EU proposes plan for future rescues of troubled banks

The European Commission today proposed its plan for how future rescues of troubled banks would work under the single resolution mechanism (SRM).

The SRM would ensure that distressed banks could be wound down safely. The EU says it would complement the single supervisory mechanism (SSM) - which will directly supervise banks in the euro area and those that join the banking union.

If plans for the SRM go ahead on schedule, banks looking to receive state aid will need to present a restructuring plan to EU regulators and set strict executive pay limits. In addition, bank owners and junior creditors will have to take losses before the injection of any public funds.

The SRM would operate through the European Central Bank from 2015, with the eventual aim being for the bank to draw from a €60bn common fund supplied by eurozone banks, which would be used to top up funds raised from a bank's bondholders and large depositors. Rescues would work on a "bail-in" rather than a "bail-out" model. Brussels would have the final say on shutting down any of the eurozone's 6,000 banks, even if the national authorities disagree.

Internal market and services commissioner Michel Barnier said:

We have seen how bank crises can quickly spread across borders, sending confidence into a downward spiral throughout the euro area. We have also have seen how the collapse of a major cross-border bank can lead to a complex and confusing situation: the resolution of Dexia is not a model to emulate.

We need a system which can deliver decisions quickly and efficiently, avoiding doubts on the impact on public finances, and with rules that create certainty in the market. That is the point of today's proposal for a Single Resolution Mechanism: by ensuring that supervision and resolution are aligned at a central level, whilst involving all relevant national players, and backed by an appropriate resolution funding arrangement, it will allow bank crises to be managed more effectively in the banking union and contribute to breaking the link between sovereign crises and ailing banks.

The Single Resolution Mechanism would work as follows (from the release):

  • The ECB, as the supervisor, 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 European Commission and the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries), would prepare the resolution of a bank. It would have broad powers to analyse and define the approach for resolving a bank: which tools to use, and how the European Resolution Fund should be involved. National resolution authorities would be closely involved in this work.

  • On the basis of the Single Resolution Board's recommendation, or on its own initiative, the 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 fund. For legal reasons, the final say could not be with the Board.

  • Under the supervision of the Single Resolution Board, national resolution authorities would be in charge of the execution of the resolution plan.

  • The Single Resolution Board would oversee the resolution. It would monitor the execution at national level by the national resolution authorities and, should a national resolution authority not comply with its decision, it could directly address executive orders to the troubled banks.

  • A Single Bank Resolution Fund would be set up under the control of the Single Resolution Board to ensure the availability of medium-term funding support while the bank was restructured. It would be funded by contributions from the banking sector, replacing the national resolution funds of the euro area Member States and of Member States participating in the Banking Union, as set up by the draft Bank Recovery and Resolution Directive.

Watch European Commissioner Michael Barnier at a press conference live here.