The passage from banking supervision to banking resolution. Players, competences, guarantees

Mario P. Chiti

1. The banking union launched in 2012 by the European Council and the Euro Zone Summit is based, as known, on two pillars: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), supported by several collateral measures as the restyling of the powers of the European Bank Authority (EBA), in operation since 2010, and the establishment of the Single Bank Resolution Fund (SRF), through an Agreement among the participating Member States on the transfer and mutualisation of contributions to the SRF1

Moreover, the banking union is underpinned by a comprehensive and detailed single rulebook for financial services for the internal market as a whole. Precisely, the recent moves towards the banking union among the member States whose currency is the euro have been followed by a new Resolution Framework for credit institutions and investment firms, as a decisive step for harmonisation of bank resolution rules across the whole Union. This Resolution Framework – provided by a new directive passed in first reading by theEuropean Parliament in April) – does not lead to a full centralisation of decision making in the field of resolution, but establishes minimum harmonisation rules.

Both pillars have been established in a very short time, almost inconceivable under the usual “meditative” timing of the Union legislators, after sharp discussions and difficult trilogues among the Union institutions. The system will operate progressively according to the timetable and conditions provided by the two main Regulations (for the SSM, Regulation no. 1024/2013; for the SRM, “Regulation 2014”). The timing for the full effectiveness of the SRM, even reduced as to the initial proposal, remains too slow and remote; definitely inadequate for the needs of the market in this critical period.

The function of prudential supervision has been centralised on the European Central Bank (ECB), in order to restore trust and credibility in the banking sector, by the already quoted Regulation no. 1024/2013 (Regulation of 13.10.2013 of the European Parliament and of the Council). Strictly connected to this reform is the Regulation no. 1022/2013, again of the European Parliament and of the Council, which emendates the 2010 EBA Regulation (no. 1093/2010), establishing a link between this Authority and the ECB.

The ECB supervision scope includes the more significant European credit institutions and investment firms, listed according detailed conditions provided by Regulation no. 1024/2013. Banks of local dimension will continue to be supervised by the national competent authorities; according to rules co-adoptedwith the ECB. The supervisory mechanism is, therefore, not bipolar (national v. centralised supervision) but coordinated in order to avoid an excessive dichotomy between the two systems. To that purpose, a particular role will be played by the regulatory and implementing technical standards adopted by EBA, and mostly by the Single Rule Book which binds even the ECB (art. 4. para. 3, Regulation no. 1024/2013; art. 5, para. 4, “Regulation 2014).

The second pillar of the banking union, the SRM, has been considered an essential instrument to avoid the damages that have resulted from banks failures in the past. In the intention of European institutions the SRM will ensure that potential future bank failures are managed efficiently. The resolution procedure only applies in respect of banks whose supervisor is the ECB (at the European level). Like the SSM, also this “Mechanism” has original features centred on a body named Single Resolution Board (SRB) which represents a new kind of agency, after the waves of “European agencies” of the last decades and the three European Supervisory Authorities of 2010. The Single Resolution Mechanism is disciplined by two set of rules: a) the “Regulation 2014” of the European Parliament and of the Council establishing uniform rules and procedure for the resolution of credit institutions and certain investments firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation no. 1093/2010; b) the Intergovernmental Agreement on the Single Resolution Fund. The Mechanism will operate in the framework of the “Directive 2014” of the European Parliament and of the Council establishing a framework for the recovery and resolution of credit institutions and investments firms and amending some Council Directives and Regulation no. 1093/2010. As said in the preliminary explicative note, at the moment these legislative acts are not yet published in the Official Journal and will be cited in a simplified form (“Regulation 2014” and “Directive 2014”).

2.The expression “banking resolution” is used in European legislative acts in numberless sections, but curiously it is never clearly defined. However there is a general agreement that resolution means “an administrative procedure to manage bank crises out of court as to protect financial stability, preserve vital systemic functions as well as protect depositors, while minimizing any adverse impact on taxpayers”.

