19 Banking Union: single resolution
mechanism
| (35195)
12315/13
COM (13) 520
| Draft Regulation establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) No. 1093/2010.
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| Legal base | Article 114 TFEU; co-decision; QMV
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| Document originated | 10 July 2013
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| Deposited in Parliament | 18 July 2013
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| Department | HM Treasury
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| Basis of consideration | EM of 27 July 2013
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| Previous Committee Report | None
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| Discussion in Council | Not known
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| Committee's assessment | Politically and legally important
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| Committee's decision | Not cleared; further information requested
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Background
19.1 In recent years various measures have been discussed, and
some introduced, to strengthen economic governance in the eurozone
and in the wider EU. Much of this activity has been concerned
with countering the present eurozone difficulties. Measures advocated
have included a "banking union". In this context the
Commission published in September 2012 a Communication about establishing
the Banking Union and two draft Regulations concerning supervision
of the banking sector.[67]
19.2 One draft Regulation (the ECB Regulation) would
confer specific tasks on the European Central Bank (ECB) concerning
policies relating to the prudential supervision of credit institutions.
The other draft Regulation (the EBA Amending Regulation) would
amend consequentially the Regulation establishing the European
Banking Authority (EBA).
19.3 The ECB Regulation would give the ECB specified
supervisory tasks in relation to the prudential regulation of
credit institutions established in the eurozone. It would have
"direct oversight of banks, to enforce prudential rules in
a strict and impartial manner and perform effective oversight
of cross border banking markets" — a Single Supervisory
Mechanism (SSM) to enforce "strict prudential rules in a
strict and impartial manner" was identified at the June 2012
European Council as a necessary precursor to recapitalisation
of banks through the European Stability Mechanism (ESM). This
proposed transfer of responsibilities to the ECB is intended to
ensure an effective prudential supervisory mechanism within the
eurozone. There would be an option for non-eurozone Member States
to participate in the SSM through a "close cooperation"
arrangement on an opt-in basis. Collectively eurozone Member States
and those choosing to opt-in would be known as "participating
Member States".
19.4 The EBA Amending Regulation would include changes
to the voting arrangements in relation to decisions in accordance
with Article 17 (breaches of EU law) and Article 19 (binding mediation)
of the EBA Regulation. These changes specify that any decision
proposed by the panel established under Article 41 of the EBA
Regulation "shall be considered as adopted unless it is rejected
by a simple majority which shall include at least three members
of participating Member States and three votes from members of
Member States which are neither participating Member States ...
nor have entered into a close cooperation with the ECB" (rather
than being adopted by simple majority).
19.5 The ECB would carry out its tasks within the
existing EU supervisory framework and would not take over any
tasks from the EBA. The EBA would continue to work towards a single
rulebook, regulatory convergence and consistency of regulatory
practice.
19.6 The accompanying Commission Communication indicated
plans for further legislative measures to follow in 2013. These
were expected to include:
- development by the EBA of a
"single supervisory handbook";
- a single resolution mechanism, which would govern
the resolution of banks in the Banking Union and guarantee customer
deposits within it; and
- coordination of the application of resolution
tools for participants in the Banking Union.
19.7 A provisional agreement has now been reached
between the Council and the European Parliament on both proposed
Regulations. They are expected to be formally approved by the
Council and the European Parliament in the autumn.
19.8 Also relevant to establishing the Banking Union
is a draft Bank Recovery and Resolution Directive (the "BRRD"),
which would set the rules for dealing with the recovery and resolution
of credit institutions and investment firms in all Member States.
On 26 June the ECOFIN Council agreed a general approach on the
BRRD[68] for discussion
with the European Parliament, which will begin shortly under the
Lithuanian Presidency.
The document
19.9 The Commission now proposes this Regulation
to establish, as the second pillar of the Banking Union, uniform
rules and a uniform procedure for the resolution of credit institutions
and certain investment firms, in the framework of a Single Resolution
Mechanism (SRM) and a Single Bank Resolution Fund. The draft
Regulation builds on the BRRD and sets out to a degree how the
BRRD should be applied within the participating Member States.
