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Title : The development of a new bank resolution
regime in Europe: fit for purpose?
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Journal of International Banking Law and Regulation

2014

The development of a new bank resolution regime in Europe: fit for purpose?
Gianni Lo Schiavo
Subject: Banking and finance. Other related subjects: European Union. Financial regulation
Keywords: Banking supervision; Banks; Corporate recovery; EU law; Legal basis
Legislation: Directive 2014/59 on the recovery and resolution of credit institutions and investment
firms [2014] OJ L173/190
Regulation 806/2014 on a uniform procedure for the resolution of credit institutions and investment
firms in the framework of a SRM and a SRF [2014] OJ L225/1
Treaty on the Functioning of the European Union art.114

*J.I.B.L.R. 689 Introduction

The system of supervision and resolution of credit institutions in Europe will change dramatically as
from the entry into force of the Single Supervisory Mechanism (SSM) in November 2014 when the
European Central Bank (ECB) will officially take over supervision of credit institutions in Europe.1 At
the same time, the European legislators have agreed on the Single Resolution Mechanism (SRM)
Regulation in April 2014.2
Until the outbreak of the financial crisis, the European legal system did not provide for harmonised
rules on resolution or winding down of credit institutions. Legislative initiatives at the European level
on the matter of a failing firm were limited and did not go beyond a mutual recognition approach that
gave considerable leeway to Member States in deciding the solutions to take at national level.
European legislation was limited to minimum harmonisation measures: a Regulation on insolvency
proceeding which excluded credit institutions from its scope of application3 and a Directive on the
reorganisation and winding-up of credit institutions.4 Both instruments did not establish a European
framework for the resolution or the winding-down of firms and, in particular, credit institutions, but they
rather set out the rules on jurisdiction to deal with weak firms among the authorities of different
Member States. The limited impact of these two measures shows that Europe lacked a harmonised
regime for cross-border resolution or winding-down of credit institutions.
Against this background, the recent European initiative to establish a European Banking Union (EBU)
goes in the direction to create a system of cross-border crisis management for financial institutions.
Among other objectives, the EBU aims to create a regulatory framework for the prevention of bank
crisis and for an orderly resolution of credit institutions. Strictly speaking, the EBU comprises two
pillars: the SSM5 and the SRM.6 Both mechanisms apply in participating Member States, which—at
the moment—correspond to the euro area Member States.
The SRM introduces important changes as it creates an institutional framework for banking resolution
at European level. The creation of an institutional framework for the resolution of credit institutions
constitutes one of the most problematic and challenging reforms to put into place in the post-crisis
environment. The final text provides for a centralised system for banking resolution. The system will
put at the centre of gravity a new European agency, the Single Resolution Board (SRB) which will
have the main task to provide the essential assessment on whether "significant" credit institutions
shall be resolved. Furthermore, the SRM establishes a Single Bank Resolution Fund (the Single
Fund) which will be pooled together at European level over time and will provide financing to the
entity’s resolution within the SRM.
The process of adoption of the SRM Regulation has been concluded almost one year later the
publication of the Commission proposal. The decision to conclude an Intergovernmental Agreement
on the transfer and mutualisation of contributions to the Single Resolution Fund7 (the
Intergovernmental Agreement) as a separate legal instrument to regulate the financial functioning of
the Single Fund constituted the most controversial element during the adoption of the SRM.
Nonetheless, before the end of the European Parliament legislature, the European co-legislators have
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succeeded in adopting the final Regulation on the establishment of the SRM.

The purpose of this article is to assess the recently adopted SRM Regulation and Intergovernmental
Agreement in the wider context of the new European regime for banking resolution regime as
provided in the Bank Recovery and Resolution Directive (the BRRD).8 At the moment, it is still too
early to predict whether the new European resolution framework will work, but there are some
grounds to say that it is an evolutionary development as compared with the absence of resolution
rules before the financial crisis. *J.I.B.L.R. 690 9
This article is structured as follows. The first part analyses the process of adoption of the European
system of banking resolution and assesses the substantive rules in the BRRD. The second part
examines the SRM, the new institutional resolution framework.

The creation of a substantive resolution regime in Europe: towards a pan-European

minimum harmonisation framework?

The path towards the adoption of a European framework of bank recovery and
resolution
It is well established that before the outbreak of the financial crisis no common European regulatory
framework existed for the recovery and resolution for credit institutions and more generally for
financial institutions. EU law did not regulate for resolution and winding-down of financial institutions.
While the Financial Services Action Plan10 promoted the set up of a European regime for the orderly
winding-down of credit institutions in Europe, its implementation did not ended up in establishing a
European regime to resolve credit institutions in Europe. The limited result of this process was the
adoption of Directive 2001/24 on the reorganisation and winding-up of credit institutions.11 This
Directive, which had an extremely long process of adoption, backed the principles applicable to the
single market for credit institutions and in particular the home country control principle.12 However, the
mutual recognition approach adopted in this Directive did not provide adequate substantive rules for
an orderly winding-down of credit institutions and in particular for those running cross-border
activities. Two main limitations are noticeable in the Directive: firstly, it does not extend to
cross-border subsidiaries; secondly, it does not harmonise insolvency proceedings, but it only
provides some general rules on the mutual recognition of insolvency proceedings.
The impact of the financial crisis prompted the EU institutions to take action to establish a new
European framework for the resolution of financial institutions. The first phase of the crisis witnessed
the recourse to the use of public money to bailout banks or ring-fencing national policies on bank’s
asset and used resolutions tools at national levels. The state-centric approach did not end up being
an efficient solution for orderly cross-border resolutions. The Fortis and Dexia cases are illustrative.13
At the same time, the need to develop a new regulatory framework was envisaged in the de Larosière
report where a chapter is dedicated to crisis management and resolution. The report stressed that:
"[t]he lack of consistent crisis management and resolution tools across the Single Market places
Europe at a disadvantage vis-à-vis the US and these issues should be addressed by the adoption at
EU level of adequate measures." 14
However, the report did not go as far as to provide specific suggestions for the creation of a new
European regulatory regime for credit institutions.
As follow-up initiatives, the Commission issued a number of Communications that intended to create
a new European architecture for the resolution of individual financial institutions and EU-based
financial groups.15
Meanwhile, the Commission launched a consultation on a new framework for recovery and resolution
of financial institutions and published a Communication on EU Framework for Cross-border Crisis
Management in the Banking Sector.16 This document, accompanied by a Staff Working Paper,
stressed the importance to create a new European regime for crisis management of credit institutions.
It emphasised the gaps and limits of the resolution regime for early intervention, bank resolution and
insolvency framework and, accordingly, it proposed substantive changes.17
Subsequently, the Commission put efforts to adopt proposals to introduce European rules for the
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recovery and resolution of financial institutions. The Commission issued a new Communication in
2010. This document stressed that the ambitious EU regulatory reform is to ensure that distressed:
"institutions of any type and size, and in particular systematically important institutions, can be
allowed to fail without risk to financial stability whilst avoiding costs for taxpayers." 18
Subsequently, the Commission launched a general consultation on the establishment of a framework
for cross-border bank resolution in March 2011.19 The results of the consultation showed that there
was a general agreement on the need to prevent the crisis through early measures and to introduce a
wide group of bank resolution *J.I.B.L.R. 691 tools. After the consultation, the Commission published
a discussion paper on the bail-in instrument, the most important instruments for orderly resolution.20 In
light of these findings, the Commission published the BRRD proposal on June 6, 2012.21

