Single Resolution Fund Research Articles

Obligation to State Reasons: Clear Principle with (Still) Unclear Scope? In Search of an Adequate Standard of Reasoning for a Decision Based on Confidential Data (Joined Cases C???584/20 P and C???621/20 P Commission and SRB v Landesbank Baden-Württemberg)

This article provides an analysis of the judgment of the Grand Chamber of the Court of Justice (the Court) of 15 July 2021 delivered in Joined Cases C-584/20 P and C-621/20 P (Commission and SRB v Landesbank Baden-W??rttemberg), which offers valuable insights into the question of the scope of the obligation to state reasons. In particular, the judgment clarifies how that obligation should be weighed, if necessary, with the obligation to protect the confidential data within the EU decision-making process. While the judgment specifically pertains to a decision of the Single Resolution Board regarding the calculation of ex-ante contributions to the Single Resolution Fund, its implications extend to all areas of EU law where the EU administration relies on confidential information in order to adopt a decision. Additionally, the judgment holds particular significance for the National Resolution Authorities of the Member States non-participating in the Banking Union, since they are required to calculate ex‐ante contributions to their national resolution financing arrangement and must, for this purpose, rely on the methodology provided by the EU legislator, as interpreted by the Court. Finally, the authors argue that regardless of its significance, the judgment leaves several questions unanswered regarding the adequacy of the reasoning of an administrative decision based on confidential data.

Umschuldungsklausel bei Anleihen der Euro-Staaten

A speciality of contracts seems to be the small print - also in contracts between the members of the European Union. The European Stability Mechanism Treaty (ESM), concluded with the purpose to install the ESM as an international financial institution and as backstop for the Single Resolution Fund (SRF), contains in one of its articles the inconspicuous reference to a mandatory majority action clause. This clause will be modified together with the prepared amendment of the ESM treaty. This amendment offers the perfect opportunity to describe Collective Action Clauses like majority action clauses - facilitating the restructuring of debt - in general and in particular those for sovereign debt of the Euro countries including their effects on the creditors position taking into account the role of the ECB as major creditor.

Reset Required: The Euro-area Crisis Management and Deposit Insurance Framework

Abstract The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. This article explains why and proposes a new framework. This could start as early as 1 January 2024 when significant institutions in the euro area will have met requirements to have enough subordinated obligations outstanding to recapitalize the bank if it were to fail. The proposed framework has four components: a single lender of last resort (the European Central Bank); a single presumptive path for resolution (exit via the use of bail-in to facilitate orderly liquidation of the failed bank by the Single Resolution Board under a solvent wind-down strategy); an investor of last resort in a bank’s gone-concern capital (its national deposit guarantee scheme); and a Single Deposit Guarantee Scheme (the Single Resolution Fund with a backstop from the European Stability Mechanism). Together, these measures would limit forbearance, assure bail-in did not touch deposits, promote competition, limit recourse to taxpayer money, standardize resolution procedures for all banks, complete Banking Union and guarantee that a euro of covered deposits would remain a euro, all without forcing national deposit guarantee schemes to reinsure one another. Last but not least the proposed framework would promote financial stability.

EU 금융통합의 메커니즘과 제도

This study visualizes different positions of Germany and the counter-coalition of the EU members in the process of financial integration. The European Union, established by the Maastricht Treaty in 1993, has achieved an economic and monetary union (EMU), but has experienced the eurozone crisis due to lack of fiscal and financial integrations into its internal market. To deal with the instability of its economic system caused by the incomplete internal market, the EU members have pursued a banking union (BU) and a capital market union (CMU). The banking union has already established two of the three pillars, the single supervisory mechanism (SSM), and the single resolution mechanism (SRM). The third pillar, the European deposit insurance scheme (EDIS), is under way. Efforts to make CMU operational are also being discussed. Germany has assumed a critical role in the process of EU’s financial integration with some different views from the counter-Germany coalition. Germany has emphasized the importance of a network of the sovereign funds for banks resolution while the counter-coalition members favor the single resolution fund. Other members prefer discretion in SRM but Germany is for rules. And Germany desires to give the Council the decision-making power, however the counter-coalition members want to give the Commission the power. All these differences come from Germany’s emphasis on the Freiburg School’s economic principles of ordoliberalism, which view liability principle (Haftungsprinzip) very crucial for a competitive market economy.

