The EU’s single resolution mechanism will enter into force, as scheduled, on 1 January 2016. This signals completion of the second pillar of Europe’s banking union.
As of 30 November 2015, a sufficient number of member states ratified an intergovernmental agreement (IGA) on the transfer and mutualisation of contributions to a single resolution fund (SRF). This will allow the SRF to become fully operational.
1. Single resolution mechanism
The creation of a single resolution mechanism (SRM) – with a central decision-making board and a single resolution fund – ensures that resolution decisions across participating member states will be taken in a coordinated and effective manner, minimising negative impacts on financial stability and reducing the dependence of banks on the creditworthiness of sovereigns.
The SRM is aimed at ensuring the orderly resolution of failing banks without recourse to taxpayers’ money. This will involve both a systematic recourse to the bail-in of shareholders and creditors, in line with the EU’s directive on bank recovery and resolution, and the possible recourse to the SRF.
The SRM will form one of the key elements of Europe’s banking union, along with the single supervisory mechanism (SSM) that entered into force on 4 November 2015. It will cover all banks established in the euro area and in other member states that choose to participate.
2. Intergovernmental agreement
The IGA enters into force on the first day of the second month following the date when instruments of ratification have been deposited by signatories participating in the banking union representing at least 90% of the aggregate of the weighted votes of all participants.
The IGA was signed in May 2014 by representatives of all member states except Sweden and the United Kingdom. The signatories issued a declaration signaling that they would strive to complete the ratification process in time to allow the SRM to be fully operational by 1 January 2016.
The agreement complements a regulation on the creation of a SRM, which establishes the fund and also features a central decision-making board. The SRM will be fully financed by bank contributions.
The Council decided in December 2013 to use an intergovernmental agreement to establish rules on the transfer and mutualisation of contributions in order to provide maximum legal certainty.
Countries that have signed the IGA but are not yet part of the banking union (i.e. non-euro area member states) will only be subject to the rights and obligations stemming from the agreement once they become part of the SSM and SRM.
3. Single resolution fund
Under the IGA, the fund will be built up over eight years, reaching a target level of at least 1% of the amount of covered deposits of all credit institutions authorised in all the participating member states. It is estimated that this will amount to about €55bn.
Contributions by banks raised at national level will be transferred to the SRF, which will initially consist of compartments corresponding to each contracting party. These will be gradually merged over the eight-year transitional phase. This mutualisation of paid-in funds will be front-loaded, starting with 40% in the first year and a further 20% in the second year, and continuously increasing by equal amounts over the subsequent six years until the SRF is fully mutualised.
This article was co-written by Marleen Mouton, Geassocieerd advocaat/Avocat associé, Lawsquare, and Olivier Hermand, Partner, PwC.