Complexity in the EU’s Resolution Mechanism: An Expanding but Unavoidable Phenomenon?

This paper analyses the most critical legal, institutional and governance issues underpinning the establishment of the Single Resolution Mechanism (SRM) which constitutes the second pillar of the European Banking Union. The architecture of the SRM combines a centralized model, where important powers are exercised at the EU level, with a decentralized execution of decisions carried out by the national authorities. The paper examines first, the legal and institutional foundations of the SRM which were of paramount importance during the negotiations for its establishment, since the EU Treaties did not explicitly provide for powers for the resolution of banks. Second, it analyses the complex governance structure, including the decision-making mechanism for the placement of a bank under resolution which is entrusted to the Single Resolution Board (SRB), an EU agency, enjoying significant powers. Finally, it assesses the role of the Single Resolution Fund (SRF) which will be endowed with EUR 55 Billion for the financing of resolution actions, and its relationship with the European Stability Mechanism (ESM).The authors review critically the structure of the SRM decision-making process, where a number of other actors are involved (ECB, Commission, ESM), in terms of: a) efficiency, as the declared objective of the SRM is the adoption of ‘efficient, effective and speedy resolution decisions’ that need to be taken within a very tight time frame, frequently overnight and which will have far-reaching economic and legal consequences; b) legal certainty, as the new edifice should be resilient to legal challenges against its legal basis or/and the delegation of powers to the SRB; and c) political legitimacy, as EU institutions should represent the European (and not national) interest and should be accountable when carrying out and implementing fundamental EU policies, such as in the field of resolution. The authors conclude that while the adoption of the SRM constitutes an important step towards the completion of the European Banking Union, some improvements, under the current EU institutional framework, may be necessary regarding, e.g. the reinforcement of the SRF financial capacity, the SRM decision-making process, the role of the ESM, the advancement of a certain form of a European Deposit Guarantee System. The increasing burden-sharing triggered by these financing mechanisms makes necessary the advancement towards the European Fiscal Union, which is indispensable for the credibility and sustainability of the European Banking Union.

As a reaction to both the global and European financial crises, and as a response to the fiscal crisis in the Euro Area in particular, the political leaders of the European Union initiated the idea of a “European Banking Union” (hereinafter the EBU) on 29 June 2012. The EBU consists of three distinctive pillars.

Since the first of January 2016, the Single Resolution Mechanism (SRM) has become fully operational. For the Member States of the European Banking Union the new regime entails a transferral of the decision-making on failing banks to the European level, specifically the Single Resolution Board (SRB). The political sensitivity hereof is illustrated by the European and Italian reaction to the mounting troubles in some parts of the Italian banking sector. The new European regime raises the question if, and if so to what degree, Member States participating in the European Banking Union (EBU Member States) retain discretion in determining the course of action for, and future of, a troubled bank. This question is explored along three lines of inquiry. First, we analyse the degree of harmonisation provided for by the BBRD and SRM. The second line of inquiry analyses EBU Member States’ influence in the SRB’s decision-making process. The third line of inquiry considers the possibilities (if any) for a public recapitalisation of troubled banks without applying the new general bail-in standard. Our first line of inquiry leads us to conclude that the EBU Member States have surrendered the decision-making on bank resolution to the EBU level, specifically to the SRB. The SRM regulation, consequently, provides for maximum harmonisation, leaving no room for national resolution tools. National resolution powers which operate and compete in the same area as the SRM, such as the Dutch nationalisation law, must thus be held as inapplicable. In the second line of inquiry we found that the SRM has both a supranational and an intergovernmental dimension. While the SRB in its executive session has a strong supranational character Member State influence in bank resolution decision remains present through the involvement of the Council and the SRB in plenary session in key decisions. In the third line we conclude that the rules imposed by the BRRD and SRM Regulation in combination with the State aid regime have rendered public recapitalisation without a bail-in virtually impossible. Outside of resolution, NCBs may assist solvent banks through ELA. In addition, EBU Member States could turn to the possibility of precautionary recapitalisation to prevent that the control over a bank’s fate is shifted to the SRB. Such precautionary recapitalisation is however subject to strict conditions.