The Bank Recovery and Resolution Directive

Before its adoption, the initial Commission proposal was endorsed by the ECOFIN Council in June
201322 and was agreed in trilogue in December 2013.23 The long BRRD has been adopted in April
201424 after a legislative process of almost two years.
The BRRD is a very detailed directive (132 articles) with many technical provisions setting out the
role, the functions and the powers of resolution that Member State should implement into national
law. To the purpose of this analysis, only the most important BRRD elements will be analysed with a
view to show the main substantive aspects that the SRM will take into account.

Scope of the Directive

The scope of the resolution regime is the first important element to analyse. The expression
"resolution" is different from insolvency or bankruptcy procedure. It aims to take into account the
special role of credit institutions by providing the means to deal with bank failure outside the ordinary
bankruptcy legislation.25 This excludes that normal bankruptcy procedures are triggered and lead to
the immediate cessation of banking activities.
The BRRD does not provide for a clear definition of what resolution is, but it specifies that resolution
refer to the application of resolution tool in line with resolution objectives26 and that resolution is
different from normal insolvency proceedings.27 This is regrettable as the Directive could have
contained a general definition of what "resolution" is. Most probably political negotiations watered
down the Commission’s proposal specifying what the definition of resolution was.28
Article 1(1) affirms that the BRRD lays down rules and procedures relating to the recovery and
resolution of a number of entities. These rules apply not only credit institutions, but also to financial
institutions, financial holding companies, parent financial holding companies, branches of institutions
established outside the Union according to the specific conditions of the Directive. This shows that the
BRRD has a wider spectrum than the supervisory arrangements in the SSM that apply only to credit
institutions.
Furthermore, the scope of the Directive is very wide as it is not limited to systemically important
institutions. This is because there is no certainty on which entities could create a systemic crisis. In
fact, a widespread failure of a number of smaller firms may cause devastating effects to the economy.
29
The resolution regime does not establish a threshold criterion for the application of the BRRD rules.
This is a positive development for the purpose of the BRRD implementation in Member States.
Among the long list of definitions there are extensive references to the definitions contained in the
CRR and the CRD IV as the ones of credit institution, financial holding company, branch, competent
authority.30 This clearly shows the attempt to create a "single rulebook" which should be applicable in
the internal market and, particularly, to avoid duplication of definitions. This is a welcome
"cross-regulatory" definition approach.
The Directive has a minimum harmonisation approach. Emphatically, the BRRD indicates that:
"Member States may adopt or maintain stricter or additional rules to those laid down in the Directive
and in the delegated and implementing acts adopted on the basis of the Directive (...)." 31
This paragraph was absent in the Commission proposal and, as such, it strengthens the role of
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Member States in regulating national resolution frameworks. Arguably, the introduction of this
paragraph may give leeway to a differentiated application of resolution rules which may jeopardise
the—yet—minimum harmonisation approach.
The resolution authorities shall be designated by each Member State.32 There is quite a wide
discretion on the designation of such authority on the part of Member States. In fact, the BRRD
specifies that imposing the design of the national authority would "considerably interfere with the
constitutional and administrative systems of Member States".33 Thus, the Directive *J.I.B.L.R. 692
reiterates its minimum harmonisation approach in designing national resolution authorities and
"delegates" the qualification of competent resolution authority to the Member States. Nonetheless, the
BRRD mandates that the national authority should be different from the national supervisory authority,
as the entrustment to the same institution would result in conflicts of interests.34
In brief, the BRRD minimum harmonisation approach is a positive development as compared with the
absence of a cross-border resolution regime in Europe. However, it may generate regulatory
divergences among Member States, especially between those that participate in the SRM and those
that do not. Moreover, it may increase legal uncertainties and regulatory competition in the internal
market.35

