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Jan 31, 2024 165 likes •333 views

EBI European Banking Institute 5t 5th E h EBI Y YRG Vi Virtual ual W Worksho hop S p Session Title Exploring governance issues between the SRB and the ESM in the use of the Common Backstop Speaker Pier Mario LUPINU PhD Candidate

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EBI – European Banking Institute 5t 5th E h EBI Y YRG Vi Virtual ual W Worksho hop S p Session

Title

Exploring governance issues between the SRB and the ESM in the use of the Common Backstop

Speaker Pier Mario LUPINU PhD Candidate in Banking and Finance Law University of Luxembourg Roma Tre University EBI Young Researcher

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ØField: resolution of credit institutions in the euro area

Ø Complex procedure requiring timely and well-structured decision making:

Ø Bodies Ø Processes

ØResearch problem: governance issues decision-making process (Common Backstop)

Ø Need to ensure smooth provision of funding during resolution

ØCovid-19 Pandemic shifted interest:

Ø ESM Treaty Reform ESM Pandemic Crisis Support Ø ESM Role as safety net for sovereigns consolidated (what about BU banks?)

ØDespite interventions post financial crisis, Covid-19 pandemic severe/unpredictable events ØAuthorities involved: SRB and ESM

Ø Core point of the study: Common backstop ESM SRF

1. Introduction

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ØStructure of the paper:

ØBackground, establishment, scope of action, governance

ØESM-SRB/SRF

ØNeeds of the SRF on the base of State Aid 2007-2014 ØDecision-making processes and related shortfalls ØSolutions:

ØPossible changes to current framework ØArrangements to simplify/shorten procedures

1. Introduction

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2. The European Stability Mechanism

ØIntergovernmental Organisation under International Public Law

ØIMF as example for structure, methods of intervention, financing (i.e. Greece 2010)

ØTreaty Establishing the ESM in February 2012 (sovereign debt crisis)

ØFinancial assistance under strict conditions ØConditionality political issue – divisions between MS

Ø From ESM Treaty reform to ESM Pandemic Crisis Support

ØESM Members: 19 euro area Member States ØESM Resources:

ØInitial capital stock €700 billion (each share of €100 000 nominal value) + Article 3 ESM Treaty ØBigger quota, more power (governance issue – i.e. DE, FR, IT)

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2. The European Stability Mechanism

ØESM Lending toolkit

ØPrecautionary financial assistance:

Ø Precautionary conditioned credit line (PCCL) Ø Enhanced conditions credit line (ECCL)

ØFinancial assistance for the recapitalisation of financial institutions of an ESM Member:

Ø Loans for indirect bank recapitalisation (Spain) Ø Direct Recapitalisation Instrument (DRI) – never used

ØLoans (macroeconomic adjustment programme) ØSupport facility in the form of purchases in:

Ø Primary markets Ø Secondary markets

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2. The European Stability Mechanism

ØGovernance: ØBoard of Governors (BoG)

ØRepresentative of ESM MS – finance minister ØMain ESM decision-making body ØChair: President of the Eurogroup

ØBoard of Directors (BoD)

ØFormer senior officials of ESM MS ØChair: Managing Director (also CEO of EFSF) – assisted by Management Board ØEnsures ESM managed according to ESM Treaty ØDecision-making body on delegation from BoG

ØIndependent Board of Auditors

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3. The Single Resolution Fund

ØEstablished with the Single Resolution Mechanism Regulation (SRMR) – Article 67 ØManaged by the Single Resolution Board (SRB) ØAssociated with BU’s highest objectives:

Østop of the vicious circle banks-sovereigns; Øequal bailout prospects for BU banks Øuse of Fund (+ Backstop) when private funds are unavailable/insufficient

ØComposed of:

Ønational compartments to be gradually mutualised Øex-ante contributions collected at national level Øunder the rules of the Intergovernmental Agreement (IGA) – political concerns

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3. The Single Resolution Fund

ØTarget level:

Ø1% of BU covered deposits ØTo be reached by 31/12/2023 (period 2016-2023) ØDynamic target

