2014 (Single Resolution Mechanism Regulation) - Main contents

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dossier	COM(2019)213 - Application and review of Directive 2014/59/EU (Bank Recovery and Resolution Directive) and Regulation 806/2014 (Single ...
document	COM(2019)213
date	April 30, 2019

Agreement²⁵

In accordance with past political agreements by Ministers of Finance,²⁶ and as also confirmed in the outcome of the December 2018 Euro Summit,²⁷ the common backstop to the SRF, essential to enhance the credibility of the Single Resolution Mechanism (SRM) in the Banking Union, will be established at the latest by the end of the transitional period for the mutualisation of the means in the SRF.

The Commission has repeatedly called for the common backstop to be put in place sooner.²⁸ In December 2018, the Euro Summit agreed that the early introduction of the backstop would be conditional on sufficient progress in terms of risk reduction to be assessed in 2020.

²² In particular Article 27 BRRD provides for the power of competent authority to activate early intervention measures when “an institution infringes or, due, inter alia, to a rapidly deteriorating financial condition, including deteriorating liquidity situation, increasing level of leverage, non-performing loans or concentration of exposures, as assessed on the basis of a set of triggers, which may include the institution’s own funds requirement plus 1,5 percentage points, is likely in the near future to infringe the requirements of Regulation (EU) No 575/2013, Directive 2013/36/EU, Title II of Directive 2014/65/EU or any of Articles 3 to 7, 14 to 17, and 24, 25 and 26 of Regulation (EU) No 600/2014 […]”

²³ Such a decision was taken recently by the ECB with respect to Carige bank (Cassa di Risparmio di Genova e Liguria). See https://www.bankingsupervision.europa.eu/press/pr/date/2019/html/ssm.pr190102.en.html

²⁴ Specifically, Article 16 SSMR

²⁵ Agreement on the transfer and mutualisation of contributions to the Single Resolution fund, 14 May 2014, 8457/14: http://data.consilium.europa.eu/doc/document/ST-8457-2014-INIT/en/pdf.

²⁶ Statement of Eurogroup and ECOFIN Ministers on the SRM backstop, 20 December 2013, 18137/13: http://data.consilium.europa.eu/doc/document/ST-18137-2013-INIT/en/pdf.

²⁷ Statement of the Euro Summit, 14 December 2018 and Terms of reference of the common backstop to the Single Resolution Fund.

²⁸ See, for example, Communication from the Commission to the European Parliament, the European Council, the Council and the European Central Bank – Further steps towards completing Europe’s Economic and Monetary Union: A Roadmap, 6.12.2017, COM/2017/0821 final and Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions on

It appears to be a broadly shared view among the Member States participating in the Banking Union that repayment of the common backstop by the SRF would be confined only to the concerned national compartment(s) in the event that the backstop was to be used before the end of the transitional period.²⁹ This has an impact on the amounts that can be repaid, and thus borrowed from the common backstop. In order to ensure that, during the transitional phase, full access to the backstop can also be had, where needed, limited changes to the Intergovernmental Agreement (IGA) will need to be agreed soon (in particular because without a rapid change to the IGA there may be limited benefit in early implementation).

One of the available options would be the mutualisation of ex-post and ex-ante contributions, starting from 2021 in order to deliver a common backstop of a credible size and increase the Banking Union resilience.

Liquidity in resolution

Ensuring that a resolved bank continues to have sufficient liquidity to meet its obligations is an essential part of an effective resolution. Liquidity can come from the market or from the normal central bank facilities. When those resources are temporarily insufficient, the SRF might be used to provide liquidity in resolution.

However, given the extent of the potential liquidity needs in resolution, the resources of the SRF, even when supplemented by a backstop of the same or similar size, may not be sufficient to adequately address these needs.³⁰

In accordance with Article 73 SRMR, the SRB may contract external borrowings in order to ensure the availability of resources for resolution, when contributions are not (yet) available for such purposes. The Commission considers that the provision allows the SRB to take appropriate means to ensure its workability, including by contracting a limited amount of borrowings outside of a resolution context.

In addition, in Member States outside the Banking Union as well as third country jurisdictions,³¹ the provision of liquidity support in resolution is foreseen either with no limits or with limits well above those possible within the Banking Union, often with the possibility of increases.

²⁹ Art. 5(1)(e) Intergovernmental Agreement.