Preparation and prevention

The Directive introduces provisions on preparation and prevention to recovery at the earliest phase of
recovery. The need for clear provisions on preparation and prevention is important to avoid recourse
to public support or the collapse of the institution that would have considerable repercussions for
financial stability. Crisis prevention is one of the main aspect that the BRRD intends to address by
avoiding the recourse to resolution tools.36 In other words, the BRRD aims to prevent as soon as
possible the use of resolution tools and the restructuring of an institution.
In view of having the widest degree of information, BRRD Title II requires Member States to ensure
that each institution draws up and maintain recovery and resolution plans. The institution shall include
the list of information indicated in the Annex Section A 37 as well as appropriate conditions and
procedures to allow the timely implementation of recovery measures and actions.38
Then, the competent authorities assess the recovery plans. First, they are required to evaluate
whether the implementation of the arrangements is reasonably likely to maintain or restore the
viability of the institution and the financial position of the institution.39 Secondly, they need to assess
whether the plan and the specific options are reasonably likely to be implemented quickly and
effectively in case of financial stress while avoiding any significant adverse effect in the financial
system.40
If the recovery plan is not submitted or it does not adequately respect the established conditions, the
competent authorities may require the institution to reduce its risk profile, enable recapitalisation
measures, change institution’s strategy and structure, review the funding strategy, make changes to
the governance structure.41 While these provisions show that the BRRD aims to regulate the
preparatory phase to recovery, they fail to address in detail the specific actions that the national
authorities shall conduct and they leave considerable discretion to national solutions.
Resolution authorities shall prepare resolution plans for each institution with a view to provide the
resolution actions that the resolution authority may take, in particular the resolution tools and powers.
42
Article 10 indicates the elements of the resolution plans. This makes clear that the resolution plan
shall, among other elements, demonstrate how critical functions and core business activities could be
separated from other functions.
The purpose of this preventive exercise is to assess to what extent an institution is "resolvable". This
means that it is feasible and credible that the resolution authority can either liquidate the institution
under normal insolvency proceedings or resolve it by applying the resolution tools and powers.43 To
evaluate whether the institution is resolvable, the competent authority will assess the matters
indicated under Annex Section C.44 In case the measures proposed by the institution do not reduce or
remove its resolvability, the competent authority will have, among others, the power to revise the
financing agreement, limit exposures, request additional information, divest specific assets, limit or
cease specific activities.45
The EBA is given an important role to produce draft regulatory technical standards or guidelines to set
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some specific rules on preparation and prevention.46

Overall, preparation and prevention to resolution is a positive improvement to coordinate the
preventive phase of resolution. However, the level of discretion to national authorities may give
grounds for differential treatments at the national level especially as regards cross-border group
institutions. The quasi-regulatory function of EBA is not sufficiently strong to set common rules on
preparation and prevention in Europe.

Early intervention powers

The BRRD provides for early intervention powers in order to prevent or prepare to as shown under
Title III. The objective of early intervention is to remedy the situation where authorities can only
resolve the *J.I.B.L.R. 693 institution.47 Early intervention powers should be taken when the
institution does not meet or is likely to breach the prudential requirements provided in the CRD IV.
Among other powers, the management body can be required to:

•
implement the measures indicated in the recovery plan;

•
examine the problem situation, identify the measures to overcome the problem and
draw up an action problem to resolve the problem;

•
convene shareholder’s meeting;

•
remove and replace board members and managing directors; and

•
draw up debt restructuring plans.

Furthermore, competent authorities may require changes to the legal or operational structure of the
institution.48
If early intervention measures prove insufficient, the Directive allows the competent authorities to
appoint a temporary administrator. This appointment is possible if the removal of the senior
management and management body is insufficient to remedy the situation.49 The temporary
administrator has all the powers of the management of the institution and shall take all necessary
measures to promote solutions to address the financial situation. However, the temporary
administrator has some power and temporal limits: he cannot override the shareholder rights under
EU and national law50; and its appointment cannot last more than one year.51
EBA is called to adopt draft regulatory technical standards as well as guidelines to coordinate and
promote the consistent application of early intervention powers.52
Overall, early intervention powers are a positive development in order to avoid the opening-up of the
resolution stage. However, the BRRD provides for excessive discretion to national authorities as to
whether and to what extent early intervention powers may be exercised.

Resolution
While prevention and early intervention measures aim to avoid that resolution takes place, the case
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may be that the institution(s) need to be resolved. The BRRD sets out a new European framework for
the resolution of financial institutions. It is essential to outline the conditions, the principles and the
powers of resolution.

Conditions for resolution

Resolution can be defined as the restructuring of one or more financial institutions
with the resolution tools implemented under the BRRD with the aim to ensure the
continuity of critical functions, to avoid adverse impact on financial stability, to
minimise reliance on public funds, to protect depositors; and to protect client funds
and client assets.53 The BRRD indicates that all these objectives are of equal
importance and resolution authorities shall "balance them as appropriate to the nature
and circumstances of each case".54 However, it is submitted that it is unlikely that all
these objectives will be treated at the same level in practice. I maintain that adverse
impact on financial stability, minimisation of public funds and depositor protection are
the most important ones.
The BRRD contains the essential conditions to determine whether an institution needs
to be resolved. As in the Commission proposal, there are three cumulative conditions
to be fulfilled:

(a)
that the institution is failing or likely to fail;

(b)
that there are no other possible alternatives that would prevent the failure of the
institution within a reasonable timeframe; and

(c)
that a resolution action is necessary in the public interest.55

Condition (a) is the most critical as it is necessary to identify the situation of failure (or
likeliness to failure) in order to apply the resolution tools. The failure or the likeliness
to fail is defined under art.32 para.4 as when "one" or "more" of the circumstances
indicated are fulfilled. These are:

•
that the institution breaches or is likely to breach the requirements for the
authorisation and licensing of its activity;

•
that the assets are or will be less than the liabilities;

•
that the institution is or will be unable to pay its debts or other liabilities; and
*J.I.B.L.R. 694

•
that extraordinary public financial support is required.
 Page7

The BRRD conditions to initiate resolution show that the national resolution authorities
will have much discretion in assessing whether an institution shall be resolved. This
may generate regulatory competition between resolution authorities and increase
legal uncertainties for market operators that may be reflected on the threshold for
resolution.56 Unfortunately, the BRRD does not include anymore the possibility to
allow the Commission to adopt delegated acts specifying the circumstances when an
institution shall be considered as failing or likely to fail.57 This omission may cause
divergences over time on the triggering event for resolution.

Main principles of resolution

The BRRD contains the general principles governing resolution under art.34. To this
analysis, the most important ones are that:

(a)
shareholders of the institution under resolution shall bear first losses;

(b)
that creditors of the institution under resolution bear losses after shareholders in
accordance with the order of priorities;

(c)
that management body and senior management of the institution under
resolution are replaced;

(g)
no creditor shall incur greater losses than would have been incurred if the
institution was wounded up under normal insolvency proceedings (the no worse
off principle); and

(h)
that covered deposits are fully protected.