Since the first of January 2016, the Single Resolution Mechanism (SRM) has become fully operational. For the Member States of the European Banking Union the new regime entails a transferral of the decision-making on failing banks to the European level, specifically the Single Resolution Board (SRB). The political sensitivity hereof is illustrated by the European and Italian reaction to the mounting troubles in some parts of the Italian banking sector. The new European regime raises the question if, and if so to what degree, Member States participating in the European Banking Union (EBU Member States) retain discretion in determining the course of action for, and future of, a troubled bank. This question is explored along three lines of inquiry. First, we analyse the degree of harmonisation provided for by the BBRD and SRM. The second line of inquiry analyses EBU Member States’ influence in the SRB’s decisionmaking process. The third line of inquiry considers the possibilities (if any) for a public recapitalisation of troubled banks without applying the new general bail-in standard. Our first line of inquiry leads us to conclude that the EBU Member States have surrendered the decision-making on bank resolution to the EBU level, specifically to the SRB. The SRM regulation, consequently, provides for maximum harmonisation, leaving no room for national resolution tools. National resolution powers which operate and compete in the same area as the SRM, such as the Dutch nationalisation law, must thus be held as inapplicable. In the second line of inquiry we found that the SRM has both a supranational and an intergovernmental dimension. While the SRB in its executive session has a strong supranational character Member State influence in bank resolution decision remains present through the involvement of the Council and the SRB in plenary session in key decisions. In the third line we conclude that the rules imposed by the BRRD and SRM Regulation in combination with the State aid regime have rendered public recapitalisation without a bail-in virtually impossible.

The Single Resolution Mechanism (SRM) was designed to create a common framework for the recovery and resolution of ailing banks headquartered in the euro area. The Single Resolution Fund (SRF) was created to be this mechanism’s financial backbone and to effectively break the doom loop between banks and governments. However, SRF funds were widely seen as insufficient in the event of the need to resolve one or more large banks. In early 2021, euro area member states agreed to changes to the European Stability Mechanism (ESM) so that it could become the financial backstop for the SRF. This paper analyses the existing and proposed arrangements on the SRF backstops, using elements of the principal–agent model. We argue that the proposed use of the ESM as the SRF’s backstop would allow euro area national governments significant control and veto possibilities through the addition of the ‘permanence of the legal framework’ clause.

The Single Resolution Board (SRB) is a European agency entrusted with a varied pouvoir by the EU-Regulation establishing the Single Resolution Mechanism (SRM). The SRM-Regulation also establishes a Single Resolution Fund from which bank resolutions in the Eurozone can (exceptionally) be financially supported. The Fund is fed by contributions from banks which are collected by the Euro-MS. In order to regulate the transfer of these contributions to the Fund and the gradual mutualisation of the initially ear-marked ‘national compartments’ of each Euro-MS to a homogenous, a Single Resolution Fund, 26 MS have concluded an Intergovernmental Agreement (IGA) – an international treaty – among themselves, which is applicable only to the Euro-MS, claiming that the EU lacked an according competence. Against this background, this paper addresses the character and the main content of the IGA and the way it empowers the SRB. Subsequently, the legality under EU law of this empowerment by means of public international law is examined. This involves an analysis of Treaty provisions which could potentially have served as a legal basis for this empowerment under EU law. Eventually, the relationship between the SRB’s tasks/powers under the SRM-Regulation and those under the IGA is fleshed out, in particular with a view to the question how conflicts between these two sets of tasks/powers are to be solved. The MS’ decision in favour of public international law will, for lack of a compelling legal basis to regulate the underlying issues in the form of EU law, turn out to be in accordance with EU law, and so will the exceptional empowerment of a European agency, the SRB, by the MS. This is mainly because the EU’s institutional balance is not thereby negatively affected and because the IGA as such ranks below EU law and is declared authoritative for the application of the SRM-Regulation only by this piece of EU law itself.

The second edition of the present study, only eight months after the first edition appeared, was deemed necessary given the entry into full operation of the Single Resolution Mechanism and the Single Resolution Fund on 1 January 2016. The study has been amended accordingly to reflect this development and take into consideration all the newly adopted legal acts and the secondary sources published after the cut-off date of the first edition, i.e. August 2015. This study aims to provide a systematic and comprehensive review of the provisions of the legal acts which are the sources of the EU Single Resolution Mechanism (‘SRM’) and the EU Single Resolution Fund (‘SRF’) that constitute the second main pillar of the European Banking Union (‘EBU’). It is structured in six (6) Sections: (1) Section A reviews the main provisions of the SRM Regulation (‘SRMR’) (under 2) and of the SRF Agreement (under 3), within the framework of the legal acts which constitute the sources of the EBU (under 1). (2) Section B provides a general overview of this new institutional framework, focusing on the various aspects of the Single Resolution Board (‘SRB’): its legal status, seat and composition, its administrative and management structure, the Appeal Panel, the independence and accountability regime, aspects of liability, and all other relevant provisions (under 1-7, respectively). (3) Section C deals with the provisions of the SRMR on resolution planning (under 1), with particular emphasis on those pertaining to the minimum requirement for own funds and eligible liabilities (MREL) (under 2) and to early intervention (under 3). (4) The resolution regime under the SRM Regulation is presented in Section D. This Section examines: the objectives and principles of resolution, the resolution procedure, the provisions on write-down and conversion of relevant capital instruments, the framework governing the resolution tools, the cooperation arrangements, as well as the investigatory powers of the Board and its power to impose penalties (under 1-6, resp.). (5) Section E deals with the SRF, and in particular with: its constitution, administration, investments, and use under the SRM Regulation (under 1), and the specific provisions of the SRF Agreement (under 2). (6) Finally, Section F contains the concluding remarks of the study.