There are two main elements of the SRM proposal:
- transfer of responsibility
for bank resolution from the national to the EU level in participating
Member States; and
- creation of a Single Bank Resolution Fund to
assist in the financing of resolutions under the SRM.
Responsibility for Bank Resolution
19.10 The draft Regulation would establish that,
for institutions within the scope of the SSM, including those
that will not fall under the direct supervision of the ECB, decisions
on their resolution would in future be taken at the EU level.
The relevant provisions are that:
- Articles 7-37 would set out
the tasks and functions to be carried out within the SRM;
- the Commission would be responsible for taking
decisions on whether to place an institution into resolution or
national insolvency proceedings;
- Articles 38-53 would establish a new EU agency,
the Single Resolution Board (consisting of an Executive Director,
Deputy Executive Director, heads of national resolution authorities
in participating Member States and representatives from the Commission
and ECB), to support the Commission's role and to take certain
decisions;
- Article 44 specifies that the Board would be
located in Brussels ¯
the Commission estimates that around 300 people would work for
the Board;
- the Board's administration would be financed
through a levy on firms within the scope of the proposal;
- the Single Resolution Board would be able to
meet in both an executive and plenary capacity;
- in its executive format, the Board would prepare
recommendations for the decisions to be taken by the Commission
and lead on some aspects of the resolution process, such as agreeing
resolution plans and conducting assessments of resolvability;
- it would also enforce implementation of resolutions
and would be able to issue directions to individual institutions
if national resolution authorities in the participating Member
States did not comply with decisions taken at the EU level;
- the Board's membership in these cases would consist
of the Executive Director, the representatives of the Commission
and the ECB and representatives from the relevant participating
Member States; and
- in its plenary format, the Single Resolution
Board would take general decisions on the operation of the SRM,
including the annual budget of the Board and on voluntary borrowing
arrangements between participating Member States.
Single Bank Resolution Fund
19.11 Articles 54-73 of the draft Regulation set
out the financial provisions of the SRM. Title VII of the BRRD
would require all Member States to set up ex-ante resolution
financing arrangements. Article 64 of the SRM Regulation would
build on this requirement and establish a Single Bank Resolution
Fund, financed through industry contributions, collected and managed
by the Single Resolution Board. Within the scope of the draft
Regulation it would replace national resolution financing arrangements
and could be used to support the resolution process in line with
the overall rules for recourse to resolution financing arrangements
established in the BRRD.
Transitional Provisions
19.12 The main structural elements of the SRM, including
provisions regarding the Board and Fund, would apply from 1 January
2015 and provisions regarding the bail-in tool would apply from
1 January 2018. This broadly mirrors the expected implementation
timetable for the BRRD.
The Government's view
19.13 The Financial Secretary to the Treasury (Greg
Clark) first reiterates that the Government has announced that
the UK will not participate in any aspect of the Banking Union
and says that that includes the SRM. He then comments on the substance
of the draft Regulation in relation to fundamental rights, subsidiarity,
the policy implications, legal issues, workability, the relationship
with non-participating Member States, the regulatory impact, the
financial implications and the negotiating timetable.