The Effect of Bank Levy Introduction on Commercial Banks in Europe

We evaluated the effects of the bank levy (BL) on the profitability of commercial banks and the balance sheet reconstruction, and the shifting of banks’ activities into countries with lower BL rates after BL introduction. Moreover, we investigated the effects of the Basel III and Single Resolution Fund (SRF) introduction on the amount of BL payment. We compared two different BL designs: the Hungarian and the German versions. The results clearly pointed to the negative effect of BL introduction on the ROA of larger Hungarian commercial banks and of smaller commercial banks in Germany. Moreover, the results showed that the introduction of the BL did not influence loan activity in Hungary. However, it decreased the value of the loans from German commercial banks. The results showed that commercial banks in Hungary prefer to restructure their balance or shift assets among different locations or entities to decrease the bank levy. The research findings also showed that Hungarian commercial banks decreased the value of paid BL after the Basel III introduction. On the other hand, the results also showed that the value of paid BL in German commercial banks increased after the Basel III and SRF introduction, especially in larger banks.

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

The aim of this article is to make certain specific considerations on the application of the ‘no creditor worse off (NCWO) principle’ (or safeguard) under the Regulation governing the Single Resolution Mechanism and the Single Resolution Fund (SRMR). Even though the field of application of the SRMR also covers other financial firms, the article’s focus, which is structured in four sections, is (solely) on credit institutions. Section 1 overviews the provisions of the SRMR dealing with the third resolution condition, namely the public interest criterion, on the basis of which the decision is taken by the Single Resolution Board whether a credit institution determined as failing or likely to fail should be resolved or wound up. It is only when the public interest criterion is met and the Board takes a decision on the resolution of the credit institution concerned, that the NCWO principle is applicable. Section 2 discusses the provisions governing the NCWO principle under international and EU banking law. In this respect, after a brief overview of the international financial standards adopted by the Financial Stability Board (FSB) on banking resolution, including on the NCWO principle (under 2.1), this principle is analysed as a general principle governing resolution under the SRMR; its perimeter of application and the obligations imposed on national resolution authorities (NRAs) in this respect are also discussed (under 2.2). The following two sections deal then, in turn, with two specific aspects of application of the NCWO principle under the SRMR: mandatory and optional exclusion of deposits from bail-in (Section 3), as well as ex-ante and ex-post valuations for the purposes of resolution (Section 4). The final Section 5 concludes.

Reset Required: The Euro Area Crisis Management and Deposit Insurance Framework

The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. Currently the framework is far more likely to manufacture a crisis rather than enable the authorities to manage one. Specifically, the current framework is far more likely to trigger the doom loop between weak banks and weak governments than to terminate or untie it. Nor will the current framework necessarily protect deposits. There is no guarantee that a euro in covered deposits will remain a euro, if the bank in which the deposit is held fails, and/or the Member State in which the failing bank is headquartered defaults. The CMDI framework aims to enhance financial stability, limit recourse to taxpayer money, promote competition and protect depositors. These policy objectives remain valid. What needs to change is the method that authorities use to achieve those objectives. First, the approach needs to integrate micro- and macro- aspects of crisis management. In particular, the approach needs to take account of the prospective roles of the European Stability Mechanism, both as a provider of credit to Member States as well as a guarantor of the Single Resolution Fund. Second, the approach needs encompass the central bank as a provider of liquidity to banks individually and to the market as a whole. Finally, the approach needs to recognize that by the time any reform proposed as a result of this review would become effective, the SRB and the significant institutions in the euro area will have completed the transition and become fully resolvable via bail-in. This affords the euro area the opportunity to reset expectations about resolution. The euro area should take this opportunity to make the crisis management and deposit insurance framework more European and more uniform. Specifically, there should be a single presumptive path for dealing with failed banks: the use of bail-in to facilitate the orderly liquidation under a solvent- wind down strategy. This will protect deposits and set the stage for the transformation of the Single Resolution Fund (SRF) into the Single Deposit Guarantee Scheme (SDGS) with a backstop from the European Stability Mechanism (ESM). In addition, measures should be taken to avoid forbearance, including the transfer of responsibility for emergency liquidity assistance (ELA) from national central banks to the ECB to create a single lender of last resort. Finally, national deposit guarantee schemes should become investors of last resort in the gone-concern capital of the failing bank. This will ensure that the orderly liquidation approach extends to all banks, including those without access to capital markets. Together, these measures would complete Banking Union, promote market discipline, avoid imposing additional burdens on taxpayers, help untie the doom loop between weak banks and weak governments, strengthen the euro and enhance financial stability.