INTRODUCTION The Single Resolution Mechanism (“SRM”) is operated by multiple authorities. The Single Resolution Board (“SRB”), the Single Resolution Fund (the “SRF”, which is owned by the SRB and does not have a separate legal personality) and the national resolution authorities of each of the 19 eurozone countries are its main actors. The ECB, the European Commission and the Council also have their role. This leads to an intricate regime of judicial review. Appeals against measures adopted under the SRM are handled, depending on the type and the origin of the measure, by the SRB's Appeal Panel, by the Court of Justice of the European Union (“CJEU”) or by national courts. Recital 120 of the SRM Regulation outlines the organisation of the judicial review within the SRM: The SRM brings together the Board, the Council, the Commission and the resolution authorities of the participating Member States. The Court of Justice has jurisdiction to review the legality of decisions adopted by the Board, the Council and the Commission, in accordance with Article 263 TFEU, as well as for determining their non-contractual liability. Furthermore, the Court of Justice has, in accordance with Article 267 TFEU, competence to give preliminary rulings upon request of national judicial authorities on the validity and interpretation of acts of the institutions, bodies or agencies of the Union. National judicial authorities should be competent, in accordance with their national law, to review the legality of decisions adopted by the resolution authorities of the participating Member States in the exercise of the powers conferred on them by this Regulation, as well as to determine their non-contractual liability. The reality, as will be seen in this contribution, is more complex than recital 120 suggests. THE APPEAL PANEL The SRM Regulation sets up an Appeal Panel within the SRB, which offers to parties affected by certain types of decisions of the SRB a first layer of legal review prior to a possible appeal to the CJEU. This first review is intended to be simpler, faster and cheaper for appellants than legal proceedings at the CJEU. There is little formalism in the procedure, the appeal must in principle be decided within a month, parties need not be represented by outside counsel and no costs are charged to the appellant.

In May 2014, 26 Member States of the EU have concluded an intergovernmental agreement on the transfer and mutualization of contribution to the Single Resolution Fund (SRF). This international treaty constitutes a core component of the second pillar of the European Banking Union – the Single Resolution Mechanism, to wind down failing banks in the Euro-zone – and complements an EU regulation adopted by the European Parliament and the Council creating the SRF. The article critically analyses the choice to use international law to adopt the rules on transfer and mutualization of contributions to the SRF. As the article maintains, resort to an intergovernmental agreement in this case was not necessary from a legal point of view. In fact, the justification for the use of international law in this case rested on a flawed legal argument, namely that EU regulations cannot impose financial obligations on the states. Moreover, as the article explains, resort to international law is unsound from a policy point of view. The use of an international treaty to regulate the transfer and mutualization of contributions to the SRF opens the door for national courts’ review of the agreement – a prospect which contrasts with the constitutional logic of leaving decision of economic questions in the political process. In light of these weaknesses, the article explains that the intergovernmental agreement was tolerated by the European Parliament to secure completion of the Banking Union before the 2014 EU elections, but concludes suggesting that a pressing constitutional challenge for the European Parliament is to devise legal and political mechanisms to prohibit the Member States from acting outside the EU legal order whenever the Treaties provide for the powers and means to act within the Union.

The ‘Banking union’, being created by the European Union (EU) comprises three linked projects: a Single Supervisory Mechanism (SSM) for banks, a single deposit insurance mechanism and a Single Resolution Mechanism (SRM) for failing banks. All three elements are introduced for the euro area and other Member States willing to participate. Under this resolution mechanism, private shareholders and creditors of a bank will be ‘bailed in’ (ie required to suffer losses) before (and as a precondition to) any ‘bail-out’ by the authorities, whether individual State governments or the €700 bn European Stability Mechanism (ESM).1 For institutional depositors and investors, this principle is uncontroversial: it is generally assumed that large and sophisticated corporates should have the capacity and motivation to monitor those they bank with. How far though does this bail-in concept extend? Are individuals and small firms also expected to take losses if their bank fails? The safety...

The EU Bank Recovery and Resolution Directive (BRRD) shifts the focus from reacting in the face of a crisis, to planning and preparing to avoid uncoordinated, ad hoc measures and aims to ensure banks resolvability; it strengthens and harmonizes early intervention measures and gives supervisors new tools and powers for managing failing banks while continuing part of their business, i.e. critical functions. The BRRD was conceived out of a need to reduce public funds being used to bail out banks considered ‘too big to fail’ and strengthen cooperation and coordination between Member States. The first part of this paper sets out how key resolution decisions, including during recovery and resolution planning, are taken for cross-border banking groups within the EU, and within the Single Resolution Mechanism (SRM) of the euro area. It also considers the impact of the BRRD on cooperation with third countries (small host countries). The second part of the paper offers a legal analysis of why no autonomous centralized decision-making powers were delegated to the Single Resolution Board (SRB). It considers whether legal judgements made in 1956 and enshrined as the ‘Meroni doctrine’ actually prohibit delegation of fully autonomous resolution powers to the SRB and more broadly prevent the creation of a centralized resolution agency for the whole EU.