Letters (a) and (b) are intended to provide rules on the priority order of losses that
resolution tools will entail. This establishes a system where shareholders and
creditors will be involved when resolution powers are exercised.
Letter (c) involves a change in the management bodies of the institution under
resolution. This means that those involved in the management activity of the institution
under resolution will be excluded from the activities of management of the institution
under resolution.
Letter (g) refers to the "no worse off principle" which indicates that if a proper
evaluation of bank assets and liabilities establishes a difference between the
treatment that shareholders and creditors are actually afforded and the treatment they
would have received under normal insolvency proceedings, they are entitled to
compensation.58
Finally letter (h) establishes that covered deposits shall be fully protected. This is to
guarantee that covered deposit are always protected whenever resolution takes place
- this is basically to avoid a "Cyprus" issue.
 Page8

Overall, resolution principles are essential for the orderly conduct of resolution
activities. However, the existence of general principles might not be fully respected in
practice if different national practices implement them differently.

Resolution tools
Resolution tools are provided in BRRD arts 37 to 58. These are analysed from the softer to the
hardest tool.

The sale of business

The sale of business is aimed to achieve an efficient and easy transfer of the shares,
the assets, the rights or the liabilities to a purchaser.59 This means that the resolution
authorities have the power to sale the business without requesting the consent of the
shareholders, the institution or other third parties. The transfer needs to be made on
"commercial terms" with due attention to the circumstances of the case.60 In other
words, the resolution authorities need to find ways to comply with commercial
condition for the sale. Procedural requirements provide that the sale of business shall
be transparent, fair and effective and it shall aim to maximise the sale price for the
instruments involved.61

Bridge institution
In case that the sale of business to a private is not possible, resolution authorities may
make use of the bridge institution tool. The bridge institution is a legal entity to which
*J.I.B.L.R. 695 shares, instrument of ownership, assets, rights or liabilities are
transferred.62 The bridge institution is wholly or partially owned by public authorities
and is created for the purpose of receiving and holding the shares or the instruments,
or the assets, rights and liabilities.63 The resolution authority exercises considerable
powers on the bridge institution. In particular, it appoints the bridge institution’s board
of director. The main objective of the bridge institution is to sell institution's assets to a
private sector buyer when market conditions are appropriate.64

Asset separation
The asset separation tool aims to transfer assets, rights and liabilities to an asset
management vehicle, which is a legal entity wholly owned by public authorities.65 This
is a special resolution tool which aims at transferring assets, rights or liabilities only
when normal insolvency procedures would have adverse effects on the market. It can
be used only in conjunction with other resolution tools.66

The bail-in tool

Bail-in is the most innovative and important resolution tool under the BRRD.67 The
Directive puts a great emphasis on the role of the bail-in tool for an appropriate
resolution of credit institutions. Article 2 defines bail-in as the:
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"mechanism for effecting the exercise by a resolution authority of the write-down and
conversion powers in relation to liabilities of an institution under resolution."
The bail-in would act as a mandatory debt mechanism for shareholders and private
sector creditors to pay the costs of the bank’s absorption of losses or recapitalisation.
Its objective is to ensure that:
"shareholders and creditors of the failing institution suffer appropriate losses and bear
an appropriate part of those costs arising from the failure of the institution." 68
According to the Commission, bail-in shall serve as an instrument to resolve large and
complex financial institutions when other resolution tools are not sufficient.69 For this
purpose, the bail-in instrument "punishes" eligible shareholders and creditors for the
losses that the institution suffers by conversion into equity or reduction and avoids
bailouts funded by taxpayers.70
Article 44 establishes the scope of application of the bail-in tool. It provides that bail-in
applies to all liabilities of an institution save as the general exclusions contained under
art.44 para.2. The BRRD may exclude certain liabilities from the write-down or
conversion powers under specific circumstances.71
The BRRD requires some minimum conditions to trigger the bail-in tool, but the
competent resolution authority remains competent to decide whether to apply it or not.
The 2010 Commission Communication opted for binding contractual arrangements for
write down or conversion to be included in the debt instrument issued by the financial
institution.72 Subsequently the Commission proposal introduced a statutory bail-in tool
to recapitalise the institution or to wind it down by exercise of public powers.73 This is
one of the most important regulatory novelties in the adoption process.
The BRRD provides a minimum requirement condition for the exercise of the bail-in
tool. This is set by the resolution authorities and shall provide that the institutions
maintain a sufficient aggregate amount of own funds and eligible liabilities.74
The implementation of the bail-in tool requires that the resolution authorities establish
the aggregate amount by which *J.I.B.L.R. 696 eligible liabilities must be written
down.75 This assessment will allow for the establishment of the amount of eligible
liabilities that need to be written down or converted.76
Most importantly, art.48 contains the hierarchy in the exercise of the bail-in tool. CET1
77
instruments are reduced first, then, if, and only if, the CET1 is not sufficient, the
Additional Tier 1 instruments are reduced. Further, the other aggregates that should
be reduced are in turn and one following the other Tier 2, Additional Tier 1 or Tier 2
and finally, the senior eligible debt.78
The BRRD provides also that, in the situation of a very critical systemic crisis, the
resolution authority may make use of government stabilisation tools that imply the use
of public money to sustain the resolution of the institution.79
The bail-in exercise binds the institution, the affected creditors and the shareholders.80
As provided in the BRRD Final Provisions the bail-in tool shall be implemented at the
latest January 1, 2016.81 This is the only part of the BRRD that does not need to be
implemented by December 2014.
Overall, the bail-in tool is the strongest regulatory instrument that would avoid that the
distressed institution is insolvent or is granted public support. The bail-in instrument
may be used to answer the question of too-big-to-fail by "restructuring" the institution’s
balance sheet. However, the bail-in instrument still needs to be deployed in practice.
Only future practice will tell to what extent bail-in will be a workable solution.