Fundamental rights
19.14 In his analysis of fundamental rights compliance
the Minister says that:
- in performing their tasks under
the SRM Regulation the Commission and the Single Resolution Board
would take decisions that affect the ability of an entity within
the scope of the Regulation to carry on business and, at their
extreme, could result in expropriations of property and serious
interferences in property rights (for example, a decision of the
Commission to place a credit institution into resolution, and
the Board's resolution scheme which the national resolution authority
would have to implement, for example requiring the transfer of
part of the failing credit institution's business to another person;
- as such Article 16 (right to conduct business)
and Article 17 (right to property) of the Charter of Fundamental
Rights would be engaged;
- other rights, for example Article 47 (right to
a fair trial) of the Charter would also be engaged (for example
Article 47 would be engaged in relation to fines and periodic
penalty payments imposed under Articles 36 and 37 of the draft);
- although the Government is broadly content with
the draft Regulation in terms of its compliance with the Charter,
it considers that further improvements could be made;
- the Government notes that the decision to place
a relevant entity into resolution could only be made in the public
interest (Articles 12 and 16(4) of the draft Regulation) and,
as such, the resolution powers conferred on the Commission and
Single Resolution Board would be capable of being exercised in
a proportionate manner;
- further clarity could, however, be provided as
to the means by which assessments of the valuer (relevant for
compensation purposes) could be challenged;
- improvements could also be made to enhance the
fairness of the decision-making procedures and ensure compliance
with Article 47 of the Charter; and
- in particular provision could be made for an
internal appeal board of the Single Resolution Board in relation
to decisions concerning fines and periodic penalty payments.
Subsidiarity
19.15 The Minister notes that the Commission argues
both that:
"only action at European level can ensure
that failing banks are resolved with minimal spill over effects
and in a constituted manner pursuant to a single set of rules.
The SRM will bring significant economies of scale and will avoid
the negative externalities that may derive from purely national
decisions and funds."
and that:
"a regulation is the appropriate legal instrument
to avoid discrepancies in national transposition and to ensure
a unified institutional mechanism and level playing field for
all the banks in the participating Member States".
He then says that, in principle, the Government agrees
that, consistent with the arrangements for the establishment for
the SSM, EU level action may be an appropriate way of ensuring
the establishment of an effective common resolution mechanism
for the participating Member States, subject to the constraints
of the existing Treaty framework.
Policy implications
19.16 The Minister first comments that:
- the Government has consistently
maintained that a comprehensive solution to the eurozone crisis
is necessary, but that the challenges facing the eurozone should
be dealt with primarily by the eurozone area itself;
- the UK, being outside the single currency, will
not take part in new measures that are only necessary to strengthen
the single currency;
- this includes the SRM and other Banking Union
measures;
- the Government recognises that there is a desire
among the eurozone Member States to deepen integration in some
areas;
- it explained to us, in relation to the SSM proposals
and the Commission's accompanying Communication on a road map
towards banking union, how an integrated financial framework could
contribute to the restoration of long-term stability to the eurozone,
backed with renewed confidence in the supervision of the financial
sector;[69]
- this can in turn bring economic benefits to the
wider single market ¯
at the same time, however, the process needs to be managed carefully
to avoid an unlevel playing field;
- the Government will therefore engage closely
with any negotiations, even where the UK is not participating,
to ensure the national interest is protected; and
- it has been clear throughout the Banking Union
that any proposals must respect the unity and integrity of the
wider single market, as well as the voice of those Member States
that are not opting into the proposals.
19.17 The Minister continues that:
- the Commission's proposal sets
out an imprecise framework for the operation of the SRM;
- the Government recognises that there are a number
of issues that have been left to Member States to agree, and more
detail is likely to come to light during negotiations on the SRM
and as the final shape of the BRRD becomes clear; and
- throughout the legislative process, the Government
will want reassurance on a number of issues, and will seek to
amend the draft Regulation if it deems it necessary.
Legal issues
19.18 The Minister comments that the SRM Regulation
must be legally sound and that, if not, it risks creating uncertainty
for public authorities, institutions within scope and creditors
and investors. He continues that, first, the Government is continuing
to consider the suitability of Article 114 TFEU as the Treaty
base for the SRM proposal. In particular, he notes that:
- in order for recourse to be
had to Article 114 TFEU it must be demonstrated that the SRM proposal
both genuinely has as its object improvement of the conditions
for the establishment and functioning of the single market and
genuinely harmonises, or at least clearly supports the process
of harmonisation;
- the proposed Regulation is aimed at those Member
States participating in the SSM (Articles 1 and 4 of the draft
Regulation); and
- this is the first time that Article 114 TFEU
has been cited as the Treaty base for a proposal aimed from the
outset at a subset of Member States.
