Planning for EU bank resolution still missing some key elements, auditors say

The Single Resolution Mechanism (SRM) is the EU system for the orderly winding-up of failing banks within the Banking Union, to avoid costly bail-outs. Since its establishment in 2015, the SRM has progressed in preparing for bank resolution, according to a new European Court of Auditors (ECA) report. However, the auditors find that further steps are needed in certain crucial areas. The Single Resolution Board (SRB) should put in place all relevant policies shaping resolution actions, and address weaknesses in the quality, timeliness and consistency of its own resolution planning. Other essential issues, such as funding in resolution and harmonisation of
national insolvency proceedings for banks, need to be resolved by the legislators. The SRM legal framework provides tools for winding up banks, once the resolution authority – the SRB in the case of significant and cross border banks, and the national resolution authorities (NRAs) in that of less significant banks in their respective jurisdictions- has decided that a failing bank cannot undergo normal insolvency proceedings under national law.

To prepare for such an eventuality, the authorities are required to draft resolution plans for every bank and, as a general rule, update them annually.

“The SRM has made progress over the last years but further steps are needed to properly plan the orderly winding-up of failing banks”, said Rimantas Šadžius, the ECA Member responsible for the report. “We found that the policies did not yet address all relevant areas and revealed weaknesses. The resolution plans improved in quality but weren’t always in line with the requirements. Moreover, the SRB has not properly identified and dealt with obstacles to a bank’s resolvability. Remedying these shortcomings would help to ensure that taxpayers do not foot the bill once again”.

The choice of resolution tool and its effectiveness depend on, among other things, whether the substantive impediments to a bank’s resolvability have been addressed or removed. Yet, the auditors observe, the SRB has refrained from determining any such impediments to date, thus failing to comply with the harmonised rules. In April 2020, the SRB issued its

“Expectations for Banks”, requiring them to strengthen certain aspects of their resolvability by the end of 2023. However, the legislators have not specified any such timeline.