Financing the resolution

Financial arrangements to the exercise of resolution powers are an essential component under the
 Page10

BRRD. There may be situations in which eligible instruments and tools will not be sufficient for an
adequate resolution. The BRRD contains provisions to establish a European system of financing
arrangements. This is composed of national financing arrangements, borrowing arrangements
between national financing arrangements and mutualisation of national financing arrangements for
group resolution.82 These resolution financing arrangements will be composed of: ex ante
contributions raised annually from the covered institutions,83 exceptional ex post contribution in case
the ex ante contributions are not sufficient,84 alternative funding means from institutions, financial
institutions or other third parties.85 The latter form of funding may take place through national or
supranational forms of financing.
The setting-up of financial arrangements requires that by December 31, 2024 a minimum target level
of 1 per cent of the amount of the deposit of all credit institutions authorised in the territory of a
Member State is reached.86 This means that every year Member State shall raise contributions at the
national level from the institutions in order to establish a financial arrangement for resolution
purposes.
In practice, the use of the financing arrangement will be used to guarantee the assets or liabilities of
the institution under resolution, to make loans to the institution under resolution, to purchase assets of
the institution under resolution.87
Overall, the introduction of financial arrangement serves to contribute to the implementation of
resolution tools. However, the national imprinting of such financial arrangements remains problematic
especially in case of cross-border resolution procedures.

The Single Resolution Mechanism: a new form of integrated supranational

resolution?
While the previous part of the contribution looked at the substantive rules on bank recovery and
resolution in the BRRD, this part will examine in more details the SRM Regulation and the
intergovernmental agreement.
Preliminarily, it shall be made clear that the SRM Regulation needs to be read in close connection
with the BRRD as the latter forms the backbone of the SRM Regulation. This is important as the
BRRD and the SRM are structurally interlinked with each other. In particular, the BRRD provides for
the substantive rules on resolution, while the SRM establish the "special" institutional framework for
banking resolution in participating Member States.
At the time of writing, the BRRD applies to all the 28 Member States, while the SRM only to
participating Member States that—at present—correspond to the euro area Member States.
*J.I.B.L.R. 697

Rationale
The rationale to create the SRM lies in the need to have an appropriate European system of common
resolution powers with tools and instruments framed in Member States participating in the EBU. This
implies that a new institutional framework for the recovery and resolution of covered entities is needed
for such purposes.
While the BRRD establishes a network of national authorities and resolution funds with the conferral
of substantive powers to resolve credit and financial institutions, the SRM creates a truly institutional
framework at European level to resolve credit institutions. Furthermore, the SRM complements the
institutional dimension of supervision of the SSM.
For these purposes, the SRM is conceived with decision-making powers at the supranational level, a
centralised pool of bank resolution expertise and experience and the progressive establishment of a
Single Bank Resolution Fund to merge financial resources from bank contributions from the national
to the European level.88 In a nutshell, an effective SRM will be essential to reach effective decisions to
resolve credit institutions within participating Member States.
Four main reasons might be considered for a single system for resolution in Europe:
 Page11

•
the presence of a single authority can facilitate timely resolution;

•
a mechanism to internalise home-host concerns and reach agreement on resolution
and burden sharing;

•
an alignment of incentives for least cost resolution;

•
achievement of economies of scale, avoidance of incoherence and duplication; and

•
accumulation of expertise that would prepare and implement recovery and resolution
plans.89

In brief, it is argued that centralisation, effectiveness and resource savings shall be considered as the
main reasons for the creation of the SRM.

The adoption of the SRM Regulation and of the Intergovernmental Agreement

The Council Conclusions of June 2012 "flagged" the idea to create a single mechanism for the
resolution of credit institution. This statement was backed in the Commission Communication on "a
Roadmap towards a Banking Union".90 It stated that an SRM "would govern the resolution of banks
and coordinate in particular the application of resolution tools to banks within the banking union".91
In December 2012, the Four President Report stressed that an integrated financial framework will
require the establishment of the SRM for the euro area. This would complement the set-up of the
SSM while being based "on robust governance arrangements, including adequate provisions on
independence and accountability, as well as an effective common backstop".92
Following the debate on the adoption of the SSM Regulations, the Commission tabled the SRM
Regulation proposal in July 2013.93 On December 18, 2013, the ECOFIN Council agreed on the
general approach for the Single Resolution Mechanism which consisted of a draft Regulation and a
decision to negotiate, by March 1, 2014, an intergovernmental agreement on the functioning of the
Single Resolution Fund.94
Shortly before the end of the legislature, the proposal for the establishment of the SRM was adopted
in April 2014. Regulation 806/2014 is the main legal instrument for the establishment and functioning
of the SRM. This Regulation was published in the Official Journal on July 30, 2014.
The SRM Regulation identifies as a subject matter of the mechanism "uniform rules and a uniform
procedure for the resolution of credit institutions". In this sense, art.1 stresses that uniform rules and
uniform procedure will be applied by the Single Resolution Board together with the Council, the
Commission and the resolution authorities of the participating Member States.95 The resolution
mechanism will be supported by the Single Bank Resolution Fund which will be created upon the
entry into force of the intergovernmental Treaty among the participating Member States to transfer the
funds raised at national level.96

Legal basis to establish the SRM: is TFEU art.114 the correct one?
The SRM confers tasks and powers on the resolution of credit institutions at European level. Such
conferral of powers requires an effective legal basis. The legal basis used to create the SRM has
been TFEU art.114. *J.I.B.L.R. 698
 Page12