19.19 The Minister then discusses the role of the
Single Resolution Board, saying that it needs to be scrutinised
carefully to ensure that the Board will not be taking any decisions
that are incompatible with the principles established in the Meroni
judgement,[70] including
the principle that EU agencies cannot take decisions involving
a wide degree of policy discretion. He suggestes that some of
the decisions that would be taken exclusively by the Board, such
as assessment of resolvability, appear to fall within that category
and that if this is right, measures should be taken to address
these issues.
19.20 A third legal issue that the Minister mentions
is that in the view of the Government the role for the Commission
in triggering the resolution of a failing institution needs to
be carefully scrutinised bearing in mind:
- that it is not contemplated
in the Treaties; and
- the potential for conflicts of interest with
the performance of the Commission's other tasks, including in
the field of state aid.
Workability
19.21 In this connection the Minister says that:
- it is in the national interest
for the SRM Regulation to be operationally sound;
- if the mechanism only serves to paralyse decision-making
on cross-border bank resolution, it could adversely affect UK
financial stability or investors;
- it is not clear at present that the decisions
taken at the EU level would be sufficiently clear and swift to
ensure that there is clarity over how a complex cross-border resolution
scenario will be managed;
- it is also important that there are strong accountability
arrangements built into the mechanism; and
- more detail on how the Commission and Board would
be held to account would be welcome.
Relationship with non-participating Member States
19.22 On non-participating Member States the Minister
says that:
- there should be protections
for those Member States outside the Banking Union, including an
explicit requirement that decisions within the SRM could not discriminate
against any Member States, including those outside the union;
- it should also be clear that the use of the Single
Resolution Fund should be treated as state aid, to avoid distorting
the single market; and
- there needs to be close scrutiny of the proposal
with reference to the final stages of negotiations on the BRRD,
which will frame the ultimate shape of the SRM — for example,
the role of the EBA on resolution issues needs to be considered
in the context of some decisions being taken at the EU and not
the national level.
Assessment of regulatory impact
19.23 The Minister says that, as it is Government
policy that the UK should not participate in the Banking Union,
the direct regulatory impact on the UK is likely to be minimal.
More information is included in the impact assessment[71]
that accompanies his Explantory Memorandum, which includes discussion
of UK entities that might be affected, the economic benfits and
costs, operational and administrative costs and enforcement (including
requirements for the Bank of England and other UK authorities
to cooperate with the Single Resolution Board).
Financial implications
19.24 The Minister says that:
- there are no direct financial
implications for the Exchequer from the proposals;
- the administrative budget of the Single Resolution
Board and the Single Bank Resolution Fund would be financed through
a levy on industry in participating Member States;
- UK banks with subsidiaries and branches within
the Banking Union would therefore contribute to the operation
of the Board and the Fund;
- The SRM would involve commitments from the EU
Budget to pay for the staff within the Commission who would be
responsible for setting up the Single Resolution Board and implementing
the tasks conferred on the Commission;
- the Commission estimates that these payments
would amount to €10.575 million (£9.065 million) from
the 2014-20 Multiannual Financial Framework;
- as the Commission's decisions are in the name
of the EU as a whole, liability for damages awarded against the
Commission as a result of legal action would also be borne by
the EU Budget unless alternative provision is made.
Council timetable
19.25 The Minister tells us that:
- the June European Council noted
the aim of agreeing legislation to establish the SRM by the end
of the current European Parliamentary cycle and Commission mandate;
and
- working group discussion has begun and will continue
in the autumn with the intention of reaching agreement in the
Council before the end of 2013.
