Single Resolution Mechanism
In the recent financial crisis it became obvious that banks in distress, especially systemically important institutions and those with cross-border activities, could not be left to go bankrupt because of possible knock-on effects for financial stability. What was lacking were rules and instruments enabling the orderly exit of banks from the market, a process commonly known as “resolution.” It would have been virtually impossible for insolvent systemically important banks to leave the market while maintaining services that are important for the functioning of the economy as a whole (“critical functions”), such as payment and lending services. Therefore, such banks had to be saved with taxpayers' money. The newly established Single Resolution Mechanism (SRM) is to ensure that, if a systemically important bank fails, the banks’ stakeholders and creditors will be held liable for the costs, so that no taxpayers’ money must be used.
Moreover, the SRM is a necessary complement to the Single Supervisory Mechanism (SSM): with the creation of the SSM and the SRM, both the responsibility for banking supervision and for the orderly resolution of banks have been moved to the European level and a balance between control and liability has been achieved. The conceptual framework of the SSM is based on two legislative acts that were designed to harmonize the resolution process and increase its effectiveness:
- the Single Resolution Mechanism Regulation (SRM-R)
- the Bank Recovery and Resolution Directive (BRRD), which was written into Austrian law with the Austrian Bank Recovery and Resolution Act (or BaSAG, as it is known by its German acronym)
At the heart of the SRM’s institutional framework is the Single Resolution Board (SRB), which controls the Single Resolution Fund (SRF).
Single Resolution Board
The Single Resolution Board (SRB) is a Brussels-based agency with legal personality and independent finances. In its plenary session, the SRB comprises its chair, the vice-chair, four permanent members and representatives of the national resolution authorities of all participating Member States. The ECB and the European Commission have observer status in the SRB.
The SRB is responsible for resolution planning (including assessing and facilitating an institution’s resolvability) as well as for the resolution of failing or failed institutions. It started to develop resolution planning, data collection and cooperation with the national resolution authorities in 2015 and has been fully operational since January 1, 2016. 2017 marked the first year in which a significant institution within the SRB’s remit was resolved.
The decision-making process in the SRM involves, in addition to the SRB, the ECB as the competent supervisory authority and the European Commission, which may approve or reject the resolution scheme or raise objections. In certain cases the European Council must be involved, who may adopt or reject the scheme.
Similar to the SSM, the SRM is organized as a decentralized system: there is a clear division of tasks between the SRB and the national resolution authorities. In Austria, the FMA is the national resolution authority. The SRB is responsible for those institutions that are directly supervised by the ECB (significant banks), for cross-border groups, and for banks that receive SRF funding. All other institutions are within the remit of the national resolution authorities.
In performing its tasks, the SRB cooperates closely with the national resolution authorities.
Single Resolution Fund
The other institutional pillar of the SRM, next to the Single Resolution Board, is the Single Resolution Fund (SRF), which forms the financial backbone of the SRM. The SRF, which is owned and administered by the SRB, started to pool resources from the banking industry on January 1, 2016, with the level of the individual contributions depending on an institution’s size and risk profile. By 2024, the SRF is scheduled to have reached its full target size of 1 % of the covered deposits of all banks in EU countries participating in the SRM – about EUR 55 billion.
EU bank resolution legislation
Creating common EU rules for bank resolution, the Bank Recovery and Resolution Directive (BRRD) provides a toolbox for financial crisis management in three different stages:
- early intervention
- bank resolution
Prevention and early intervention measures are at the discretion of the supervisory authorities. If their measures fail to prevent an institution from exiting the market, further action will be taken by the resolution authorities.
The BRRD was written into Austrian law with the Bank Recovery and Resolution Act.
Banks must produce recovery plans in which they explain what measures they would take if their financial situation were to deteriorate. The competent supervisory authorities review and assess these recovery plans. The resolution authorities (in Austria, the FMA), in turn, draw up resolution plans in which they describe how an institution can be resolved or restructured in an orderly way. If the resolution plans reveal potential obstacles to successful resolution, the institution concerned will be requested to take measures to remove them (e.g. by changing its legal or operational structure, selling off certain assets, limiting certain activities).
The supervisory authorities are entrusted with far-reaching powers of intervention; moreover, they stand ready to intervene early not only in case of regulatory violations but also if there is a likely breach of regulatory rules. For instance, they may require institutions to hold additional capital and implement measures and rules set out in the recovery plan.
If prevention measures and early intervention prove ineffective, institutions can be resolved instead of undergoing normal insolvency proceedings. This is only possible under the following circumstances: The institution is failing or likely to fail; there is no private sector solution; and resolution is in the public interest. If these conditions are not met, the institution must be wound up under normal insolvency proceedings.
The BRRD provides resolution authorities with a number of specific resolution tools. The core element of the harmonized legal framework is the bail-in of shareholders and creditors. The bail-in tool cannot be applied, however, to deposits protected under deposit guarantee schemes, collateralized claims and liabilities to employees of the failing institution.
Other resolution tools and powers available to the resolution authorities are
- the sale of the institution under resolution,
- the transfer of assets to a bridge institution (which must have a bank license), and
- the transfer of assets to an asset management vehicle ("bad bank").
Implementation in Austria
Austria implemented the BRRD by adopting the Bank Recovery and Resolution Act (BaSAG), thereby creating a national legal framework for how to deal with banks that are failing or likely to fail. The BaSAG contains provisions
- requiring the production of recovery plans by banks and the production of resolution plans by the resolution authorities, including powers to remove obstacles to resolution (prevention);
- enabling supervisory authorities to intervene at an early stage, including related additional powers to intervene (early intervention); and
- forming the basis for the establishment of a national resolution authority and for entrusting the authority with the necessary powers and tools (resolution).
The BaSAG is aimed at ensuring an orderly market exit of banks without causing substantial negative repercussions for financial stability while protecting depositors and other customers and keeping the taxpayers' burden to a minimum. The obligation to develop recovery plans and resolution plans as well as the FMA’s power of early intervention had been incorporated into the Austrian Banking Intervention and Restructuring Act (or BIRG, as it is known by its German acronym) and the Austrian Banking Act even before the adoption of the BaSAG. The relevant provisions of the latter two acts were adapted to the BRRD and integrated into the BaSAG.
Austria implemented the BRRD by adopting the Bank Recovery and Resolution Act (BaSAG), thereby creating a national legal framework for how to deal with banks that are failing or likely to fail. The provisions on recovery plans and early intervention are addressed to the supervisory authorities, the provisions on bank resolution to the resolution authority. The BaSAG installed the FMA as the competent resolution authority. In this capacity, it cooperates closely with the OeNB on specific issues; this arrangement follows the dual approach pursued in supervision.