A bank failure may seem like a distant event, but its repercussions have the potential to affect every citizen. In order to prevent systemic financial crises, such as the one in 2008, and to safeguard depositors' savings without taxpayers having to pay, Europe has set up the Banking Union and its resolution mechanism. How does this mechanism work, and what protection does it offer in practical terms? This article sheds light on how it works and the guarantees it provides.
Union Bancaire: a strengthened supervision and resolution framework
Union Bancaire was designed to harmonise the supervision of banks within the eurozone and other participating member countries, and to manage bank failures in an orderly fashion. It is based on essential pillars designed to ensure the solidity of the sector.
The Single Supervisory Mechanism (SSM): supervision by the ECB
At the heart of the Banking Union, the Single Supervisory Mechanism (SSM) entrusts the European Central Bank (ECB) with direct supervision of the largest banks in the participating Member States.. For other banks, the ECB retains a supervisory role over the competent national authorities. The aim of this centralisation is to ensure consistent application of prudential rules and to identify risks at an early stage at European level. The aim is to maintain financial stability and guarantee the robustness of credit institutions.
The Single Resolution Mechanism (SRM): managing bank failures
Complementary to the MSU, the Single Resolution Mechanism (SRM) establishes a framework for the effective management of banks in difficulty within the Union Bancaire. Its central body is the Single Resolution Board (SRB), which is responsible for preparing resolution plans for the largest banks and those with significant cross-border activity.. In the event of a proven or foreseeable failure of a bank, the CRU, in collaboration with the national resolution authorities, can trigger a resolution procedure in order to preserve financial stability, protect depositors and prevent taxpayers from bearing the burden of losses.. This mechanism is financed by the Single Resolution Fund (SRF), which is funded by contributions from the banking sector itself..
Towards a European Deposit Insurance Scheme (EDIS)?
Union Bancaire also aims to strengthen depositor protection. Currently, deposits are guaranteed at national level up to 100,000 euros per depositor and per bank, in accordance with the European directive on deposit guarantee schemes.. Discussions are underway to create a European Deposit Insurance Scheme (EDIS). This system would mutualise deposit guarantees at European level, offering even stronger and more uniform protection for all depositors in the Banking Union, and further breaking the link between banks and their sovereign states. The current state of negotiations shows that progress is being made towards this objective, although full implementation will still take time.
How does the resolution of an ailing bank in the EU work?
The resolution of a bank is a regulated process aimed at managing its failure in an orderly manner, minimising the impact on the economy and customers. This process is based on early detection of difficulties and plans prepared in advance.
Early detection and preventive plans: recovery plans
Before a situation becomes critical, banks are required to draw up and maintain preventive recovery plans.. These plans, which are subject to assessment by the supervisory authorities (such as the ECB or the competent national authorities), detail the measures that the bank would take to restore its financial viability in the event of a significant deterioration in its situation.. They include a range of options relating to capital and liquidity, the restructuring of activities or the sale of assets.. The aim is to enable the bank to overcome a crisis on its own.
When does resolution become necessary (proven or foreseeable failure)?
A resolution procedure is envisaged when a bank is in a situation of actual or foreseeable failure.. This means that the institution no longer meets, or is on the verge of no longer meeting, prudential requirements, that its assets are less than its liabilities, or that it is unable to meet its current obligations.. In addition, it must be established that no alternative private sector measure (such as a capital increase by existing shareholders) or early monitoring measure would enable the failure to be avoided within a reasonable period of time.. Finally, resolution must be deemed necessary in the public interest, in particular to preserve financial stability, ensure the continuity of the bank's critical functions and protect depositors..
Who decides? The central role of the Single Resolution Board (SRB) and national authorities
The decision to place a bank in resolution is taken by the Single Resolution Board (SRB) for large banks under its direct jurisdiction, or by the national resolution authorities for other banks, in close collaboration with the SRB.. The ECB, as supervisor, plays a key role in informing the CRU when it considers that a bank is in a state of actual or foreseeable default.. Le role of the CRU and FRU is therefore central to this system. Once the decision has been taken, the relevant resolution authority implements the resolution plan, using the appropriate tools.
Tools for managing a banking crisis without panicking
To manage the failure of a bank without causing panic and without calling on public funds, the resolution authorities have a range of tools at their disposal, defined in particular by the BRRD framework.