The Reform of the European Stability Mechanism: Process, Substance, and the Pandemic

The European Stability Mechanism (ESM) has been instrumental in safeguarding the financial stability of the Euro area and of its Member States. This article looks at the tumultuous process of reforming the ESM. It analyses the main changes that would be brought about by the draft revised ESM Treaty, whose text was agreed upon in June 2019 and finalized in December 2020. These concern the ESM’s purposes and operations; the procedure for granting stability support to a Euro area Member State; precautionary financial assistance instruments; single-limb collective action clauses; and the common backstop to the Single Resolution Fund. The focus then shifts to the changes agreed upon in response to the COVID-19 crisis. A new credit line has been introduced, the Pandemic Crisis Support, which builds on an existing instrument. It is argued that the reforms posited in the draft revised ESM Treaty would plug important gaps in the framework of the Economic and Monetary Union. Nevertheless, some of the ESM’s underlying vulnerabilities would remain, notably as regards its governance, the status of non-Euro area Member States, and the framework for its transparency and accountability. A more comprehensive reform could have taken place, which would have improved upon the overall structure of the Euro area. European Stability Mechanism, ESM Treaty, ESM reform, Pandemic Crisis Support, European Monetary Fund, economic governance, accountability

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

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.

European Deposit Insurance System (EDIS): Cornerstone of the Banking Union or Dead End?

While the first two pillars of the Banking Union, a Single Supervisory Mechanism (SSM) and a European Resolution Mechanism (SRM) have been realized rather smoothly, the realization of the third pillar, a European Deposit Insurance System (EDIS), proves a bigger challenge. Already in November 2015 the European Commission issued its EDIS proposal. One year later, the European Parliament rapporteur proposed important amendments in her draft report. Since then, the legislative train has stopped, with the Council making the EDIS discussion dependent on additional risk reduction measures for the banking sector. In this contribution we examine the goals of creating EDIS, as well as the reasons and possible solutions for the long-lasting deadlock, and critically assess the main features of the different versions of EDIS currently on the table. We find that the three pillars of the Banking Union are heavily interconnected. The main reason why the realisation of EDIS has been put on hold, are indeed shortcomings in the single rulebook and the first pillar. With the adoption in 2019 of a number of risk reduction measures, progress on EDIS may therefore finally gain momentum. Furthermore, a well-functioning second pillar should drastically reduce the occurrence of DGS payout events. This has changed the nature of DGSs in the EU, which now have a broader responsibility in helping to ensure the availability of deposits at all times, also during resolution proceedings. All current versions of EDIS institutionally anchor this interconnectedness, bringing the SRM and EDIS under the auspices of the same Board, while close cooperation with the first pillar is also ensured. We conclude that the competing visions on EDIS equally further banking stability and equally allow efficient cooperation between the three pillars. From a banking stability perspective, more important than the exact version of EDIS would be other measures to complete the Banking Union, such as the realisation of a common backstop for the Single Resolution Fund and EDIS.

The reform of the European Stability Mechanism

This article seeks to explain the main aspects of the reform of the European Stability Mechanism, as agreed in principle by the leaders of the euro area member states. The article focuses particularly on the ESM’s new mandate to act as the common backstop to the Single Resolution Fund, the reform of its precautionary lending instrument, the expansion of its role in country monitoring both in and outside of programmes, and the future treatment of debt sustainability issues, including the adoption of a revised euro area model collective action clause. By shedding light on the nature and context of these developments, the authors hope to dispel some misunderstandings about the content of this reform and contribute to a clearer understanding of what is at stake.

Government Euroscepticism and differentiated integration

ABSTRACT It is common to consider mass politics and Eurosceptic politicization as ‘post-functionalist’ constraints that encourage differentiated European integration. This study argues that the relevance of Euroscepticism depends on who wins the domestic competition for government office. European mass politics are organized as delegation systems. These systems concentrate authority in the government and give little influence to parliaments and publics. If Eurosceptic parties reach the government, they will push for differentiation and even disintegration. If pro-EU parties succeed, uniform integration is likely to prevail. An empirical analysis of differentiated integration from the 1992 Maastricht Treaty to the 2016 Single Resolution Fund shows that only government Euroscepticism – rather than opposition, extra-parliamentary, or popular Euroscepticism – encourages differentiation. This study explains how uniform integration can prevail even in ostensibly Eurosceptic countries. It suggests that the impact of Eurosceptic politicization depends on party competition and is often more limited than might seem at first sight.

