Article Post on 25 April 2014

Next step towards the banking union

During the last plenary session of the current legislature on April 15, the European Parliament approved three pieces of legislation considered as central for the establishment of a solid and efficient Banking Union, namely:

1. Bank Recovery and Resolution Directive (RRD)

After the Trilogue Agreement between the European Parliament, the EU Member States and the Commission on December 11, 2013 (click here for more information), the text of the RRD has now been voted by the European Parliament. 

The RRD constitutes the single rulebook for the resolution of banks and large investment firms in all 28 EU member States. It sets new binding rules in order to reduce the risk that resolution of bank defaults be made via public funding therefore at the expense of taxpayers, especially by introducing the principle of bail-in so that shareholders and creditors will first be called to contribute to the resolution scheme in case of a bank failure.

2. Single Resolution Mechanism (SRM)

The SRM constitutes the second pillar of the Banking Union and will complement the first pillar, the Single Supervisory Mechanism (SSM)1

Thus, the SRM will implement the RRD in the Euro area, the RRD being considered as “not sufficient for Member States who share the common currency or are supervised by a single supervisor, the European Central Bank (ECB) in the Banking Union2.  In this regard, the SRM is supposed to apply the substantive rules of the RRD in a coherent and centralized way in order to ensure that if a bank subject to the SSM faces serious difficulties, its resolution can be managed efficiently with minimal costs to tax payers, through the implementation of a Single Resolution Board and common resolution financing arrangements including a Single Resolution Fund.

The Single Resolution Board will play a central role in the SRM’s operation and will involve permanent members as well as the Commission, the Council, the ECB and the national resolution authorities. While the ECB will be primarily responsible for triggering the SRM with respect to institutions that it considers being at risk of failure, the Single Resolution Board will in a second step, after having asserted that (i) there are no alternative private solutions (bail-in) and that (ii) a resolution action is necessary in the public interest, be tasked to prepare a resolution scheme for the failing institution. Such resolution scheme will then be implemented by national resolution authorities in accordance with national law including the transposed RRD provisions.

The Single Resolution Fund is aimed to ensure the availability of medium-term funding support in order to allow troubled institutions to continue operating during a restructuring under the SRM. It will have a target level of EUR 55 billion, the equivalent to approximately 1 percent of covered deposits of all authorized banks established in the 18 Member States of the Euro area, to be reached over 8 years through a levy on all the said banks.  

The SRM will be implemented through two texts: a SRM Regulation covering the main aspects of the mechanism as well as an Intergovernmental Agreement (IGA) related to specific aspects of the functioning of the Single Resolution Fund, to be adopted by the Member States of the Euro area. This means that all the national parliaments will have to endorse the IGA before it comes into force and that for further changes to the Single Resolution Fund, the said Member States will have a veto right. Although no surprises are expected as to the adoption of the IGA by national parliaments, it remains to see whether such two-piece implementation of the SRM may impede the effectiveness of the SRM in the long term.

Except for certain specific exceptions related to the preparation of the resolution plans applying from 1 January 2015, the SRM regulation shall be applicable together with the bail-in tools under the RRD from 2016.

3. Deposit Guarantee Schemes (DGS)

The third pillar of the Banking Union, i.e. a single supranational Deposit Guarantee Scheme, still needs to be fully implemented as the political agreement to enact such a unique scheme has not yet been reached.

Thus, the agreement found on April 15 consists of the revision of the existing Directive on DGS adopted in 1994. The key elements of the recast Directive are (i) a universal guarantee of deposits preserving the harmonised coverage level of € 100 000 per depositor and per bank (ii) an easier and faster access to repayment by gradually reducing the repayment deadlines from currently 20 working days to 7 working days in 2024 (iii) a robust financing regime with the introduction of a target level for ex ante funds of DGS of 0.8% of covered deposits to be collected from banks over a 10 year period, and (iv) a better information for depositors, for example with the mandatory countersignature of a standardised information sheet containing all relevant information about the coverage of the deposit by the responsible DGS.

Still to come…

SSM: Completion by the ECB of the comprehensive assessment of the 128 banks which will be under its direct supervision is scheduled for November 2014.

SRM Regulation and DGS Directive: Final Council endorsement is still required. In the meanwhile, the agreed texts will undergo final review by the EU legalists before being published. 

IGA’s: Ratification by the Member States of the Euro area should occur without delay once the final text will be available.

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1 The SSM has been adopted by Regulation No 1024/2013 of 15 October 2013. It confers new supervision to the European Central Bank for the banks of the Euro area, including direct supervision of significant banks, and shall be fully operational in November 2014.

2 MEMO/14/295 of the European Commission dated 15 April 2014


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