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Single Resolution Mechanism fully in force from January to prevent future banking crises in eurozone (4 January 2016)

Date: 04/01/2016
Duncan Lewis, Crime Solicitors, Single Resolution Mechanism fully in force from January to prevent future banking crises in eurozone

The Single Resolution Mechanism (SRM) became fully operational on 1 January 2016, in order to bolster the resilience of the financial system –
and help avoid future crises by providing for the timely and effective resolution of cross-border and domestic banks in EU member states.


The EU Commission proposed the Single Resolution Mechanism on 10 July 2013 and it entered into force on 19 August 2014.

The provisions relating to the cooperation between the Single Resolution Board and the national resolution authorities for the preparation of the banks’ resolution plans applied from 1 January 2015.

The Single Resolution Mechanism works by the Single Supervisory Mechanism (SSM), as the supervisor, signalling when a bank in the eurozone – or established in a Member State participating in the Banking Union – is in severe financial difficulties which need to be resolved.

The Single Resolution Board (SRB) consists of representatives from the relevant national authorities – those where the bank has its headquarters, as well as branches and/or subsidiaries – and the SSM and European Commission.

The SRB will carry out specific tasks to prepare for and carry out the resolution of a bank that is failing or likely to fail – and will also decide whether and when to place a bank into resolution.

The SRB also sets out in the resolution scheme a framework for the use of resolution tools and the Single Resolution Fund (SRF). The resolution scheme can then be approved or rejected by the EU Commission – or, in certain circumstances, by the Council – within 24 hours.

Under the supervision of the SRB, national resolution authorities will be in charge of the execution of the resolution scheme.

The SRB oversees the resolution and monitors the execution at national level by the national resolution authorities.

Should a national resolution authority not comply with its decision, the SRB directly addresses executive orders to the troubled banks.

An SRF is set up under the control of the SRB and will ensure the availability of funding support while the bank is resolved.

It is funded by contributions from the banking sector – but the SRF can only contribute to resolution if at least 8% of the total liabilities of the bank have been bailed-in.

The SRM allows for more uniform financing conditions for individuals and businesses, as a result of a single mechanism to deal with the failure of banks, irrespective of the Member State of origin – thereby reducing the interdependence between credit supply and the health of public finances.

A “casino” banking culture has been blamed for the 2007 banking crisis and subsequent 2008 credit crunch.

Since the banking crisis, it has also emerged that some bankers were rigging LIBOR (London Interbank Offered Rate, which sets the cost of short-term lending to both individuals and business).

EU Commissioner Jonathan Hill – responsible for Financial Stability, Financial Services and Capital Markets Union – said:

“The Banking Union already has the tools it needs to supervise the banks within the Euro area.

“As of 1 January, the Single Resolution Mechanism will now also be in place.

“This means that we now have a system for resolving banks and of paying for resolution, so that taxpayers will be protected from having to bail out banks if they go bust.

“No longer will the mistakes of banks have to be borne on the shoulders of the many.”

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