A crucial first step on the way towards a more genuine EMU was achieved in 2014 with the completion of the legal framework for an integrated Banking Union. In addition to the establishment of a Single Supervisory Mechanism (SSM) for euro area banks, a common resolution mechanism for dealing with bank failures, namely the Single Resolution Mechanism (SRM), was set up. The central authority of the SRM, the Single Resolution Board (SRB), is responsible for a common safety net, namely the Single Resolution Fund (SRF), whose resources are based on ex ante contributions from the financial industry and will be drawn on for the resolution of failing credit institutions only after the implementation of the bail-in rules set out in the bank recovery and resolution directive (BRRD). The target level of the SRF to be reached by 2024 amounts to 1% of the covered deposits of all banks in participating Member States, i.e. about €55 billion. The SRF has been operational since 1 January 2016.
However, the design of the Single Resolution Fund could be further enhanced. The Five Presidents’ report highlights that a credible common fiscal backstop for the SRF should be set up both during the transition period and in steady state. It also suggests that a direct credit line from the European Stability Mechanism (ESM) to the SRF could be a solution, noting that the backstop should be fiscally neutral in the medium term. Ex post contributions from the banking sector would be raised to refund the ESM.
In December 2013, ECOFIN Ministers agreed to set out a system by which bridge financing would be available as a last resort if the SRF’s resources are completely depleted before it reaches the target level of €55 billion. The arrangements for the transitional period should be operational by the time the Fund was established.
Two years later (December 2015), ECOFIN Ministers endorsed a harmonised Loan Facility Agreement (LFA) with the SRB, according to which each Member State participating in the SRM will provide a national individual credit line to back its national compartment in the SRF in case of possible funding shortfalls following the resolution of its banks. All 19 banking union Member States had signed a LFA on bridge financing for the SRF.
An ad hoc working group in the Council was established on 13 January 2016 and has been examining measures to strengthen the Banking Union, including the set-up of a common fiscal backstop to the SRF at the latest by the end of 2023. Following the completion of the transposition of the BRRD by all Member States in early November 2016, the ECOFIN Council decided to ‘give a mandate [to the Economic and Financial Committee] for technical work on the common backstop to start’, in line with its commitment included in the roadmap to complete the banking bnion agreed on 17 June 2016.
In its annual report on the banking union in 2015, the European Parliament stressed 'the need, as a consequence of the existence of the national compartments in the SRF, to rapidly put in place an adequate bridge financing mechanism in order to provide the fund, if necessary, with sufficient resources in the period before its completion and guarantee the effective separation between banks and sovereigns'. It recalled that ‘the Eurogroup and the ECOFIN ministers identified, in their statement of 18 December 2013, the possibility of having recourse either to national sources, backed by bank levies, or to the European Stability Mechanism'. At the same time, it welcomed 'the agreement reached to secure public bridge financing to help ensure the availability of funds for concrete resolution action through national resources'. Lastly, the SRF could be integrated into the EU legal framework. MEPs called on the Commission 'swiftly to take the necessary steps for a quick integration of the intergovernmental agreement into the framework of EU law, as provided for in Article 16 of the Agreement'. Parliament reiterated similar calls in its annual report on the banking union in 2016 and 2017.
In its May 2017 reflection paper on the deepening of the EMU, the European Commission reiterated its support for fiscal backstop for the SRF : ‘A credible fiscal backstop to the Single Resolution Fund is essential to make the new EU framework for bank resolution effective, and to avoid costs for taxpayers’ (p. 20).
On 6 December 2017 the Commission set out a roadmap for deepening the EMU, which comprises a proposal for a Council Regulation to create a European Monetary Fund (EMF) anchored in the Union legal framework. The tasks and the financial means of the European Stability Mechanism (ESM) would be transferred to the EMF, and other tasks could be added, such as serving as a common backstop to the SRF. The Eurogroup discussed the matter on 19 February and 24 May 2018, putting much emphasis on a possible role for the ESM as a backstop to the SRF. The Euro Summit of 29 June 2018 agreed that the ESM will provide the common backstop to the SRF, while the details were to be arranged at a later stage. The Euro Summit of 14 December 2018 endorsed the terms of reference that set out how the backstop to the SRF will be operational -and anticipated provided sufficient progress has been made in risk reduction- to be assessed in 2020. On 13 June 2019, the Eurogroup came to a broad agreement on revising the ESM treaty to implement the political agreement reached at the Euro Summit in December 2018. This agreement covered also the common backstop to the SRF. Further discussions took place at Euro Summit level on 21 June 2019 with expectations for the Eurogroup to continue its work with a view to reaching an agreement on the full package in December 2019. On 13 December 2019, the Euro Summit took stock of progress made on the implementation of its June 2019 Statement, including the revision of the ESM Treaty (for complementary information, see the fiche on 'Integration of the ESM into EU-law by creating an EMF').
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Author: Carla Stamegna, Members' Research Service, legislative-train@europarl.europa.eu