ØSRB’s governance:

ØPlenary Session ØExecutive Session (restricted or extended) Ø1 Chair Ø4 full-time board members (1 vice chair with no voting rights)

ØSFR insufficient acknowledged in Recital 102 SRMR and Recital 10 IGA

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3. The Single Resolution Fund

ØFund can intervene:

Øextend short-term funding to

Øfailed bank Øbridge entity

Øprovide guarantees to potential purchasers of a failed bank Øinject capital in a bridge entity

ØFund cannot provide:

Øloss absoption Ørecapisalisation Øexception (min 8% bail-in and max 5% SRF contribution)

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4. The Common Backstop

ØSort of “rescue” support to the SRF when depleted ØNo alternative funding solutions

Ø“Last resort” principle

ØSize depending of SRF level for:

Øtransitional period (until 2023) Østeady state (from 1/1/2024)

r before depending or reduction of risk factors

(i.e. NPLs)

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4. The Common Backstop

Ø2 Types of credit lines:

Ø Revolving Ø Parallel (i.e. Croatia, Bulgaria)

ØDecision-making similar to State Aid EC approval

Ø De Groen and Gros background (period 2007-2014) example as justification for Backstop Ø Comparison with possible effects of pandemic Ø Data: (EC DG COMP)

Ø 72 banks – 45% BU total assets - €313 billion in losses – out of 72 complete data for 62 banks Ø Out of 62 – 31 banks outside scope (17 enough capital – 14 minimum capital reached with bail-in) Ø Remaining 31 banks (6% BU assets) – 72 billion SRF intervention:

Ø 13 banks need €32 billion, after bail-in need €10 billion Ø 18 banks need €182 billion, after bail-in + own funds need 149 billion – fund to provide max €62 billion (what about €87 billion?)

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4.1 Decision-making process

ØConditions:

Ødepletion SRF Øunavailability/failure to raise funds from alternative sources as:

ØTemporary transfer of no mutualised funds ØBorrowing from third parties ØSale of shares ØDRI Backstop (Article 19 ESM Treaty)

Ø Forward looking approach – “just in case” Ø Disseminate security – reputation

ØFunding from alternative sources still not sufficient

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4.1.1 SRB

ØFinancing arrangements to be included in resolution plans ØDecision-making process for the use of the SRF:

Ø if strict conditions of Article 76 SRMR Ø if approved by EC (State Aid rules) Ø Council can intervene if

Ø public interest Ø material modifications by EC

ØExecutive session to decide ØAny Plenary Member can intervene if

Ø €5 billion from the Fund per single resolution action Ø Above €5 billion in a period of 12 months

ØSRB makes request to ESM

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4.2.1 ESM

ØSRB request to ESM BoG accompanied by proposal of ESM Managing Director

ØSource of delay – Solution inspired by FOLTF declaration (Article 18 SRMR)

ØMandatory consultation (i.e. SRB for ECB), which form?

Ø ESM-SRB MoU on working arrangements Ø Specific provision in the revised ESM Treaty

ØDecision made by BoG on unanimity – or delegation to BoD (under discussion) ØBoD takes decision about disbursement ØDecision to be taken within 12hrs, Managing Director can delay up to 24hrs

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Conclusion

ØObjective: timely and effective decision-making process ØSolutions:

Ø Improvement of SRB request procedure Ø Shortening of ESM internal decision-making process:

Ø Possibility to delegate the entire process to BoD (Article 4(4) ESM Treaty) Ø Issue of conclusions by ECB and EC, further delays Ø SRB instead of ECB-EC? Possible political issues, accountability? Ø Possibility to delegate for a limited period to the Managing Director (ESM Terms of Reference) Ø Excluding possibility of delays by the Managing Director

Ø MoU ESM-SRB on working arrangements about Common Backstop (EC-ESM example)

Ø Good impact of SRB arrangements Ø Existing MoU SRB-EC does not improve use of the Fund

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EBI – European Banking Institute

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