The SRM: a European solution for ending ‘too big to fail’
The SRB is the central resolution authority within the Banking Union. Together with the National Resolution Authorities of participating Member States, it forms the Single Resolution Mechanism.
The single resolution mechanism (SRM) applies to banks under the remit of the SRB. It is the second pillar of the Banking Union. The purpose of the SRM is to ensure an orderly resolution of failing banks with minimal costs for taxpayers and to the real economy.
The SRM regulation establishes the framework for the resolution of banks in EU countries participating in the banking union.
The crisis revealed the need to overhaul the regulatory framework for banks...
The financial crisis that unfolded in 2008 showed that authorities lacked the tools and preparation to wind down banks in an orderly manner. Ending the so-called ‘too big to fail’ problem and the undesirable feedback loop between banks and governments went to the top of the political agenda of the G20 group of nations. The G20 endorsed the Key Attributes for Effective Resolution Regimes of the Financial Stability Board (FSB) in October 2011 and annexes were added in October 2014.
This international reference document requires member jurisdictions to establish frameworks for the orderly wind down – referred to as ‘resolution’ – of large, systemically important financial institutions. The EU’s response was to establish an orderly cross-border resolution mechanism via the Bank Recovery and Resolution Directive (BRRD), which provides resolution authorities with comprehensive powers and resolution tools to intervene when a bank meets the conditions for resolution. Resolution authorities have to prepare resolution plans detailing how a bank will be resolved, in a way that achieves the resolution objectives, while ensuring taxpayers avoid carrying the burden, as was the case in the recent crisis. The BRRD, the Deposit Guarantee Scheme Directive (DGSD), the European Commission (EC) Delegated Acts, prepared on the basis of Technical Standards drafted by the European Banking Authority (EBA), and the EBA’s Guidelines, form a single rulebook for the EU for resolution planning and execution and the application of Deposit Guarantee Schemes (DGSs) (see the Annex for a current list of EC Delegated Acts, EBA Technical Standards, and EBA Guidelines).
... and build an appropriate bank resolution regime for the Banking Union
Though this single rulebook achieves a high degree of harmonisation across the EU, it was soon recognised that a network of national resolution authorities and resolution funds was unsuited to Member States that share a common currency and are supervised by a single supervisory system, the SSM. As a consequence, the EU adopted the SRMR to create the SRM, with a strong centralised decision-making body, the Single Resolution Board (SRB), and the Single Resolution Fund (SRF). This set-up provides key benefits:
‣ Strong, centralised and independent decision-making ensures that resolution decisions across participating Member States of the Banking Union are taken effectively and quickly, avoiding uncoordinated action, minimising negative impact on financial stability, limiting the need for public financial support and ensuring a level playing field.
‣ The SRF pools significant resources from bank contributions and therefore protects taxpayers more effectively than national funds, while at the same time providing a level playing field for banks across participating Member States of the Banking Union.