Single resolution board

What Is Single Resolution Board?

The Single Resolution Board (SRB) is a central authority within the European Union's Banking Union, responsible for the orderly bank resolution of failing banks. Its primary mission is to ensure that when banks collapse, they do so with minimal impact on the real economy, the financial system, and the public finances of the participating member states. This falls under the broader category of financial regulation, aiming to prevent financial crises and protect taxpayers from the costs of bank failures. The SRB works to prevent systemic risk by managing the winding down of non-viable banks.

History and Origin

The Single Resolution Board was established in 2014 by Regulation (EU) No 806/2014, known as the Single Resolution Mechanism (SRM) Regulation, and began operations on January 1, 2015. It became fully responsible for resolution activities by January 1, 2016. Its creation was a direct response to the Eurozone sovereign debt crisis, which highlighted the interconnectedness of national banking systems and the significant burden bank failures placed on national taxpayers. The SRB forms the second pillar of the European Banking Union, complementing the Single Supervisory Mechanism (SSM) led by the European Central Bank (ECB).²¹ The aim was to create a unified framework for banking supervision and resolution across participating EU member states to foster financial stability and break the "doom loop" between sovereign debt and banking crises.²⁰

Key Takeaways

The Single Resolution Board (SRB) is the central resolution authority for failing banks within the European Banking Union.¹⁹
Its primary goal is to ensure orderly bank resolutions, minimizing costs to taxpayers and preventing wider financial instability.¹⁸
The SRB conducts resolution planning and has the power to apply various resolution tools, including bail-in.¹⁷
It manages the Single Resolution Fund (SRF), financed by contributions from the banking sector, to support resolution actions.
The SRB works in close cooperation with national resolution authorities and the ECB.¹⁶

Formula and Calculation

The Single Resolution Board's operations do not involve a specific financial formula or calculation in the traditional sense that an investment metric might. Instead, its work revolves around legal, regulatory, and strategic assessments for managing bank failures. However, a key aspect related to its financial capacity is the Single Resolution Fund (SRF).

The SRF is built up through annual contributions from banks in the participating member states. The target size of the fund is set at a minimum of 1% of the amount of covered deposits of all credit institutions authorized in all participating Banking Union member states. This target was gradually built up from 2016 to 2023.

Interpreting the Single Resolution Board

The existence and actions of the Single Resolution Board signify a significant shift in how bank failures are handled within the European Union. Its presence aims to ensure a standardized approach to crisis management for significant and cross-border banks, moving away from fragmented national responses. A functioning SRB indicates a commitment to reducing moral hazard by ensuring shareholders and creditors, rather than taxpayers, bear the losses when a bank fails.¹⁵ The SRB's effectiveness is often measured by its ability to execute resolutions smoothly, protect critical banking functions, and maintain market confidence without resorting to bailout measures funded by public money.

Hypothetical Example

Imagine a large, cross-border banking group, "EuroBank Plc," operating across several EU member states, faces severe financial distress due to significant losses from a poor investment strategy. National supervisory authorities, in conjunction with the European Central Bank (ECB), determine that EuroBank Plc is "failing or likely to fail."

At this point, the Single Resolution Board steps in. The SRB would assess whether the bank can be returned to viability through private measures. If not, and if winding down the bank under normal insolvency proceedings would harm public interest due to its systemic importance, the SRB would adopt a resolution scheme. This scheme might involve a "bail-in" of the bank's shareholders and creditors, meaning they absorb the losses to recapitalize the bank. The SRB could also decide to sell parts of the business to a healthier institution or establish a bridge bank to maintain critical services. The goal is to ensure continuity of essential services, protect deposit guarantee schemes, and minimize disruption to the financial system, all while avoiding the use of taxpayer funds.

Practical Applications

The Single Resolution Board's role is crucial in the practical application of the Bank Recovery and Resolution Directive (BRRD) within the Banking Union. Its core functions include:

Resolution Planning: The SRB develops comprehensive resolution plans for significant banks under its remit, outlining how they would be resolved if they were to fail. This proactive approach aims to make banks "resolvable" and reduce the need for emergency measures.¹⁴
Early Intervention and Assessment: In cooperation with the ECB, the SRB assesses whether a bank is failing or likely to fail and determines if resolution action is necessary in the public interest.¹³
Executing Resolutions: When a resolution is deemed necessary, the SRB has the power to apply resolution tools, such as the sale of business, bridge institutions, asset separation, or the bail-in tool, which requires shareholders and creditors to absorb losses.¹² A notable real-world application was the SRB's resolution of Banco Popular Español in 2017, where it was sold to Santander for €1. Th¹¹is swift action protected depositors and maintained financial stability in Spain and Portugal.
¹⁰ Single Resolution Fund Management: The SRB manages and administers the Single Resolution Fund (SRF), which can be used to stabilize a bank during resolution if other means are insufficient, financed by the banking sector itself.