The bail-in principle: making shareholders and creditors contribute before the State
One of the main tools is internal bail-in.. This mechanism requires the bank's losses to be absorbed first by its shareholders and then by some of its creditors, whose claims may be written down or converted into capital.. The aim is to recapitalise the bank with private funds and restore its viability, without using taxpayers' money.. Covered deposits (up to €100,000) are explicitly protected and excluded from bail-in in the vast majority of cases..
Other instruments: sale, bridge bank, asset segregation
In addition to the bail-in, the tools provided by the BRRD directive include:
- Sale of activities All or part of the failing bank's business may be sold to a solvent buyer.
- The bridge bank In this case, sound assets and liabilities, or critical functions, can be temporarily transferred to a bridge bank, supervised by the authorities, while a sale or restructuring solution is found.
- Asset separation Toxic" assets or assets that are difficult to value can be transferred to an asset management structure (often called a "bad bank") in order to isolate them from the rest of the bank's or bridge institution's balance sheet, thereby facilitating its restructuring or sale.
These instruments can be used alone or in combination, depending on the bank's specific situation.
The Single Resolution Fund (SRF): a resource financed by the banks
To support the implementation of resolution measures and guarantee their effectiveness, the Single Resolution Fund (SRF) has been set up.. It is funded by regular contributions paid by the Union Bancaire banks themselves, in proportion to their size and risk profile.. The FRU can be used, under strict conditions, to facilitate the application of resolution tools, for example by providing guarantees or loans, or by contributing to the recapitalisation of a bridge institution, always with the aim of minimising the impact on public finances.. The aim is for the banking sector itself to finance the costs of resolving internal failures.
What protection is there for customers and the economy?
The European banking resolution framework has been designed with one central objective: to protect bank customers and preserve the stability of the economy as a whole. Several mechanisms contribute to this objective.
Deposit guarantee: up to €100,000 protected per depositor and per bank
The most direct protection for citizens is the deposit guarantee. In all EU countries, national deposit guarantee schemes (DGS) ensure that the deposits of individuals and many businesses are protected up to €100,000 per depositor and per bank, in the event of the bank's failure.. This amount applies to all accounts held by the same depositor with the same bank. In the case of a joint account, each joint holder benefits from this guarantee.. Refunds must be made promptly, generally within seven working days..
Ensuring the continuity of essential banking services
Another major objective of resolution is to ensure the continuity of the failing bank's critical functions. This means that even if a bank is in resolution, customers should be able to continue to access their accounts, use their means of payment and benefit from essential banking services without major disruption. Tools such as the bridge bank or the rapid sale of activities are designed to enable this continuity..
Limiting the impact on global financial stability
By managing the failure of a bank in an orderly fashion, the resolution mechanism aims to avoid a contagion effect that could destabilise the entire financial system.. Banking crises can spread rapidly if confidence is shaken. By making shareholders and certain creditors contribute first (bail-in) and by having tools to isolate problems, the aim is to avoid massive recourse to public funds and to preserve confidence in the solidity of the European banking sector as a whole.
The European banking resolution system is a complex but essential mechanism for the confidence and stability of our economy. By organising the management of banking crises and protecting deposits, it aims to ensure that an institution's difficulties do not have disproportionate consequences for citizens and the financial system as a whole. For specific questions about your rights as a depositor or for a more detailed analysis of banking regulations, the expertise of a lawyer can prove invaluable. Do not hesitate to contact our firm for a advice on banking law or for our firm's support.
Frequently asked questions
What is a bail-in?
This is a mechanism whereby the shareholders and certain creditors of a bank in difficulty absorb the losses or see their claims converted into capital to recapitalise it, before any recourse to public money..
Are my deposits safe in the event of a bank failure in Europe?
Yes, deposits of up to €100,000 per depositor and per bank are protected by national deposit guarantee schemes, coordinated at European level..
Who pays for a bank's resolution?
Mainly the bank's shareholders and creditors via the bail-in.then the Single Resolution Fund (financed by contributions from the banks themselves)the aim being to minimise the use of public funds.
What is the difference between recovery and resolution?
The aim of recovery is to restore a bank in difficulty to health through internal measures (recovery plan).. Resolution occurs when the bank is failing or close to failure, with more drastic tools managed by the authorities to preserve stability..
Does the CRU manage the resolution of all European banks?
No, the CRU is directly responsible for the largest banks and cross-border groups within Union Bancaire.. The other banks are managed by the national resolution authorities, but under the supervision and rules of the CRU..
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