It is self-evident and acquired that the two functions of supervision and of resolution are strictly inter-connected. The point is expressly reaffirmed in the preamble of Regulation 2014, “Whereas” no. 6a: “the SRM is imbricated to the process of harmonization in the field of prudential supervision, brought about by the establishment of the European Banking Authority, the Single Rule Book on prudential supervision, and, in participating Member States, the establishment of a Single Supervision Mechanism to which the application of prudential supervision rules is entrusted. Supervision and resolution are two complementary aspects of the establishment of the internal market for financial services whose application at the same level is regarded as mutually dependent” (see also “Whereas” no. 8a).

The supervisory function of the ECB on the banks of European relevance is finalised to ensure all the stakeholders that the banks entering the SSM, therefore falling within the scope of SRM, are fundamentally sound and trustworthy.

3. The issue considered in this comment from a juridical point of view is the link between the outcomes of the supervisory powers and the beginning of the resolution procedure, when supervision has highlighted some critical situation for banks and financial institutions. Precisely, the comment will examin the competence to discover and assess the crisis; the first phases of the resolution procedure as the recovery plans finalised to preparation and recovery, the “early intervention” procedure in case of bank failing or next to fail; the drafting and adoption of resolution plans and schemes.

The focus of the comment will be the Europeanization of bank resolution, which is the most innovative part of the SRM. However, it must be stressed once again that the “Mechanism” neither concentrates all powers on the European institutions and agencies, nor does it operate in two separate parts, the national and the Europeans ones as demonstrated by the involvement of the national competent authorities in most cases.

Much embricated as they are, yet supervision and resolution maintain some different features. Firstly, their legal base is different: art. 127 TFEU (conferral of specific tasks) for the SSM; art. 114 TFEU (measures for the approximation of national provisions) for the SRM. Secondly, the supervisory mechanism is relatively simple, establishing a wide number of administrative powers for the ECB (while the regulative powers are limited). ECB is a “technical”/specialised institution which ensures a neutral approach in dealing with the supervised banks. Differently, the assessment and resolution Mechanism is much more complex due to the number of bodies involved and the characteristics of each phase of the procedure.

Whereas” no. 69a of Regulation 2014 makes explicit that functionally “the SRM brings together the Council, the Commission, the Board (the SRB) and the Resolution Authorities of the participating Member States”. This co-presence of supranational (Commission) and intergovernmental (Council) institutions and of a technical agency (the Board), acting as operational independent body, could imply different visions and delays in adopting the resolution schemes, just in situations where is vital to take speed and appropriate measures.

The European Parliament has for a long while contrasted the Council role because it gives space to political considerations in a procedure which should be purely technical; in principle and according to “Whereas” no. 6a: “the SRM will ensure a neutral approach in dealing with failing banks”. Inevitably, the Council’s involvement in the procedure will make the resolution less independent and more political.

In the compromise which has allowed the final approval of “Regulation 2014” the prevailing position has been that “considering that only institutions of the Union may establish the resolution policy of the Union and that a margin of discretion remains in the adoption of each specific resolution scheme, it is necessary to provide for the adequate involvement of the Council and of the exercise implementing powers”. The role of the Council is of particular relevance in order to verify whether a resolution action is “necessary in the public interest” (art. 4 and art. 16 “Regulation 2014”).

The theme here considered is a clear example that the managing bank crisis may assume a different relevance when from the first discoveries of crisis by the ECB the procedure continues with the intervention of the Board and of the Commission, in a permanent dialogue with the ECB (leaving aside, as said before, the national competent authorities).

4. The procedure for connecting supervision and resolution is so complex and formally rigid to raise scepticism on its factual working. Obviously only future implementation and experience will give precise indications, but also when the procedural timing is respected the joint participation of so many bodies implies the juridical relevance of different public interests, not easily amalgamated. There is also the serious risk that sensible information on the bank in difficulties are known by a large number of competitors and bodies interested, aggrieving the failing.