This provision allows for the adoption of measures for the approximation of the provisions laid down
by law, regulation or administrative action in Member States which have as their object the
establishment and functioning of the internal market.
The use of TFEU art.114 has been used extensively over time, especially during the financial crisis.
For instance, this is the case of the European System of Financial Supervisors (ESFS), in particular
the establishment of the European Banking Authority (EBA), the European Securities and Market
Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).97
Furthermore, the greatest part of recent financial sector reforms have been adopted by relying on
TFEU art.114. This has been the case for the new Capital Requirement Regulation and Directive 98;
the European Market Infrastructure Regulation (EMIR)99; the Short Selling Regulation (SSR),100 the
BRRD.
TFEU art.114 has then be used both in an institutional and in a substantive way. It has been used
both to create new entities (regulatory agencies) and to reform the substantive rules applicable in
financial markets.
There are a number of arguments in favour of the use of TFEU art.114 to establish the SRM.
Firstly, the proper functioning of the single market is highly dependent on the level of integration of
Member States that share the single currency and those that do not. This justifies the use of TFEU
art.114 for the establishment of a system that is ideally open to all Member States.
Secondly, the use of TFEU art.114 is the most practical legal basis to the integration of financial
markets. The effectiveness of the EBU is subject to the appropriate use of the legal tools to establish
an integrated financial market. This justifies the creation of a European-wide system of resolution that
aims to reduce the obstacles that can arise in the context of market integration.
Thirdly, the existence of the Single Supervisory Mechanism cannot work properly without the SRM
and thus both pillars need to have a strong legal basis. The "fortunate" existence of a legal basis to
confer prudential supervision to credit institutions to the European Central Bank101 did not correspond
to an equal legal basis for resolution. The use of TFEU art.114 came as the natural choice for such
purposes.
Fourthly, it is essential for resolution authorities to be able to act swiftly and effectively for crisis
management—resolute resolution action may take no longer than a weekend. A fragmented, lengthy
and amorphous consensus-based decision-making framework would be problematic in that situation.
This suggests that the use of a legal basis aiming to harmonise the decision-making processes at the
centre of the system is sound to the purposes of reaching the desired resolution outcome. Only TFEU
art.114 can play this role in the internal market.
Overall, these main reasons indicate that the use of TFEU art.114 is the appropriate legal basis for
the creation of a supranational system of bank resolution.

Scope, division of tasks and substantive rules

Scope of the SRM

The first arts (1–7) of the SRM Regulation provide for the scope of application of the
SRM.
The SRM applies to:

•
credit institutions established in participating Member States;

•
 Page13

parent undertakings established in one of the participating Member States,

including financial holding companies and mixed financial holding companies;
and

•
investment firms and financial institutions established in participating Member
States when they are covered by the consolidated supervision of the parent
undertaking.

The link with the SSM is an important feature aiming to create a supranational system
for banking supervision and resolution. The SRM applies to participating Member
States of the SSM.102 However, the system does not exclude the non-euro area
Member States. There may be the conclusion of a close cooperation agreement with
non-euro area Member States which will give the status of participating Member State
to the ones joining close cooperation.103 Hence, it is not *J.I.B.L.R. 699 excluded that
also other non-euro area Member States join a close cooperation in near future.

Division of tasks in the SRM

The SRM division of tasks provides for a differentiation between "significant" and "less
significant" entities under the SSM.104 This distinction was not present in the original
Commission proposal, but was included following the final adoption of the SSM which
confers direct supervision to the ECB for "significant" credit institutions.
With that said, art.7 provides for an explicit division of tasks between the
supranational level, through the role of the SRB, and national resolution authorities.
The former will be responsible to draw up resolution plans and to adopt all decisions
relating to resolution for "significant" credit institutions in compliance with Regulation
1024/2013 and those in relation to which the ECB has decided to exercise directly
itself as well as for other cross-border groups.105 Conversely, the resolution planning
and functions for "less significant" institutions will be exercised by national authorities.
If resolution action requires the use of the Single Fund, then the SRB is responsible to
adopt the resolution regardless of the significance of the credit institution.106 This is the
only explicit exception that confers resolution powers to the SRB for "less significant"
entities. However, art.7 paras 4 and 5 interestingly establish that the SRB may be
conferred or may exercise all relevant powers as regards other entities if necessary.
These provisions contain clauses to allocate further responsibilities to the SRB.

Basic substantive rules

Many rules contained in the BRRD on substantive aspects of resolution are
reproduced with some "supranational" changes in the SRM Regulation. This is
because the BRRD constitutes the substantive backbone of the SRM in terms of
resolution tools.

Resolution planning
The SRM Regulation contains rules on resolution planning before any resolution
is envisaged.107 The SRB shall draw resolution plans similarly to what happens
 Page14

for the national resolution authorities which are not part of the SRM. The
resolution plan is based on the information sent to the SRB. An important aspect
of this phase consists in the Resolution Board or, where appropriate, the national
resolution authorities assessing the resolvability of the institution or the group
entity.

Early intervention
Chapter 2 concerns early intervention for resolution purposes. In this phase, the
SRB receives information on resolution by the ECB or the competent national
authority. Among other tasks, the SRB has the following powers towards the
institution:

•
- to request information with a view to prepare for the resolution;

•
- to carry out a valuation of the assets and liabilities of the concerned
institution or group;

•
- to contact or arrange contacts to potential purchasers in order to prepare
for the resolution of the institution or the group; and

•
- to ask the national resolution authority to draft a preliminary resolution
scheme for the institution or group concerned.108

This phase does not envisage the exercise of decision-making procedures to

resolve institutions as it is still preliminary in nature. However, the SRM
Regulation does not confer sufficient powers to the SRB at the preliminary stage.
The difference between BRRD art.27 and SRM Regulation SRM art.13 shows
that the SRB has far less powers than national resolution authorities. *J.I.B.L.R.
700

Resolution and resolution tools

When an entity is deemed to be resolvable, pursuant to the BRRD, the SRM
Regulation contains substantive rules on resolution tools. These are the sale of
business, the creation of bridge institutions, asset separation and the bail-in tool.
109
Their substantive content corresponds to what is included in the BRRD.
The resolution tools are included in the SRM Regulation mainly to confer directly
to the SRB the power to exercise resolution tools in accordance with the
procedure set out in art.18.110

