Single Resolution Mechanism (SRM)
Status quo and agenda 2019
The conclusion of the trilogue negotiations constitutes the lead negotiators’ agreement on the structure of the EU banking package, the reform package for regulating the European banking sector. A core component of the banking package is to revise the BRRD. BRRD II will also continue to focus on the loss absorbing and recapitalisation capacity of banks and the handling of unsecured liabilities in the event of insolvency. In addition, efforts to implement and harmonise the MREL regulation will also be addressed. At a national level, BaFin is also making significant progress with restructuring and resolution by publishing two consultations at the beginning of the year.
During the financial crisis from 2007 onwards, various countries, including Germany, had to bail out failing banks. In some cases, they had to inject huge quantities of taxpayers’ money, so as not to jeopardise the stability of the financial sector. Due to this experience, governments wanted and realised the need to preserve financial stability in future crises without having to spend such vast quantities of public money.
Bail-outs, bail-ins and resolution
Germany determinedly pursued this objective from the outside. Consequently, 2013 saw the passing of the Bank Separation Act whose regulations on minimum requirements for the design of recovery plans (MaSan) were fleshed out in the BaFin (Germany’s financial supervisory authority) 3/2014 circular.
At a European level, the 2014/59/EU bank recovery and resolution directive (BRRD I) and the 806/2014/EU regulation (SRMR) were adopted in 2014. At the beginning of 2016, the newly created European single resolution board (SRB), spearheaded by Dr Elke König (formerly of BaFin), took over the baton. The SRB’s responsibility is to trigger resolution of all banks under the direct supervision of the European Central Bank and of banks with subsidiaries in other member states participating in the single supervisory mechanism. The SRB’s task is to restructure and/or resolve failing systemically important banks. In addition to the single supervisory mechanism (SSM), the single resolution mechanism (SRM) is the second pillar in the European banking union and was agreed on by the EU Council in June 2012.
In Germany, appropriate regulations based on the BRRD I directive and SRM regulation (SRMR) were also incorporated in the German Act on the Recovery and Resolution of Banks (SAG) in 2014. Following extensions in the interim, SoFFin (special fund for financial market stabilisation) has been closed for good since the beginning of 2016. Therefore, it’s no longer possible to approach it for new funds or safeguards (more). In Germany, SoFFin was the body that provided the bail-out funds required after 2007. Since 1 January 2018, BaFin has acted as the national resolution authority (NRA) and administrator of the restructuring fund. As the national resolution authority, BaFin bears key responsibility for resolution planning of banks that don’t fall under the primary responsibility of the single resolution board (SRB) as systemically important banks. With regard to the systemically important banks, BaFin also exerts direct influence via the internal resolution teams (IRTs) and extended executive sessions. As the resolution authority, it’s also responsible for the resolution of all German banks and financial groups whose cross-border resolution is carried out in conjunction with resolution colleges.
Resolution under the German Act on the Recovery and Resolution of Banks doesn’t replace but complements the insolvency proceedings concept and can only be applied where a threat to financial stability in the event of a crisis is plain, e.g. due to the size, complexity, risk profile and/or interconnectedness of the bank.
BRRD II, 2019
The conclusion of the trilogue negotiations constituted the agreement by the lead negotiators from the EU Council, Parliament and the Commission on the structure of the EU banking package, the reform package for the regulation of the European banking sector.
A core element of this agreement is the revision of the bank recovery and resolution directive called BRRD II. The aim of the original BRRD was to make European banks resilient and, in particular, capable of being resolvable in order to avoid further “too big to fail” problems. Similarly to the first BRRD, BRRD II also focuses on the loss absorbing and recapitalisation capacity of banks and the handling of unsecured liabilities in the event of insolvency. The main amendments to BRRD II include the possibility of imposing a temporary moratorium, even before a resolution measure is triggered, provided that certain conditions are met. In addition, the MREL regulations (the minimum requirement for own funds and eligible liabilities) will be amended as follows.
The future MREL framework
A key revision involves the new directive harmonising the calculation of the MREL ratio with the internationally applicable total loss absorbing capacity (TLAC) requirements. Organisations with a balance sheet total of more than €100 billion – known as top tier banks – must also meet a certain subordination ratio in relation to their total liabilities and own funds (TLOFs) with regard to their MREL requirement. In addition, a minimum level for the MREL ratio set individually for each bank is to apply to these organisations. Furthermore, a safeguard clause for retail investors has been included in line with the European Parliament’s proposal.
A further milestone in the implementation of the MREL rules and regulations was the extension of the liability cascade to include a new class of unsecured debt instruments. At a national level, this step had already been fast-tracked out of BRRD II and implemented in article 46f of the German Banking Act in July 2018.
The SRB’s work programme for 2019
At the same time as developments were moving ahead at trilogue level, the single resolution board (SRB) also published its work programme for 2019 in November 2018. In line with the single resolution mechanism (SRM), the focus is once again on ensuring and improving the proper resolution of failing banks so that there is the least possible impact on the real economy and public budgets, whereby the body wants to be proactive. For 2019, the SRB will be concentrating on five strategic areas. First of all, it wants to make significant progress in establishing MREL by pressing ahead with defining the minimum requirements for further banks. In this context, the SRB is planning to define around 100 minimum requirements for groups of banks and 530 for individual banks. In 2019, it also wants to continue to add more detail to and strengthen the resolution framework by publishing further directives. With a view to possible critical developments in the financial system, the SRB plans to develop its crisis response capability with regard to the necessary crisis management processes. In addition, the SRB wants the single resolution fund (SRF) to be fully up and running in 2019. Finally, the SRB will be focusing on the one hand on optimising effective internal crisis management processes. On the other hand, it will concentrate on streamlining its own organisational structure and making it more efficient.
BaFin agenda in 2019
Efforts to create regulations are also occurring at a national level. As the national resolution authority, BaFin is also making significant progress on restructuring and resolution with the publication of two consultations at the beginning of the year. On 1 February 2019, it published a consultation on the minimum requirements banks must meet to use the bail-in instrument in the event of resolution regarding the data availability of the information to be provided and its technical and organisational structure. A few days later, on 5 February, another consultation followed with the draft circular on reporting information for resolution planning (MIA). The consultation concerns BaFin’s handling and administrative practice under the 2018/1624 implementing regulation, which specifies the procedures for forwarding information and the reporting requirements for banks. Therefore, it’s a key instrument used in drawing up resolution plans and assessing resolvability.
Due to the new legal situation, minimum requirements for the design of recovery plans (MaSan) are currently being revised as part of the 09/2017 consultation and drafted into an implementing decree on the minimum requirements for restructuring planning for banks and investment firms and a draft of a leaflet [BaFin notice] on reorganisation planning (MaSanV).
Similarly to the SRB’s work programme, BaFin’s agenda will focus on resolution in 2019. In addition to the previously mentioned minimum bail-in requirements, BaFin’s concentrating on three further core areas to ensure the resolvability of German banks. Initially, it will continue to push ahead with identifying and eradicating impediments standing in the way of resolvability on the German banking market. In addition, BaFin aims to improve the flow of information and data transmission on the part of banks with better technical and operational approaches. Finally, crisis processes and crisis infrastructure are to be strengthened in future.