The bank crisis management and resolution is articulated in three phases: bank recovery plans for preventing the failure; early bank is failed or next to fail; resolution. The first phase is disciplined by Regulation no. 1024/2014 for the ECB powers; the early intervention and resolution phases by “Regulation 2014”.

Let us consider the first phase. The ECB supervision on “significant” banks can reveal situations of difficult or of true crisis. In such event the preparation and prevention planning is open and the interested bank is requested to draw up recovery plans detailing all the measures to be adopted to restore its viability. It is therefore the bank itself that draws up the recovery plan, at certain conditions provided by the cited disciplined and punctually detailed in BRRD 2014 (the general framework law). The Board remains in any case competent for indicating to the bank some specific initiatives to be undertaken or may assume directly the recovery plan, if appropriate. In case, the Board may also identify impediments to resolvability and adopt measures to facilitate resolvability. The entire phase is “technical” and is conferred to the interested banks and to the Board.

When the situation is seriously deteriorated, due to the unsuccessful plan or to other reasons, or when no preparation and prevention plans have been adopted, the early prevention phase starts under art. 11 of “Regulation 2014”. This is the legal and material point of connection between the two major functions of the banking union: the move from supervision and recovery towards the resolution.

Let us now examine the main steps of the procedure, focusing firstly on the “early intervention” (art. 11 “Regulation 2014”).

5. Once assessed the bank deteriorated situation– whether a credit institution is failing or likely to fail, or whether there is no reasonable forecast that an alternative private sector or supervisory action might prevent its failure within a reasonable time – the ECB informs the Board on the measures to be assumed, or alternatively, the initiatives that ECB itself intends to assume under the two cases provided in art. 16 Regulation no. 1024/2013 and in art. 23a “Directive 2014” (BRRD). If so, the Board will receive all the relevant information.

In turn, upon receipt of the note on the measures required by the ECB or by the national competent authorities, the Board informs the Commission immediately and may prepare the resolution plan of the institution or group concerned. Then the Board verifies – in cooperation with the ECB and the national competent authorities – the actual bank situation of the bank considered and if the plan fits the case. The Board assesses if there is a systematic threat (the “public interest” condition) and there is no alternative private solution. The ECB and the national competent authorities may assume additional measure; in which case the Board is informed.

The measures adopted in this phase can be of different kind and invasive of the bank powers under resolution, such as the appointment of a special manager and the order to contact potential buyers.

Following the early intervention phase, if the situation requires the formal resolution procedure, the SRM provides the drafting of the resolution plan and of the resolution scheme. The procedure must comply with the general principles on resolution indicated at art. 13 of “Regulation 2014”, as the principle of bail-in (the shareholders of the institution under resolution bear the first losses; creditors of the institution bear losses after the shareholders in accordance with the order of priority of their claims pursuant art. 15; etc.) and the principle that individuals and entities are made liable, subject to Member States law, under civil and criminal law for their responsibilities for the failure of the institution under resolution. All the procedure and the decisions adopted must respect the principle of proportionality, choosing the tools and powers that best achieve the resolution objectives that are relevant in the circumstances of the case (see art. 12, para. 1, “Regulation 2014”).

The drawing of the resolution plan is subject to the conditions provided at art. 16, para. 1, “Regulation 2014”, subdivided in two classes: the first, as the assessment of no reasonable prospect, verified by the ECB after consulting the Board; the second, as the determination that the entity is failing or likely to fail, assessed by the Board, in coordination with the ECB. In the first case, whether the ECB does not adopt the decision within three days from the information, the Board will assess. The bank conditions’ assessment is of crucial importance, as easy to guess, giving the legal and actual grounds of the following resolution procedure. As said, the bodies involved are three (ECB, Board and national competent authorities), none of them having exclusive powers.

