to fail (determined by the ECB)

ii. no reasonable prospect that any alternative private sector or

supervisory action (including early intervention measures

or the write down or conversion of capital instruments)

would prevent the CIs failure within a reasonable

timeframe (determined by the Board in executive session

or, where applicable, by the NRAs in cooperation with

ECB)

iii. a resolution action is necessary in the public interest

37


3. Resolution procedure (cont.)

(b) Board adopts a resolution scheme

(c) The Commission and the Council endorse the scheme or

object

(d) Implementation of resolution actions

38

39

SRB submits

resolution scheme

to the Commission

(COM)

COM within 24 hours

endorses the resolution

scheme

COM within 24 hours

objects to the resolution

scheme concerning

discretionary aspects of it

SRB within 8 hours

modifies the resolution

scheme in accordance with

the reasons expressed

COM within 12 hours

proposes to ECOFIN to

object to the resolution

scheme on the grounds that

the resolution scheme does

not fulfil the criterion of

public interest

No objection by the

ECOFIN to the resolution

scheme within 24 hours

from its transmission by the

SRB

Adoption of

the resolution

scheme

Objection by the ECOFIN to

the resolution scheme within 24

hours from its transmission by

the SRB

winding up of

the entity

concerned

COM within 12 hours

proposes to ECOFIN to

approve or object to a

material modification of

the amount of the Fund

provided for in the

resolution scheme

ECOFIN objects to a material

modification of the amount of the

Fund provided for in the

resolution scheme within 24 hours

from its transmission by the SRB

Adoption of

the resolution

scheme

ECOFIN approves a material

modification of the amount of the

Fund provided for in the resolution

scheme within 24 hours from its

transmission by the SRB

SRB within 8

hours modifies

resolution scheme

in accordance

with the reasons

expressed

3. Resolution procedure (art. 18 SRMR)

40


4. Resolution tools

Art. 22 (1) SRMR

If the Board decides to apply a resolution tool and that resolution action

would result in losses being borne by creditors or their claims being

converted, it must instruct the national resolution authorities to

exercise the power to write down and convert relevant capital

instruments in accordance with Art. 21 immediately before or together

with the application of the resolution tool.

Resolution tools:

i. sale of business (Art. 24)

ii. Asset separation (Art. 26)

iii. Bridge institution (Art. 25)

iv. Bail-in (Art. 27)


5. Other important provisions

Use of State aid and of the Single Resolution Fund (Art. 19)

Valuation for the purposes of resolution (Art. 20)

Write down and conversion of capital instruments (Art. 21)

Also:

The Board closely monitors the execution of the resolution

scheme by the NRAs (Art. 28)

NRAs must take the necessary actions to implement

decisions referred to in the SRMR. Otherwise the Board

may directly order an institution to take specific measures.

(Art. 29)

41

E. Single Resolution Fund

42


1. The SRF Agreement

Contracting Parties (CPs) committed to the following:

to transfer gradually the contributions raised at national level to the

SRF

to allocate, during a transitional period, the contributions to

different ‘compartments’ corresponding to each CP.

This transitional period:

• starts on the date of application of the SRF Agreement, and

• lapses when the SRF reaches the target level (under Art. 68), but

not later than eight (8) years after the date of application of the SRF

Agreement.

43


1. The SRF Agreement (cont.)

The use of the compartments will be subject to a

‘progressive mutualisation’, meaning that they will cease to

exist at the end of the transitional period with a view to

achieving the effective operations and functioning of the SRF.

The mutualisation of paid-in funds will evolve as follows:

• 40% in the first year,

• a further 20% in the second year,

• and continuously increasing by equal amounts over the

subsequent six years.

44


1. The SRF Agreement (cont.)

instrument of public international law and, as such, subject

to the principle of reciprocity

must be applied and interpreted in conformity with the

Treaties and EU banking law concerning the resolution of

institutions

open to accession by MS other than the CPs

within ten (10) years of its entry into force, its substance

should be incorporated into the EU legal framework

45


2. SRMR provisions

Target level (Art. 69): at least 1% of the amount of

covered deposits of all CIs authorised in the

participating MS

Ex-ante contributions (Art. 70): raised at least annually

and pro-rata to each CIs total liabilities less covered

deposits

Ex- post contributions (Art. 71-74): extraordinary basis

Owned, administered and managed by the Board (Art.

67, 75)

46


3. Mission of the SRF

The Board may use the SRF only to the extent necessary, inter

alia, for the following specific purposes:

• to guarantee the assets or the liabilities of or to make loans

to the CI, its subsidiaries, a bridge institution or an asset

management vehicle,

• to purchase assets of the CI,

• to pay compensation to shareholders or creditors if

necessary,

• to make a contribution to the CI in lieu of the write-down or

conversion of liabilities of certain creditors when they have

been excluded from the scope of bail-in (Art. 27(5)).

47


48


the adoption of the resolution framework is a major

achievement of the new EU banking framework and resolution

is expected to become the new norm

SRM should be viewed as supplementary to the SSM and

these two components of the EBU should be considered

together

Unlike the ECB within the SSM context, the SRB, as an EU

agency, is subject to restrictions inherent to the agency model:

critically relies on NRAs

from an operational point of view, the SRB will be

considerably smaller than the ECB

49

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