³⁰ See, for example: Eurogroup report to Leaders on EMU deepening, 4 December 2018, https://www.consilium.europa.eu/fr/press/press-releases/2018/12/04/eurogroup-report-to-leaders-on-emu-deepening/; “Financing bank resolution: An alternative solution for arranging the liquidity required”, November 2018, W.P. de Groen, In-depth analysis requested by the ECON committee of the European Parliament, available at: http://www.europarl.europa.eu/RegData/etudes/IDAN/2018/624423/IPOL_IDA(2018)624423_EN.pdf ; “How to provide liquidity to banks after resolution in Europe’s banking union”, November 2018, M. Demertzis, I. Gonçalves Raposo, P. Hüttl, G. Wolff, In-depth analysis requested by the ECON committee of the European Parliament, available at: http://www.europarl.europa.eu/RegData/etudes/IDAN/2018/624422/IPOL_IDA(2018)624422_EN.pdf

The Commission therefore strongly supports the ongoing reflections on other sources and solutions for the provision of liquidity support in resolution and calls for these to be agreed upon and implemented in the course of 2019. It is important that resources of sufficient scale are available to provide short-term liquidity support, where needed.

Other issues

Article 129 BRRD requires the Commission to carry out a reflection on the basis of the conclusions of the Report of the European Banking Authority (EBA) on simplified obligations, issued in December 2017 pursuant to Article 4(7) of the Directive³² as well as the EBA report on the Minimum Requirement of Eligible Liabilities (MREL) issued pursuant to Article 45(19) BRRD in December 2016.³³

The EBA report on simplified obligations provides an overview of the application of the BRRD provisions, which allow competent and resolution authorities to require simplified recovery and resolution plans from eligible banks. Eligibility for simplified obligations must be determined based on several factors, as outlined in Article 4 BRRD and the Delegated Regulation on Simplified obligations.³⁴ The report highlights the different practices and approaches used by competent and resolution authorities with respect to the application of simplified obligations. Against this background, the report recommends continuous monitoring of the remaining divergences.

The Commission takes stock of the report and considers that simplified obligations are an important element of the framework, to ensure efficiency and proportionality of the requirement to develop recovery and resolution plans, as well as to reduce, where appropriate, the administrative burden of competent and resolution authorities. The Commission may therefore reflect on the need for improvements of the framework in this respect, taking into account the outcome of the monitoring of simplified obligations by the EBA.

The Banking Package, adopted by the co-legislators on 16 April 2019, includes several measures to amend the MREL regime and has therefore superseded the requirement for a review based on the EBA report.

B. Interaction between resolution and insolvency and reflection on possible further harmonisation of insolvency

The resolution regime constitutes a “carve-out” from general insolvency proceedings applicable under national laws. In particular, when a bank is determined to be failing or likely to fail, if there is no alternative private sector measure and it is in the public interest to put that institution in resolution, the harmonised rules contained in

³²https://www.eba.europa.eu/documents/10180/1720738/EBA+Report+on+the+Application+of+Simplified+Obligati ons+and+Waivers+in+Recovery+and+Resolution+Planning.pdf

³³ https://eba.europa.eu/documents/10180/1695288/EBA+Final+MREL+Report+%28EBA-Op-2016-21%29.pdf

³⁴ Commission Delegated Regulation (EU) 2016/1075 of 23 March 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the content of recovery plans, resolution plans and group resolution plans, the minimum criteria that the competent authority is to assess as regards recovery plans and group recovery plans, the conditions for group financial support, the requirements for independent valuers, the contractual recognition of write-down and conversion powers, the procedures and contents of notification requirements and of notice of suspension and the operational functioning of the resolution colleges, available at: https://eur-lex.europa.eu/legal-

BRRD/SRMR apply. In absence of a public interest to put the bank in resolution, the bank is wound up according to insolvency rules pursuant to the applicable national law.

At present, national insolvency laws applicable to failing banks are largely not harmonised, and the application of the insolvency rules at national level vary between Member States. BRRD/SRMR so far only introduced a limited element of harmonisation. In particular, BRRD mandates that certain non-covered eligible deposits have a higher ranking in national insolvency than other ordinary unsecured non-preferred liabilities and that covered deposits rank in insolvency higher than non-covered eligible ones.³⁵ The insolvency ranking has been further harmonised through the Bank Creditor Hierarchy Directive amending the BRRD.³⁶ The Directive created a new class of debt (senior non-preferred debt), which ranks in insolvency above subordinated liabilities, but below senior liabilities.

The review clause of the SRMR requires the Commission to assess whether to further harmonise insolvency proceedings for failing or likely to fail institutions.

The differences between insolvency regimes across the Banking Union may be a source of challenges and complexity for the resolution authority, particularly when insolvency is used as counterfactual in the context of measures on cross-border banks in resolution (to meet the “no creditor worse off” principle³⁷). More experience is needed to understand whether and how these issues should be addressed. However, the Commission can already identify some elements of bank insolvency laws for failing banks, which may deserve further reflection. These include an assessment on the applicable ranking of claims in national insolvency in different Member States, also with a view to determine whether further alignment between the ranking in insolvency and resolution is desirable.³⁸ More clarity could be needed on the procedures available at national level for the liquidation or wind up of banks which are declared failing or likely to fail but for which there is no public interest in taking resolution action. The BRRD/SRMR is not specific about how insolvency procedures for these banks should unfold, as these elements are not harmonised and are left to the national legislator to determine.