Exploring Governance Issues between the SRB and the ESM in the Use of the Common Backstop

To date, the resolution of the Banco Popular Espanol, being the first and only resolution case in the euro area, has had the “benefit” of bringing to light several shortfalls of this crisis management system. Back then, thanks to the sale of business, the need of the use of the Single Resolution Fund (SRF) has been avoided, prompting criticism on whether the fund had sufficient means to overcome a major widespread crisis. During the period elapsed from the last financial crisis, the euro area banking sector has built capital and liquidity buffers, which were aimed at protecting them for future shocks. Although it is now widely accepted that crises are of a cyclical nature, new risks and the high interconnectivity of today’s economic activities brought an unexpected crisis due to the current pandemic. The consequences of this unprecedented event in modern history had severe effects to the worldwide economy, mostly for the boundless block of labour activities, which caused severe losses for households, enterprises and governments that consequently affected the financial intermediation function of the banks. Concerning the European Stability Mechanism (ESM), the current pandemic has had the effect to put temporary on hold the discussion on the revision of the ESM Treaty, including its role as a Backstop to the SRF, so that the Mechanism could experience a new role through the ESM Pandemic Crisis Support. In such a framework, this paper aims to bring back the attention to the unfinished path in the establishment of the Common Backstop by addressing an important element of risk, namely its decision-making process. The main aim is to explore possible governance issues, which could hamper a timely and effective use of the Common Backstop, in the case that the SRF would be depleted and no alternative funding sources would be available.

The Reform of the European Stability Mechanism: Process, Substance, and the Pandemic

The European Stability Mechanism (ESM) has been instrumental in safeguarding the financial stability of the Euro area and its Member States. This article looks at the tumultuous process of reforming the ESM. It analyzes the main changes brought about by the draft revised ESM Treaty. These concern the ESM’s purposes and operations; the procedure for granting stability support to a Euro area Member State; precautionary financial assistance instruments; single-limb collective action clauses; and the common backstop to the Single Resolution Fund. The focus then shifts to the changes agreed upon in response to the COVID-19 crisis. A new credit line has been introduced, the Pandemic Crisis Support, which builds on an existing instrument. It is argued that the reforms posited in the draft revised ESM Treaty will plug important gaps in the framework of the Economic and Monetary Union. Nevertheless, some of the ESM’s underlying vulnerabilities remain, notably as regards its governance, the status of non-Euro area Member States, and the framework for its transparency and accountability. A more comprehensive reform could have taken place, which would have improved upon the overall structure of the Eurozone.

Plug the Gap: Make Resolution Ready for Corona

Banks are not immune from COVID-19. The economic downturn may drive some banks to the point of non-viability (PONV). If so, is the resolution regime in the Euro-area ready to respond?No, for banks may not have the right amount of the right kind of liabilities to make bail-in work. That could lead to a banking crisis.The Euro area can avoid this risk, by arranging now for a recap later. This would plug the gap between what the failing bank has and what it would need to make bail-in work. To do so, banks would pay – possibly via the contributions they make to the Single Resolution Fund – a commitment fee to a European backstop authority for a mandatory, system-wide note issuance facility. This would compel each bank, as it reached the PONV, to issue to the backstop, and the backstop to purchase from the bank, the obligations the failing bank needs in order to make bail-in work. Such obligations would take the form of “senior-most” non-preferred debt, and bail-in would stop with such debt. That would allow the SRB to use the bail-in tool to resolve the failed bank, reopen it and run it under a solvent wind down strategy. That protects counterparties and customers and ensures the continuity of critical economic functions. It also keeps investors at risk and promotes market discipline. Above all, it preserves financial stability.