This paper is aimed to examine the Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF), with particular reference to the effective level of control on their activity and the potential democratic deficit stemming from them. To this end, it first provides a definition of resolution for banks, followed by the examination of why the efficiency of prudential supervision in the Euro area is significantly linked to a centralised system of resolution. Within this ambit, it illustrates that the SRF is financed by contributions from the banking sector which transfer is based on a separate intergovernmental agreement between the Member States of the Euro area. After, it analyses the relationships between the SRM and the European Banking Authority (EBA) and their several implications. Finally, the paper tries to show whether, and to what extent, it is possible to overcome the democratic deficit in the SRM and the SRF and its contradictions.

Complexity and uncertainty in the application of the regulations of the European system of financial supervision are due to the fact that its particular elements were implemented over a period of time. First, it was a system of European financial supervision authorities i.e. the European Banking Authority (EBA), the European Insurance and the Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), whose main objective was to coordinate national actions. Then there were established the European Banking Union, including the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), as well as the European Stability Mechanism (ESM), which constitutes also a part of the system of support for endangered banks. Legal interpretation problems are a result of differences in the scope of competences of these entities. For example, there is uncertainty whether the regulations refer to the eurozone or the whole European Union and if they refer to banks only or to other financial institutions as well. An analysis of the SSM, the SRM or the ESM does not always offer a clear answer to questions such as: who, when and using what tools should act; when, for example, the ECB may and should correct the decisions of national supervisors; what is the role of the ESRB, if we take account of the enhanced competences of the ECB in the banking union; if and when banks may question supervisory decisions concerning, for example, establishing a buffer or classifying an institution as SIFI, etc. Similarly, the role of the EBA or the ESM is unclear in the context of the establishment of the banking union, the SSM, the SRM, the ESM and the delegation of power of the ECB and the European Commission to regulatory agencies (Meroni doctrine) or the practice of establishing regulatory agencies outside the bounds of the treaty (Pringle doctrine). Therefore the regulatory landscape in this context requires impact assessment.

In May 2014, 26 Member States of the EU concluded an intergovernmental agreement on the transfer and mutualization of contribution to the Single Resolution Fund (SRF). This international treaty constitutes a core component of the second pillar of the European Banking Union – the Single Resolution Mechanism, to wind down failing banks in the Euro-zone – and complements an EU regulation adopted by the European Parliament and the Council creating the SRF. This article critically analyses the choice to use international law to adopt the rules on transfer and mutualization of contributions to the SRF. As the article maintains, resort to an intergovernmental agreement in this case was not necessary from a legal point of view. In fact, the justification for the use of international law in this case rested on a flawed legal argument, namely that EU regulations cannot impose financial obligations on the states. Moreover, as the article explains, resort to international law is unsound from a policy point of view. The use of an international treaty to regulate the transfer and mutualization of contributions to the SRF opens the door for national courts' review of the agreement – a prospect which contrasts with the constitutional logic of leaving decisions about economic questions in the political process. In light of these weaknesses, the article explains that the intergovernmental agreement was tolerated by the European Parliament to secure completion of the Banking Union before the 2014 EU elections, but concludes suggesting that a pressing constitutional challenge for the European Parliament is to devise legal and political mechanisms to prohibit the Member States from acting outside the EU legal order whenever the Treaties provide for the powers and means to act within the Union.

The Commentary on the European Banking Union presents an article-by-article analysis of the legislation which constitutes the basis of the two main pillars of the European Banking Union, i.e. the Single Supervisory Mechanism, with the European Central Bank as single supervisory authority for significant banking institutions (mainly) in the Eurozone, and the Single Resolution Mechanism and the Single Resolution Fund, with the Single Resolution Board as a centralized decision-making body for the resolution of banks (mainly) in the Eurozone. With contributions by Martina Almhofer, Fabian Amtenbrink, Jens-Hinrich Binder, Seraina Neva Grünewald, Christos V. Gortsos, Georg Gruber, Elke Gurlit, Christos Hadjiemmanuil, Matthias Haentjens, Janina Heinz, Ann-Katrin Kaufhold, Alexander Kern, Klaus Lackhoff, Christoph Ohler, Chryssa Papathanassiou, Mikulas Prokop, Georgios Psaroudakis, René Smits, Emiliano Tornese, Andreas Witte, Karl-Philipp Wojcik and Georgios Zagouras.