The Commission launched a study to get a better understanding of these issues.³⁹ The aim of the study will be to provide a basis for the analysis of divergences in the insolvency frameworks for banks under different national laws and to assess the interactions between these frameworks and the resolution rules. The study should also identify potential policy options for harmonisation, including the possible introduction of administrative liquidation proceedings in the EU.

³⁵ Article 108 BRRD

³⁶ Directive (EU) 2017/2399 of the European Parliament and of the Council of 12 December 2017 amending Directive 2014/59/EU as regards the ranking of unsecured debt instruments in insolvency hierarchy

³⁷ The principle is codified in Article 34 BRRD and requires that shareholders and creditors do not incur greater losses in resolution than insolvency

³⁸ In case of harmonisation of the ranking of claims in insolvency, due consideration should be given to the status of certain privileged creditors such as tax authorities, social security institutions, workers/employees

³⁹ The study was launched further to a request and budget provision made available by the EP for a Pilot Project on the Banking Union. A call for tender was published on 7 September 2018, see https://ted.europa.eu/TED/notice/udl?uri=TED:NOTICE:389651-2018:TEXT:EN:HTML&ticket=ST-35512292-rGDZ9PTvzUdNJZvojeKKI1EdXBHdQdHshD8PU99JSVKIfmyXIsA4zPHRCzeoTNQsdCLBE7Iu53KzhFMVrsz

C. Functioning of the SRM and SRB

The SRMR review clause provides that the Commission should carry out an assessment of several aspects related to the governance and functioning of the Single Resolution Mechanism (SRM) and the SRB.

The items listed for review, which are grouped below for convenience, include:

- assessing the interactions of the SRB (and the SRM in general) with other actors in the resolution process as well as the EBA, the European Securities and Market Authority (ESMA), and the European insurance and Occupational Pensions Authority (EIOPA);

- assessing whether the target level or the reference point of the SRF should be revised;

- assessing the internal governance arrangements of the SRB and other operational issues, and particularly the investment portfolio of the SRB;

- assessing the legal status of the Board as an agency of the Union.

As a preliminary remark, the Commission notes that the SRB assumed full resolution powers in 2016 and it needed time to establish its internal functioning and reach full staffing. There is not, therefore, a sufficient amount of information or experience to carry out an in-depth review.

It is, however, possible

to provide a few preliminary considerations.

Concerning the procedure established in the SRMR for the adoption of a resolution scheme⁴⁰, this entails several steps and requires coordination between various actors, including the SRB, national resolution authorities, the European Central Bank, and the Commission. In addition, the procedure requires that, in order to preserve financial stability and avoid a negative impact on the market, the resolution scheme must be adopted and executed in a very short timeframe. Although the procedure poses certain challenges, it ensures that decisions on bank resolution are taken quickly, while preserving the roles and prerogatives of all actors involved.

Outside the resolution procedure, the SRB has worked with national authorities, in accordance with the procedures set out in the framework. In the 2017 resolution planning cycle, the SRB set binding MREL targets at consolidated level for the majority of the largest banking groups within the SRB’s remit, and the SRB intends to set binding targets for all groups within its remit by 2020.

Concerning EBA, on 27 November 2017, the Commission published a Report on the role of the EBA with respect to mediation procedures in resolution.⁴¹ The Report addressed some issues that the EBA brought to the Commission’s attention. All these issues concern provisions of the EBA founding regulation,⁴² which is being amended in the context of ESAs review.⁴³

⁴¹ https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52017DC0661

⁴² Regulation 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority)

⁴⁰ Article 18 SRMR

Concerning the revision of the target level and reference point for the SRF, the SRMR lays down that by the end of an initial period of eight years from 1 January 2016, the available financial means of the SRF shall reach at least 1% of the amount of covered deposits of all credit institutions authorised in all participating Member States.⁴⁴ Similarly, the BRRD provides that by 31 December 2024, the available financial means of Member States’ financing arrangements shall reach at least 1% of the amount of covered deposits of all the institutions authorised in their territory.⁴⁵ Member States may set target levels in excess of that amount, an option that some Member States have used in transposing the BRRD.

A number of Delegated and Implementing Regulations have been adopted since 2014, laying down the modalities related to the ex-ante⁴⁶ and ex-post⁴⁷ contributions to be collected for the Single Resolution Fund and the national financing arrangements. Subsequently, within the Banking Union, the SRB calculated and, through national resolution authorities, started collecting ex-ante contributions to the Single Resolution Fund.⁴⁸ Outside the Banking Union, banks are now contributing to the national financing arrangements.