The Institutional framework

 Page15

The Single Resolution Board

The SRM Regulation establishes a new European agency, the Single Resolution
Board. The SRB is an EU agency with legal personality111 with its seat in Brussels.112
The Board is composed of an Executive Director, four full-time Members and a
member appointed by each participating Member State representing the national
resolution authority.113 The Commission and the ECB are permanent observers in
plenary and executive sessions.
The Board convenes in plenary and executive sessions.114 Among other functions, the
plenary sessions comprise the power to adopt the annual work programme, the
annual budget and resolution schemes.115 Importantly, the plenary session is
convened when the action to be taken requires more than 5 billion euro in capital or
twice that amount in terms of liquidity from the Single Fund. The plenary session shall
also evaluate the application of resolution tools, including the use of the Single Fund,
in case 5 billion euro or more have been used throughout the calendar year.
Moreover, the plenary session is convened to decide the necessity to raise
extraordinary ex post contributions, borrowing of the Single Fund and financing
arrangements in case the resolution of a group with entities in participating and
non-participating Member States is above the 5 billion euro threshold.
The executive session takes all decisions to implement the SRM Regulation.116 In
particular, the executive session takes specific decisions relating to a single credit
institutions or a banking group. Representatives of the relevant national resolution
authorities may or may not attend the executive sessions.
Article 52 provides for the decision-making of the Board in plenary session. As a
general rule, the plenary sessions decide on simply majority unless otherwise
provided. This is, in particular, the case when the Single Fund is used above a certain
threshold.
Article 55 provides for the decision making process in the executive session. Both in
cases of a deliberation on an individual entity or on a cross-border group, the Board
requires consensus among the Board’s members. If this is not possible, then the
regulation provides that the Board members shall take decision by a simple majority.
No participant has a veto power.
The SRM regulation contains provisions on the degree of independence and
accountability of the SRB. The Regulation contains a provision on the accountability of
the SRB to the European Parliament, the Council and the Commission.117 This entails
that the Board has to submit each year a report, shall participate in a hearing before
the competent Committees of the Parliament and shall reply orally or in writing to
questions addressed to it by the European Parliament or the Council.

Resolution procedure in the SRM

The resolution procedure under the SRM Regulation is set out in art.18. This is the
most important provision on the decision-making process in the SRM. There are some
phases for the resolution of significant credit institutions to take place. These are
summarised as follows. *J.I.B.L.R. 701
Firstly, the ECB signals when a "significant" bank or a cross-border group in a
participating Member States is failing or likely to fail. The first appraisal can also come
by the SRB which, under particular circumstances, can trigger the process by its own
initiative.118
Secondly, the SRB determines that the institution is failing or likely to fail, there is no
reasonable prospect of a timely private sector rescue and that a resolution action is in
 Page16

the public interest.119

Thirdly, the SRB, with the support of the relevant national resolution authorities,
prepares and adopts the resolution scheme.120 The arrangement adopted in art.18 is
that the ultimate assessment of discretion is the Commission’s responsibility.
However, the SRB is already exercising discretion in assessing the use of resolution
tools.
The Commission endorses the resolution scheme or can object to its discretionary
aspects.121 In addition, the Council has a right to object, but only on a proposal from
the Commission and on a limited number of matters (the existence of a public interest
or a material modification of the amount of the Single Fund to be used in a specific
resolution action).
In practice, the Commission and the Council have only 24 hours from the assessment
of the resolution scheme by the SRB in which to object. In all, then, the procedure
should take place within 24 hours or, at most, 32 hours (eight hours being the period
for the SRB to modify the scheme in response to Commission or Council objections).
The procedure set out in the SRM Regulation is the outcome of fierce political
negotiations on the role of the SRB, the Commission and the Council. Three remarks
should be made.
First, it appears that the procedure to approve the exercise of resolution powers is
lengthy and burdensome and will only be activated if no alternative solution is found.
Nonetheless, it remains open the question to know "what" other solution might be
found which do not involve public support. When an institution is likely to resolve there
might be the risk of national divergent interventions which avoid a truly supranational
procedure.
Secondly, the national imprinting in the procedure may prevent resolution from taking
place as the Council may reject the resolution scheme if it is against public interest.
However, the Commission might decide whether to call the Council or not and in so
doing the Commission might be willing not to involve the Council.
Thirdly, the Commission exercises excessive power on the endorsement of the SRB
resolution scheme. The Commission’s proposal placed the SRB as the last
supranational "arbiter" over the resolution procedure as the SRB would have adopted
a resolution decision addressed at national authorities on how to proceed.122 This
procedure would have conferred more effectiveness to the supranational resolution
procedure.

Investigatory and sanctioning powers

An important aspect in the context of the SRM is the empowerment on the SRB to
exercise investigatory and sanctioning powers for resolution purposes. The SRB is
given the power to investigate and sanction market participants in certain
circumstances.
The power to investigate comprises the power to request information under art.34, the
power to carry out general investigation under art.35 and the power to conduct on-site
inspections under art.36.
The SRM Regulation provides also for penalties to be applied to entities subject to
resolution. Fines shall be applied in cases where entities do not supply information
requested, they do not submit to a general investigation or an on-site inspection or
where they do not comply with the decisions of resolution addressed to them by the
board.123 Conversely, the Board shall adopt periodic penalty payments in order to
compel:
 Page17

•
an entity to comply with a decision to request information;

•
a person to supply complete information; *J.I.B.L.R. 702

•
a person to submit to an investigation and in particular to produce complete
records, data, procedures or any other material required and to complete and
correct other information provided in an investigation launched by a decision
taken pursuant to that article; and

