Single Resolution Mechanism Research Articles

Das europäische Bankensystem: Bestandsaufnahme und Herausforderungen

We discuss the current state of the European banking system and the major challenges for the future. The low interest rate environment may give rise to asset price bubbles and interest rate risk, which should be counteracted by macroprudential regulation. Overcapacities in banking should be reduced by resolving banks that do not pass the ECB’s comprehensive assessment. The link between banks and sovereigns could be alleviated by reforming the regulatory treatment of government bond holdings and by establishing a credible backstop for the Single Resolution Mechanism. Finally, the fragmentation of the European financial system may be tackled through greater harmonisation and by improving resolution procedures for cross-border banks.

Banking union: a solution to the euro zone crisis?

In June 2012 European Council launched the banking union as a new project expected to contribute to solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? A banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, by establishing common mechanisms to solve banking crises, and by encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme (EDGS). Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other issues are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other issues are related to the EU specificity (is the banking union a step towards more federalism?); the more stringent are related to structural choices regarding the European banking system. Banks’ solvency and ability to lend, would depend primarily on their capital ratios, and thus on financial markets’ sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed by the interdiction to run risky activities on financial markets. Can European peoples leave such strategic choices in the hands of the ECB?

The Single Supervisory Mechanism or 'SSM', Part One of the Banking Union

The Regulation on the Single Supervisory Mechanism mandates the European Central Bank to exercise prudential supervision on the banks located in the Euro area, whether directly by the Bank’s own services for the significant banks, or indirectly by the national prudential supervisors but under the general guidance of the ECB for the less significant banks. The paper gives a detailed analysis of the new regime, its scope, the consequences for the existing supervisory systems, especially the home-host attribution of competences and the cooperation between the ECB and the national supervisors, the consequences for the non-euro Member States and for the third country jurisdictions. This regime is likely to substantially modify the existing supervisory landscape. It is the first step towards the Banking Union and is to be followed by legislative instruments on Bank Recovery and Resolution Directive, the Regulations on a Single Resolution Mechanism and on Deposit Guarantee Schemes. These three measures should allow dealing with defaulting banks without calling on the taxpayers.

The Single Resolution Mechanism of the European Banking Union: its structure and functioning

The recent financial crisis showed that the institutions of the European Union (EU) and its member states are poorly prepared for solving current problems of banks, which are experiencing financial difficulties in European markets. In order to be able to further provide services for citizens and companies, member states’ governments had to support banks with public finances and provide guarantees on an unprecedented scale. It did help to avoid a collapse of banks and a disturbance of the economy, but only by putting the burden on taxpayers and thereby causing deterioration in public finances. An agreement about the right course of action in the face of these difficulties experienced by cross-national banks has not been reached either. The major situation changer should be the European Banking Union (EBU), also called the Integrated Financial System, which is in the process of being created. The foundations for it have been laid during Lithuanian presidency of the Council of the EU in the second half of 2013. For Lithuania and all other EU member states, joining the banking union will mean handing over important national state powers to the European Union institutions.

Den Bock zum Gärtner machen? – Eine ordnungspolitische Hinterfragung der Bankenunion / ECB as single supervisory authority: Setting the fox to watch the geese?

Zusammenfassung Während die EZB bislang fortgesetzt ihre geldpolitischen Befugnisse durch faktische Fiskalpolitik ergänzt und in diesem Zusammenhang Überliquidität im Bankensystem schafft sowie die Kollateralanforderungen senkt,73 soll sie durch die Bankenunion in die Lage versetzt werden, frühzeitig mikroprudentielle Risiken in der Kreditwirtschaft der Eurozone zu entdecken, einzuhegen und ggf. vom Single Resolution Mechanism die Liquidation eines Kreditinstituts zu verlangen. Damit wird jenes Organ der EU, das für die Geldpolitik ein vorrangiges Ziel beachten (Preisniveaustabilität) muss, mit einer Aufgabe bepackt, die es unmöglich lösen kann, ohne die eigene Unabhängigkeit aufs Spiel zusetzen. Mehr noch: jene Instanz, die unter dem Gesichtspunkt der Bankenstabilisierung hohe Risiken der Kreditinstitute unbegrenzt refinanziert hat und damit unweigerlich die Anlagepolitik der Banken quergeschrieben hat, soll eben die Folgen dieser Politik nun als Bankenaufsicht einfangen. Gleichzeitig weigert sich die EZB, die Staatenfinanzierung durch Banken nicht länger aufsichtsrechtlich zu privilegieren. Die dabei streitgegenständlichen Risiken stellen ein Vielfaches der jeweiligen Staatsschuld der Eurozonenmitglieder dar, ohne dass bisher auch nur der Ansatz gemacht worden ist, auch den Schattenbankensektor bei dieser Gelegenheit aufsichtsrechtlich einzuhegen Wenn für den Fall unzureichender Haftungsmasse im Single Resolution Fund der ESM zur Rekapitalisierung von Banken mobilisiert würde, wäre dies nicht nur ein ordnungspolitischer Offenbarungseid, sondern der entscheidende Schritt zur eurozonenweiten Entkopplung von Herrschaft und Haftung in der Kreditwirtschaft. Dann hätten jene spezifisch deutschen Sektoren der Kreditwirtschaft wie Sparkassen und Genossenschaften Beiträge an den EU-Abwicklungsfonds geleistet, obschon sie aufgrund ihres Geschäftsmodells und ihres Haftungsverbunds diese nie in Anspruch nehmen können