The EBA adopted a report in October 2016 on the reference point for setting the target level for resolution financing arrangements.⁴⁹ The report recommended changing the base for the target level for resolution financing arrangements from covered deposits to total liabilities less covered deposits, in order to reach more consistency with the regulatory framework. However, it also emphasised that resolution authorities and institutions must have certainty about the contributions during the build-up of resolution financing arrangements, and that volatility in the target level during that period should be avoided.

At this stage, the SRF is still being built up and has never been used for any resolution action. The focus should therefore be on reaching the target level and ensuring full implementation of the existing legal provisions. Changes to the target level itself or the reference point and the contributions do not appear necessary at this stage in the process.

Any further assessment could only be undertaken once the entire mechanism to provide funding in resolution will be complete and potentially put to test in concrete cases. It suffices to say at this stage that increased private sector loss-absorbing capacity,

⁴⁴ Article 69(1) SRMR. Article 102(1) BRRD.

⁴⁶ Commission Delegated Regulation (EU) 2015/63 of 21 October 2014 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to ex ante contributions to resolution financing arrangements, and Council Implementing Regulation (EU) 2015/81 of 19 December 2014 specifying uniform conditions of application of Regulation (EU) No 806/2014 of the European Parliament and of the Council with regard to ex ante contributions to the Single Resolution Fund.

⁴⁷ Commission Delegated Regulation (EU) 2016/778 of 2 February 2016 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to the circumstances and conditions under which the payment of extraordinary ex post contributions may be partially or entirely deferred, and on the criteria for the determination of the activities, services and operations with regard to critical functions, and for the determination of the business lines and associated services with regard to core business lines.

⁴⁸ https://srb.europa.eu/en/content/ex-ante-contributions-0.

⁴⁹ In accordance with Article 102(4) BRRD. Report on the appropriate target level basis for resolution financing arrangements, EBA-OP-2016-18, 28 October 2016, available at: http://www.eba.europa.eu/documents/10180/1360107/Report+on+the+appropriate+target+level+basis+for+resoluti

particularly as a result of the rules on MREL contained in the Banking Package, and the growth of the SRF can be considered as valid means to reduce the possible exposure of sovereigns to the banking sector.

With respect to the issue of the governance of the SRB and the change of its legal status from agency to EU institution,⁵⁰ given its recent creation and the limited practical experience gathered so far, there are not sufficient elements at this stage to suggest changes to the current provisions. In this respect, the Commission underlines that such a change of legal status would require a modification of the Treaty on the Functioning of the European Union (TFEU).

Finally, in view of the potential accession to the Banking Union of non-participating Member States, there may be scope to reflect on the modalities for an acceding Member State to participate in the SRM.

IV. Conclusion

The Commission takes stock of the issues discussed above, which are based on the limited experience the Commission gained from the application of the resolution framework so far.

The framework has been applied only in a limited number of cases. Out of those, only one case concerned the resolution of an institution under SRMR. It is also worth noticing that a number of these cases dealt with “legacy issues” which accumulated during the financial crisis or before.

In addition, the provisions concerning the bail-in tool and the establishment of the Single Resolution Board became applicable only as of 1 January 2016. Other elements -such as resolution planning for larger and complex institutions and the provisions concerning MREL – require a phasing in to be fully implemented.

Moreover, certain crucial parts of the framework – including the provisions on MREL, moratorium powers and the recognition of liabilities governed by third-country law - are in the process of being amended and, once in place, transition periods will apply.

In light of this, it

is premature to design and adopt legislative proposals at this stage.

The Commission will, however, continue monitoring the application of the resolution framework and further assess the issues identified above, also in light of additional elements provided by the recently launched study on the harmonisation of national insolvency laws and experience stemming from possible future application of the resolution framework.

To this end the Commission will also engage in a comprehensive discussion of the topics identified in this report with respect to BRRD/SRMR (as well as issues that may emerge from application of the resolution framework) with experts appointed by the European Parliament, Member States and all relevant stakeholders.

⁵⁰ Article 94(1)(a)(i) SRMR requires that, as part of the review of the legislation, the commission assesses whether ”there is a need that the functions allocated by this Regulation to the Board, to the Council and to the Commission, be exercised exclusively by an independent Union institution and, if so, whether any changes of the relevant

In this context the Commission will also take into account the interaction with policy developments in relation to deposit insurance, including the work of the High Level Group established by the Eurogroup,⁵¹ and the review of the Deposit Guarantee Scheme

Directive.⁵²

Eurogroup report to Leaders on EMU deepening of 4 December 2018.

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