When those conditions have been verified, the Board adopt (with a preliminary decision, not yet final) the draft resolution scheme and transmit it immediately to the Commission, which for the purpose of the procedure may be considered as the second “technical” resolution Institution. The Commission has the alternative, to solve in any case with the maximum possible speed (within twelve hours from receiving the scheme): to endorse the resolution scheme drawn by the Board, or to raise objections on existence of the public interest conditions or on the entity of the funds required. When the evaluation of public interest is involved, even the Commission’s decision is not final because the last word is for the Council, due to its “general” relevance. The Council will decide with simple majority. Whether the Council decides that the condition of public interest is not matched, the possible failing of the bank is a matter of pure national law and wound up by the domestic law and courts. The Board will watch and instruct the national competent authorities.

The resolution scheme will enter into force in twenty-four hours from its transmission to the Commission, if no objection is raised. Alternatively, in case of reasoned objections by the Commission or by the Council, the Board must comply with the reasons expressed, modifying accordingly its original scheme.

6. The discipline here summarized is in line with the principle of delegation of powers to agencies, as interpreted by the Court of Justice in the famous Meroni case (13.6.1958, case 9/56) and now reconsidered in a new perspective by the ESMA case (22.1.2014, C-270/12). In brief, as stated in the opinion of the Council legal service of 7.10.2013, no delegation can be presumed and thus an explicit decision to delegate must be taken; a delegation of powers cannot be excluded even in the absence of a specific basis for it in the Treaty; any delegation of powers where the conferred powers are broader than those of the delegating authorities is unlawful; a delegation involving discretionary powers implying a wide margin of discretion would imply an illegal transfer of responsibility, altering the balance of powers; the delegation should be subjected to precise rules.

Here the adoption of the resolution scheme drafted in most cases by the Board - as the body with the necessary operative independence – is not final, involving both the Commission and the Council. Furthermore, in the cited ESMA judgement the Court of Justice has explained that a delegation of specific powers to a body with a particular expertise does not imply a true transfer of responsibilities, where the delegate body will substitute the delegating authority.

The resolution scheme may have a wide scope, with different measures assumed according to the characteristics of the failing bank, as sale of business, establishing of a bridge-institution, bail-in, asset separation, etc. In any case the resolution scheme shall establish the details of the tools to be applied to the institution under resolution.

This phase has here a limited consideration because it goes beyond the scope of the paper, focused on the procedural connection between early intervention and beginning of resolution.

7. After the analysis of the new discipline, some general remarks on the Single Resolution Mechanism governance.

According to the initial proposal by the Commission, all the resolution procedure should have been centred on the Board, operating in coordination with the Commission and under the EBA rules. The Board has consequently been designed in a new way, in comparison with the general model of the European agencies and even with the recent three European Supervisory Authorities established in 2010 (European Banking Authority; European Securities and Markets Authority; European Insurance and Occupational Pensions Authority).

Regulation 2014” provides that the Board shall be the body responsible for the effective and consistent functioning of the SRM. Legally, “a European agency with specific structure corresponding to its tasks” (art. 38, para. 1). It should act independently and have the capacity to deal with large banking groups, to act swiftly and impartially, to ensure that appropriate account is taken of national financial stability, financial stability of the Union (“Whereas 19). As a collegiate body, the Board is composed by a full time Chair and four further full time independent members, plus a member appointed by each participating Member States, representing the national competent authorities. The Board will act in plenary and executive sessions (the Chair and the four independent members). As a rule the Board adopt decisions in plenary session, but the crucial decisions requiring expertise and independence are assumed in executive session. If a possible comparison is possible, the only body with some similarities with the Board is the ECB.

The institutional choice of the SRM confirms that, as like the States, the European Union shapes the administrative bodies according to the character of the conferred functions.