European Union Public Policy Tendencies in the Banking Bector

Over the financial crisis, the ability of authorities to manage crises both domestically and in cross-border situations has been severely tested. The financial crisis exposed many problems within the global financial system and in the way it was regulated and governed. Financial market regulators did not accurately identified the risk of the banks taken in securitization procedures and did not estimated the losses that could appear in case of the systemic crisis. This led to chaotic bank crisis resolution and extraordinary financial cost suffered by Member States. Hence, the taxpayers were called upon billions of euro to recapitalize the banks in order to prevent the contagion risk. These failures of efficient prudential supervision and lack of regulation in banking restructuring and resolution has led to a need to create a banking union in the European Union which should assure the sufficient capital requirements of the banks and harmonized deposit guarantee scheme, also creation of the single supervisory mechanism and (single) banking recovery and resolution mechanism. Some of the legislative initiatives are agreed, others are under negotiation processes and an important single resolution mechanism proposal is still under in drafting process. As for public policy of the European Union the most important legislative procedures are single supervisory mechanism (SRM) and banking restructuring and resolution (RRD). The said proposals will centralize the prudential supervision in the hands of European central bank and provide harmonized approach on bank rcoery and resolution mechanisms. However, the centralization of the prudential supervision within euro-zone and non-euro zone member states that are willing to join the SSM will have a significant impact on the national public administration systems. Therefore, there is a need of scientific analysis of this phenomena. Hence, the article considers possible positive and negative the implications of the SSM and RRD on national public administration systems and stresses the main problematic issues (efficacy of centralized supervision, funding of the resolution, institutions that could be a resolution authority). The author stresses that in overall the RRD proposal will enforce the structured and also more efficient supervision and would definitely reduce the risk of spending taxpayers’ money in banks’ resolution. As regards to SSM, the author claims that the centralized model could be efficient only in cases where the domestic supervisory institution provides the sufficient know-how for the European central bank.

Probleme der Bankenunion: Falsche Lehren aus der Krise

Der Aufsatz bietet eine kritische Analyse der derzeitigen Pläne (Stand: 31.07.13) für a) eine gemeinsame Bankenaufsicht, b) eine direkte Bankenrekapitalisierung aus den Mitteln des "Europäischen Stabilitätsmechanismus„ (ESM), c) einen gemeinsamen Abwicklungsmechanismus und -fonds und d) eine gemeinsame Einlagenversicherung der Euroländer. Auf die Darstellung der geplanten Regelungen folgt jeweils eine Rechtfertigungsanalyse. Dabei wird zwischen ökonomischen und rechtlich-institutionellen Problemen unterschieden. Soweit die Ziele als gerechtfertigt erscheinen, wird gefragt, ob sie auf die vorgesehene Weise erreicht werden können und ob es nicht andere, bessere Mittel zu ihrer Erreichung gibt.

A Banking Union for the Euro Area

A banking union—a single supervisory-regulatory framework, resolution mechanism, and safety net—for the euro area is the logical conclusion of the idea that integrated banking systems require integrated prudential oversight. The case for a banking union for the euro area is both immediate and longer term. Moving responsibility for potential financial support and bank supervision to a shared level can reduce fragmentation of financial markets, stem deposit flight, and weaken the vicious loop of rising sovereign and bank borrowing costs. In steady state, a single framework should bring a uniformly high standard of confidence and oversight, reduce national distortions, and mitigate the buildup of concentrated risk that compromises systemic stability. Time is of the essence. Progress is required on all elements. A single supervisory mechanism (SSM) must ultimately supervise all banks, with clarity on duties, powers and accountability, and adequate resources. But without common resolution and safety nets and credible backstops, an SSM alone will do little to weaken vicious sovereign-bank links; they are necessary also to limit conflicts of interest between national authorities and the SSM. A single resolution authority, with clear ex ante burden-sharing mechanisms, must have strong powers to close or restructure banks and be required to intervene well ahead of insolvency. A common resolution/insurance fund, sized to resolve some small to medium bank failures, with access to common backstops for systemic situations, would add credibility and facilitate limited industry funding. The challenge for policymakers is to stem the crisis while ensuring that actions dovetail seamlessly into the future steady state. Hence, agreeing at the outset on the elements, modalities, and resources for a banking union can help avoid the pitfalls of a piecemeal approach and an outcome that is worse than at the start. The December 2012 European Council agreement on an SSM centered at the European Central Bank (ECB) is an important step, but raises challenges that should not be underestimated. Meanwhile, to delink weak sovereigns from future residual banking sector risks, it will be important to undertake as soon as possible direct recapitalization of frail domestically systemic banks by the European Stability Mechanism (ESM). Failing, non-systemic banks should be wound down at least cost, and frail, domestically systemic banks should be resuscitated by shareholders, creditors, the sovereign, and the ESM. A banking union is necessary for the euro area, but accommodating the concerns of non-euro area European Union (EU) countries will augur well for consistency with the EU single market.