Limitations and Criticisms

Despite its crucial role, the Single Resolution Board and the broader Single Resolution Mechanism (SRM) have faced limitations and criticisms. One area of concern has been the complexity and potential for fragmentation in the "multi-layered" system of litigation and coordination between the SRB, national resolution authorities, and other EU bodies. Ch⁹allenges in information flow and the need for the SRB to build an autonomous ability to determine if a bank is failing or likely to fail have also been raised.

A⁸dditionally, some critics argue that the framework still needs to be fully tested under a severe, large-scale crisis, particularly concerning cross-border liquidity in resolution. The ability to access sufficient liquidity quickly during a crisis remains a key challenge. Wh⁷ile the Banking Union and the SRB have significantly improved the European financial architecture, discussions continue regarding the completion of the third pillar, a common European Deposit Insurance Scheme (EDIS), which some believe is necessary for a truly robust framework and to prevent reliance on state aid in certain scenarios.,

⁶#⁵# Single Resolution Board vs. European Stability Mechanism

While both the Single Resolution Board (SRB) and the European Stability Mechanism (ESM) are critical components of the European Union's efforts to ensure financial stability, they serve distinct purposes.

The Single Resolution Board is a resolution authority responsible for managing the failure of individual banks within the Banking Union. Its mandate is to ensure an orderly resolution process, minimizing the impact on the economy and public finances by applying resolution tools and, if necessary, utilizing the Single Resolution Fund, which is financed by the banking sector. The SRB's focus is on restructuring or winding down failing banks in a controlled manner.

I⁴n contrast, the European Stability Mechanism is an intergovernmental organization established to provide financial assistance to euro area member states experiencing or threatened by severe financing problems. The ESM provides loans and other financial assistance to countries, not directly to banks, although its funds can be used indirectly to recapitalize banks through government support. It acts as a "backstop" to the Single Resolution Fund in extreme circumstances, providing a safety net for the financial system as a whole, rather than directly managing bank resolution. The ESM's primary role is to safeguard the stability of the euro area, offering stability support under strict conditionality.

In essence, the SRB deals with individual failing banks, seeking to resolve them without taxpayer money, while the ESM provides broader financial assistance to stabilize sovereign states that might face difficulties due to systemic financial shocks.

FAQs

What is the primary objective of the Single Resolution Board?

The primary objective of the Single Resolution Board is to ensure an orderly bank resolution of failing banks within the European Banking Union, minimizing the impact on the economy, financial system, and public finances. It aims to prevent costly taxpayer-funded bailouts.

#³## Which banks fall under the SRB's responsibility?
The SRB is directly responsible for the resolution of significant banks supervised by the European Central Bank (ECB) and other cross-border banking groups established within participating member states. National resolution authorities handle smaller banks, often under the coordination of the SRB.

How is the Single Resolution Fund (SRF) financed?

The Single Resolution Fund (SRF), managed by the SRB, is financed by annual contributions from the banking sector itself. Banks in the participating member states contribute to build up the fund to a target level.

What happens if a bank fails under the SRB's supervision?

If a bank is deemed "failing or likely to fail" by the ECB and the SRB, and public interest requires intervention beyond normal insolvency, the SRB will implement a resolution scheme. This might involve tools like "bail-in," where shareholders and creditors absorb losses, or the sale of business to another bank, to ensure the continuity of critical functions while protecting depositors.,

²#¹## Is the SRB related to the European Stability Mechanism (ESM)?
Both the SRB and ESM contribute to financial stability in the EU, but they have different roles. The SRB focuses on resolving individual failing banks, while the ESM provides financial assistance to euro area countries to safeguard the stability of the euro area as a whole. The ESM can act as a backstop to the Single Resolution Fund in certain severe situations.