However, after the sharp discussion on the first “Regulation 2014” draft, the final compromise of March 2014 has eased the Board’s centrality in the Resolution Mechanism. The mitigation of the Board’s powers is evident both in the reduction of its autonomous initiatives and in the assessment of resolution conditions and the subsequent drawing of the resolution scheme, where, in addition to the powers of the Commission, it has been provided a final competence to the Council. This reshaping of competences is due, under the institutional compromise, to the political relevance of resolution when significant European banks are involved as well as to the evaluation of the general public interest of the case, which can be appreciated in full only by a combination of powers of expert (neutral) bodies and of the “political” institution (the Council).

A second general remark relates to the character of the resolution procedure. The legislative acts which now discipline the SRM provide a procedure so rigid and detailed to become in itself a factor of complexity. Obviously, only the next implementing experience will show whether this view is correct, but surely the wording and the length of “Regulation 2014” and of “BRRD 2014” (only the latter is more than five hundred pages long) is not compatible with the need for a “market compatible” law, easy to understand and to manage.

It is hoped that if the next implementing experience confirms the risk of rigidity it will be possible to amending and to simplify the discipline here considered. Wisely, “Regulation 2014” provides this opportunity saying that the Commission is empowered to review the application of the Regulation in order to assess its impact and to establish if any modifications or further developments are needed in order to improve the efficiency and effectiveness of the SRM.

A third and final remark relates to the risk that a discipline so complex and of difficult managing may cause unacceptable legal and economic breaches to the rights of the banks involved and of their shareholders.

The resolution mechanism is per se a procedure which makes European a function traditionally falling in the sovereignty of the States and of their laws; furthermore, it impinges on many issues of private law beyond (or perhaps in contrast with) the limits of the competences conferred to the Union. The “intrusion” of the resolution procedure can become unbearable if the many players involved in the Mechanism overlap themselves with possible delays and inconsistencies; especially in case of leaks of sensible information/data on the bank, increasing its difficulties.

An opportune balance with some of these risks is now the provision – yet assumed after much contrast – that all the acts assumed in the procedure could be reviewed by the Court of Justice (to be here considered as the EU Judiciary, including the General Court, under art. 19 TEU). The principle implies that also the acts related to the phases here considered may therefore be justiciable, even very technical.

As provides by “Whereas” 69a and art. 75 of the “Regulation 2014”, the Court of Justice should have jurisdiction to review the legality of decisions adopted by the Council, the Commission and the Board, in accordance with art. 263 TFEU (action for annulment) or art. 265 TFEU (failure to act), as well for determining their non contractual liability. Furthermore, the ECJ has, according to art. 267 TFEU, competence to give preliminary rulings upon request of national jurisdictional authorities on the validity and interpretation of acts of the institutions, bodies or agencies of the Union.

The framework of the legal guarantees is completed by an interesting system of “ administrative justice” – peculiar to the SRM – provided by art. 77b “Regulation 2014”, according to which the interested party (as a rule the bank under resolution, but also the resolution authorities) may appeal against a decision of the Board which is addressed to that person or which is of direct and individual concern to that party. The appeal shall be considered by the Appeal Panel, a quasi-judicial body(not a court) composed by five persons of high reputation.

At last, we can affirm that the European legislators on banking union have been fully consistent in providing a legal discipline for the connection between supervision and resolution. A centralised supervision, as now in operation, without a link with a new resolution mechanism at European level would have been a function deprived of any effectiveness; vanishing the banking union itself. However, the discipline here considered is very complex, as result of an institutional compromise; it can operate only if the players will act in mutual trust and spirit of cooperation.


1The law is as stated on the 30th April 2014. Two recent legislative acts, the Regulation on SRM and the Directive establishing a framework for the recovery and resolution (BRRD), are not yet published in the EU Official Journal. These acts are quoted in a simplified form (“Regulation 2014” and “Directive 2014”, or BRRD). When published, the official texts might present some changes with the final drafts here considered.