Conclusion
19.26 Although this proposal would not apply directly
to the UK, clearly it would have implications, perhaps significant,
for the UK's financial services industry. So we may well wish
to recommend the draft Regulation for debate. But we would not
wish to decide on that until we have an indication from the Minister
of how early negotiations are developing on the issues of importance
to the UK. To that end we should like such a report from the Minister
by the end of October.
19.27 As for the various legal issues the Minister
mentions, including those relating to fundamental rights, we comment,
and in turn, invite comment from the Minister as follows:
i) On the important question of the Treaty
base for the measure, we note, that unlike the proposed Single
Supervisory Mechanism Regulation based on Article 127(6) TFEU,
there is no specific Treaty Article which makes any allowance
for bank resolution. In default of this, the Commission seeks
to rely on the more general legal base of Article 114 TFEU but
we agree with the Government that this should be contested. Article
114 provides for the adoption of "...measures...which have
as their object the establishment and functioning of the internal
market". The Article is to apply "for the achievement
of the objectives of Article 26". Article 26(2) TFEU defines
the "internal market" as "...an area without internal
frontiers in which the free movement of goods, persons, services
and capital is ensured in accordance with the provisions of the
Treaty". Given that it is clear that the current document
will only apply to those Member States participating in the Single
Supervision Mechanism (essentially the Eurozone Member States
and any others who choose to participate), the Commission would
appear to be wrongly conflating the concepts of "Eurozone"
and "internal market". In view of this, we ask the
Minister what he intends to do to challenge the choice of legal
base and whether, in due course, the Government would consider
bringing proceedings before the Court of Justice (CJEU);
ii) We also ask what action the Minister proposes
to take in respect of the Commission's role in triggering a resolution
of a bank in the absence of enabling Treaty powers;
iii) We agree that measures should be put
in place to ensure that the Single Resolution Board (SRB) operates
in a way which complies with the Meroni[72]
judgment. We consider that the Board should not be
making decisions involving a wide degree of discretion, uncontrolled
and unsupervised by the EU institutions (apart from the possibility
of judicial review before the Court of Justice). We ask what
measure the Minister has in mind.
iv) In terms of making the proposal comply
better with the Charter on Fundamental Rights, we ask the Minister
to inform us:
- what extra improvements,
beyond those already outlined (the suggestion of internal appeals
board and greater clarification of valuation assessments linked
to compensation), the Government has in mind; and
- to what extent the improvements contemplated
consider the differing implications of the SRM proposals for the
rights of the UK individual, as well as institutional investors
and shareholders.
19.28 Pending the Minister's responses to these
various requests the document remains under scrutiny.
67 (34217) 13682/12, (34218) 13683/12, (34231) 13854/12:
see HC 86-xiv (2012-13), chapter 1 (17 October 2012), HC Debs,
6 November 2012, cols. 805-833 and HC 86-xxxiv (2012-13), chapter
14 (6 March 2013). Back
68
See http://register.consilium.europa.eu/pdf/en/13/st11/st11148-re01.en13.pdf. Back
69
Op cit. Back
70
Case C 9/56 Meroni v High Authority [1958] ECR 133. The
Minister summarises thus: "The Court laid down in its judgment
in that case three well-established principles: (a) an institution
may not delegate powers that it does not itself possess; (b) a
delegation of powers which'... involves clearly defined executive
powers the exercise of which can ... be subject to strict review
in the light of objective criteria determined by the delegating
authority 'is permissible. This is because it 'cannot
appreciably alter the consequences involved in the exercise of
the powers concerned...'; (c) on the other hand, a delegation
of powers which '... involves a discretionary power, implying
a wide margin of discretion which may, according to the use which
is made of it, make possible the execution of actual economic
policy' is impermissible. This is in particular because it
'...replaces the choices of the delegator with the choices
of the delegate...' and thereby '...brings about an actual
transfer of responsibility.'" Back
71
See http://europeanmemorandum.cabinetoffice.gov.uk/. Back
72
See note 10. Back
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