The European
Parliament and Council reached agreement on legislation to establish a Single
Resolution Mechanism to orderly resolve failed and failing financial
institutions and investment firms. The resolution authority is backed by an appropriate resolution funding arrangement and a robust
decision-making process. A Single Resolution Fund would be constituted to
which all the financial institutions in the participating Member States would
contribute. Parliament is expected to pass the legislation
in April, with subsequent approval by the Council. The Single Resolution
Mechanism would enter into force on January 1, 2015, while bail-in and
resolution functions would apply from one year later, as specified under the
Bank Recovery and Resolution Directive.
In case of a cross-border failure of a major financial firm, noted
Commissioner for the Internal Market Michel Barnier, the Single Resolution
Mechanism will be much more efficient than a network of national resolution
authorities and will help avoid risks of contagion. While the Single Resolution
Mechanism might not be a perfect construction, he continued, it will allow for
the timely and effective resolution of a cross border financial institution,
thus meeting its principal objective.
Resolution Board. Centralized
decision-making would be built around a strong Single Resolution Board and
would involve permanent members as well as the Commission, the Council, the
European Central Bank (ECB) and the national resolution authorities. In most
cases, the ECB would notify the Board, the Commission, and the relevant
national resolution authorities that a financial institution is failing. If the
Board finds that there is a systemic threat and no private sector solution in
sight, it would adopt a resolution
scheme including the relevant resolution tools and any use of the Resolution Fund.
The Commission, is responsible for assessing the discretionary aspects of the
Board's decision and endorsing or objecting to the resolution scheme. The
Commission's decision is subject to approval or objection by the Council only
when the amount of resources drawn from the Single Fund is modified or if there
is no public interest in resolving the financial firm. Where the Council or the Commission object to the
resolution scheme, the Board would have to amend the resolution scheme, which
would then be implemented by the national resolution authorities. If resolution
entails State aid, the Commission would have to approve the aid prior to the
adoption by the Board of the resolution scheme.
Resolution Fund. The Resolution
Fund has a target level of €55 billion and can borrow from the markets if
decided by the Board in plenary session. The Fund would be owned and
administrated by the Board. The Single Fund would reach a target level of at
least 1 percent of covered deposits over an eight-year period. During this
transitional period, the Single Fund, established by the Regulation, would
comprise national compartments corresponding to each participating Member State
The resources accumulated in those compartments would
be progressively mutualized over a period of eight years, starting with 40
percent of these resources in the first year. The establishment of the Single
Fund and its national compartments and the decision-making on its use would be
governed by the Regulation, while the transfer of national funds towards the
Single Fund and the activation of the mutualization of the national
compartments would be provided for in an inter-governmental agreement
established among the participating Member States in the Single Resolution
Mechanism.
In recent remarks at a financial stability forum
in Frankfurt , the Minister emphasized that the
Single Resolution Mechanism must have efficient decision-making procedures. He
cautioned that the resolution of failed and failing financial firms must not be
delayed by national interests or conflicts. That is why Germany