Bank Stability and the European Deposit Insurance Scheme

Empirical evidence shows that a financial distress, faced by a bank or the whole economy, might cause large-scale withdrawals of deposits even when bank deposits are protected by deposit insurance, implicitly or explicitly guaranteed by a government. Building on Kiema and Jokivuolle (2015), we present a new model of such partial bank runs. In our model withdrawals are caused by the fear that both the bank and the government’s deposit guarantee might fail in the future. Our focus is on a guarantee rather than on insurance, since the assets of deposit insurance funds might not be sufficient in large-scale systemic crises. Guarantee failure is possible because, being sovereign, the government may choose not to keep its promises. This option causes a fixed welfare cost (e.g. a reputational cost), which in a sufficiently severe crisis may be smaller than the costs from deposit guarantee payments. We also assume that, being welfare-maximizing, the government recapitalizes the bank during the early stage of the bank run. When decisions concerning deposit guarantee payments are made, recapitalization costs are already sunk costs, but the partial bank run has reduced the coverage costs that the remaining deposits might cause for the government. In this way, the depositors who withdraw funds during a partial bank run decrease the danger of a deposit guarantee failure and increase the incentives of the remaining depositors to keep their deposits in the bank. We apply our framework to the European Deposit Insurance Scheme (EDIS), and we view the reliability of the Single Resolution Fund and its backstop as the counterpart to the reliability of the government’s promises. It turns out that in an asymmetric shock that affects only a single eurozone country, the EDIS improves bank stability, but its effects might be ambiguous in a systemic crisis that affects the whole Banking Union.

Administrative Kontrolleinrichtung auf EU-Ebene

The Single Resolution Board (SRB), created by a Regulation of the EU, is the response of the European Union to the financial crisis. It’s intervention powers and competences are respectively wide. The SRB collects from the systemically relevant credit institutions of the „Eurocountries“ contributions to cover its administrative expenses on the one hand and in a significant degree for financing the Single Resolution Fund on the other hand. The experience of the SRB Appeal Panel confirms that such an expert committee is an appropriate instrument for the review and correction of administrative decisions. Currently, its experts come from Finland, Greece, Italy, Austria, Portugal, Spain and Germany. With the support of its independent Secretariat based in Brussels, the communication takes place to a large extent via electronic media and teleconferences, but also in form of physical meetings of its members in Brussels.

An Evolutionary Path Towards a European Monetary Fund

Abstract There is no need for Europe to replicate the International Monetary Fund (IMF). The European Stability Mechanism (ESM) can provide the backstop for sovereigns, even without a financial contribution from the IMF. In this sense, the ESM already constitutes to a large extent a ‘European Monetary Fund’. Other IMF activities, such as surveillance and policy coordination should remain with the European Commission, the Eurogroup and other existing bodies. The financial resources of the ESM will be required as a backstop only intermittently, in times of great financial market instability. The need for this will evolve as a function of the nature of financial markets and their cross-border integration. It is not possible to forecast with any precision when the next financial crisis might break out and what form it will take. Any evolution of the ESM should thus aim at enhancing flexibility in its instruments while clarifying its overall mandate (financial stability), rather than changing the details of the rescue mechanism or its institutional structure. The financial stability function of the ESM should be extended to the central institutions of the Banking Union, with an ultimate backstop for the Single Resolution Fund (SRF). Moreover, the ESM should be viewed as the natural instrument for unifying the euro area’s representation in the IMF.

The Commission’s proposal to establish a European Monetary Fund - a critical analysis

On December 6, 2017, the European Commission published a set of proposals to reform the euro area. These proposals include, inter alia, the creation of a post of European Finance minister, a euro area budget-line and the establishment of a European Monetary Fund (EMF). The latter will be at the centre of this article. The Commission does not intend to set up the EMF anew from scratch. Rather, the new EMF is to be built on the wellestablished structure of the European Stability Mechanism (ESM). The new EMF will thus succeed to and replace the ESM, with the latter’s current financial and institutional structure essentially preserved. However, the new institution will also take on a number of additional functions, such as providing a financial backstop for the Single Resolution Fund (SRF), enhanced monitoring tasks and the responsibility to report regularly to the European Parliament. But will these changes make EMU more efficient, coherent and democratic? And has the EU the competence to establish such a mechanism at all? The objective of this article is to answer these complex questions. Fundstelle: Riss, Hofmeister , The Commission’s Proposal to Establish a European Monetary Fund: A Critical Analysis, ALJ 2018, 139–158 ( http://alj.uni-graz.at/index.php/alj/article/view/126 ).

A common backstop to the Single Resolution Fund

During the establishment of the Banking Union it has been agreed to develop a common backstop to the Single Resolution Fund. The following key principles constitute the point of departure of this paper:1. Fiscal neutrality in the medium term;2. Instrument of last resort;3. Equivalent treatment across all Member States in the Banking Union; and4. No costs for non-Banking Union Member States.For each aspect the legal and regulatory background as well as the economic implications are provided. They significantly influence the common backstop’s final design and the choice of an adequate provider for the steady state.