EU Banking Resolution, Insolvency Framework, and Public Interventions

Public International Law as a Means to Empower EU Bodies: The Case of the Single Resolution Board (SRB)

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.

European Banking Union B: The Single Resolution Mechanism

We investigate whether the bank crisis management framework of the European banking union can effectively bar the detrimental influence of national interests in cross-border bank failures. We find that both the internal governance structure and decision-making procedure of the Single Resolution Board (SRB) and the interplay between the SRB and national resolution authorities in the implementation of supranationally devised resolution schemes provide inroads that allow opposing national interests to obstruct supranational resolution. The amendments to the framework recently proposed by the European Commission would not alter the assessment materially. We also show that the Single Resolution Fund (SRF), even after the ratification of the reform of the European Stability Mechanism (ESM) and the introduction of the SRF backstop facility, is inapt to overcome these frictions. We propose a full supranationalization of resolution decision-making. This would allow European authorities in charge of bank crisis management to operate autonomously and achieve socially optimal outcomes beyond national borders.

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.

Chapter 3 introduces the EU regime. The EU adopted the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) and created special regimes for cross-border bank resolution. For Banking Union Member States, the Single Resolution Board (SRB) is the resolution authority for cross-border banks. The BRRD transposes the previous Directive on Reorganisation and Winding-up of Credit Institutions (CIWUD), and thus resolution actions imposed on an EU bank with one or more branches in other Member States are automatically recognised in those other Member States. In addition, the BRRD requires that resolution colleges must be established to resolve banking groups consisting of entities in different Member States. These are special intra-EU arrangements. On the other hand, for resolution actions taken by third-country authorities with regard to third-country banks with entities in the EU, Articles 94-96 BRRD list the conditions for recognition and grounds for refusal of recognition. These provisions make it explicit that EU resolution authorities are empowered to recognise and enforce third-country resolution actions. Article 94 BRRD specifies that, after recognition, EU resolution authorities have the power to enforce third-country resolution actions with regard to subsidiaries (equity or other ownership instruments), branches, and assets of third-country banks located in the EU, and rights and liabilities governed by the law of one of the EU Member States. In particular, Article 96 accepts the jurisdiction of third-country resolution authorities, and EU branches of third-country institutions are generally subject to third-country resolution authorities, unless an EU branch is not subject to third-country resolution actions or recognition of third-country resolution actions would violate EU public policies. Article 95 BRRD numerates five public policies, based on which EU authorities may refuse to recognise and enforce third-country resolution actions, namely, financial stability, resolution objectives, equal treatment of creditors, material fiscal policies, and national laws. Given the lack of cases, for the time being, it is difficult to predict how EU authorities would apply these exceptions. In general, these rules are overly simple, without a comprehensive list of conditions for recognition or distinguishing recognition of foreign resolution proceedings with ongoing effects and foreign resolution measures with immediate effects, let alone subsequent consequences after recognition.

Considerations on the application of the NCWO principle under the SRM Regulation

How Single is the Single Resolution Mechanism?

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 aim of this paper is to analyse the potential design and competences of a European Deposit Insurance System, which would extend the operation of the existing Single Resolution Mechanism. The analysis also builds on the design of the Federal Deposit Insurance Corporation (FDIC) operating in the US, which is endowed with both resolution and deposit insurance competences. I argue that the Single Resolution Fund (SRF) could be transformed into a Single Resolution and Deposit Insurance Fund (SRDIF) whose capacity would be increased to 1.8% of insured deposits. SRDIF resources would be available both for bank resolution and deposit pay-outs. The main elements of the financing arrangements for the SRDIF would include risk-weighted ex-ante contributions from the banking sector and a public backstop created through a transformed ESM. Given the legal constraints derived from the so-called Meroni ruling, the discretionary decision making of an institution managing the SRDIF would have to involve the Commission and the Council as is the case of the existing Single Resolution Board (SRB). In order to mitigate the adverse selection issue, mutualisation of resources in the SRDIF would have to be gradual over a transition period of six years until 2024. A sufficient reduction of risks across national banking sectors in the EU/Eurozone Member States would have to be achieved in the transition period.

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.

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.

The Single Resolution Mechanism (SRM) and the Single Resolution Fund (SRF): A Comprehensive Review of the Second Main Pillar of the European Banking Union (THIRD EDITION)

The establishment of Banking Union and the Single Resolution Mechanism has been arguably a success for the Eurozone. However, the enforcement of the new rules seems to meet significant challenges related to legacy problems that could make bank resolution economically and politically unfavourable for Member States. Italy and the two Veneto banks that were liquidated under national laws in June 2017 constitute such a case. This paper argues that this ‘orderly liquidation’ was, in essence, a hidden resolution, which raises logical legality concerns as to the actions ultimately taken by the European and national resolution authorities. The fact that public interest for resolution was not established by the Single Resolution Board, but was instead established by the Commission to provide liquidation aid on grounds of 107(3)(b) TFEU, combined with the reasoning of the Commission’s decision do not seem to conform with the bank resolution and state aid rules currently in place.

This article examines the new EU rules on the resolution of banks and their conformity with Article 107 TFEU. Normally, state aid rules apply to national measures. However, EU law that came into effect on 1 January 2016 extended the application of state aid rules to the decisions and actions of the Single Resolution Board. This article argues that, although compliance with Article 107 TFEU by the Single Resolution Board will make its decisions more complicated, it will also bring about much needed uniformity in the resolution of banks across the EU.