•
a person to submit to an on-site inspection.124

Financing the resolution in the SRM

The rules in the SRM Regulation

The creation of the Single Fund is an essential piece of the SRM. The Single Fund will
progressively take over national resolution financing arrangements and will constitute
the main financing arrangement to deal with resolution expenses within the SRM.
The creation of the Single Fund is mandated by the need to:
"ensure a uniform administrative practice in the financing of resolution and to avoid
the creation of obstacles for the exercise of fundamental freedoms or the distortion of
competition in the internal market due to divergent national practices." 125
This means that the Single Fund will be a new European fund to assist the competent
authority in the exercise of resolution. This will ensure the availability of medium-term
funding support while a credit institution is being restructured.
Preliminary, it is important to specify that different financial arrangements may apply
to the funding of the Single Fund. Under the SRM Regulation, the financing resources
for resolution can be of four kind: ex ante contributions from of each institution;
extraordinary ex post contributions from the institution; voluntary borrowing between
financing arrangements; and alternative funding means.
Ex ante contributions are the normal form of annual financial contribution to the Single
Fund. The target level for the Fund is indicated as at least 1 per cent of the amount of
deposits of all credit institutions authorised in the participating Member States.126 The
resources will be taken directly by covered entities as a form of bank levy.
The individual contribution to create the Single Fund shall not exceed 12.5 per cent of
the target level each year.127 The calculation of the contribution of each individual
institutions consists of a flat contribution based on the institution’s pro rata share of
the liabilities of all institutions in the participating Member States and a risk-adjusted
contribution based on the institution’s own risk profile.128 This means that the Single
Fund will be established with the progressive transfers of ex ante contributions raised
at national level. The target level will be achieved in a period no longer than eight
 Page18

years since the entry into force of the provision on the constitution of the Single Fund.
129
Upon completion of the ex ante contributions, the Single Fund shall reach 55 billion
euro once full mutualisation takes place.
The SRF can be used for a range of purposes such as providing guarantees, making
loans, purchasing assets, and providing compensation to shareholders or creditors. It
can be used to confer capital to a bridge bank or asset management vehicle, but it
must not be used directly to absorb the losses of a failing institution or for direct
recapitalisation.130
Extraordinary ex post contributions can be raised to cover shortfalls and the SRB may
also borrow or arrange other means of support to augment the funding available to the
Single Fund.131
Voluntary borrowing arrangements consist of financial borrowing agreements with the
non-participating Member State national funds.132 In practice these would involve
borrowed resolution funds from non-participating Member States. *J.I.B.L.R. 703
Finally, alternative funding means consist of borrowings or other forms of support from
institutions, financial institutions or other third parties in case the amount raised are
not sufficient.133 At present, it remains unclear what sources would constitute
alternative funding means in the SRM and, more in particular, if the European Stability
Mechanism would serve such function.

The rules in the Intergovernmental Agreement

The Single Fund is aimed to provide the resolution financing within the SRM. The key
political players involved in the adoption of the SRM framed a separate
intergovernmental agreement to address some elements which were deemed to fall
outside the scope of the SRM Regulation.
As indicated in the SRM Regulation Preamble this agreement is limited to those
specific elements "concerning the Fund that remain within the competence of Member
States" and, as such, it is "designed as complementary to the Union legislation on
banking resolution and as supportive and intrinsically linked to the achievement of
Union policies".134 The main objective of the intergovernmental agreement is to
regulate the way in which the establishment of national compartments will be
progressively mutualised over a transitional period of eight years to give full financial
capacity to the Single Fund.
The Single Fund will be funded by national compartments which will be merged over
time during the transitional period. These are national financing structures which will
collect ex ante contributions from covered entities each year.135 The use of the
compartments is subject to a progressive mutualisation with a view to make it possible
for the Fund to conduct effective operations and functioning after eight years.
The purpose and scope of the agreement is spelled out in art.1 which states that the
Agreement aims to regulate the transfer of the contributions raised at national level to
the Single Fund; and to allocate, during a transitional period, the contributions that all
subject entities raise at national level to different compartments.
Article 3 sets out the commitment on the part of participating Member States to
transfer irrevocably to the Single Fund the contributions that they collect from the
covered entities.
Article 5 provides for the progressive mutualisation of the Single Fund and the
"waterfall" steps for the progressive mutualisation of the national compartments.136
Article 5(3) sets out that all the compartments shall be merged and shall cease to
exist after the elapsing of the transitional period. Hence, at the end of the transitional
period the Single Fund will be fully capitalised.
 Page19

Other aspects of the Intergovernmental Agreement comprise the possible participation

(and their contribution to the Fund) of the non-euro area Member States into the SRM
137
; the bail-in conditionality138; and the compensation provisions to the benefit of those
Member States which do not participate in the SRM.139 All these aspects are
complementary but equally important to the setting-up of the Single Fund over the
transitional period.
In sum, the intergovernmental agreement stands out as an international agreement
aiming to regulate the set-up of funding arrangements from the national compartments
to the Single Fund at European level. The choice to adopt an intergovernmental
agreement is political in nature and can be criticised from the point of view of its
legitimacy as TFEU art.114 was clearly a sufficient legal basis for such purposes.
In sum, the intergovernmental agreement remains an essential—yet legally
criticisable—component of the SRM.

The entry into force of the SRM: transitional rules

The final provisions in the SRM Regulation state that the SRM Regulation will enter into force as from
January 1, 2016.140 However, this timing refers to the bail-in tool and to the progressive establishment
of the Single Fund. In fact, most of the institutional rules will apply earlier (by way of exception) as
from 2014 or 2015. This is, in particular, the case for the provisions relating to the *J.I.B.L.R. 704
cooperation between the Board and the national resolution authorities for the preparation of the
resolution plans as well as those relating to the establishment of the Board and the SRM.141
Conversely, the full mutualisation of the Single Fund will be completed eight years after its
establishment, hence in January 2024.
On a critical note, the presence of a transitory period—yet very long for the full constitution of the
Single Fund—will create uncertainties to policy enforcers and market operators. This is true especially
for the progressive development of the Single Fund.

Conclusion
This article has examined the newly adopted reform to establish the Single Resolution Mechanism in
the wider context of the European regime to establish a new bank resolution regimes and rules.
The BRRD sets a new stage in the process of establishment of a crisis-management legal regime for
banks as it provides new rules on the resolution tools for credit institutions in Europe. As the ECB
indicates, the BRRD:
"is … the most crucial regulatory change in Europe in relation to breaking the bank-sovereign nexus.
It represents a true paradigm change, ending the culture of bail-out and ushering in a culture of
bail-in." 142
The establishment of resolution tools marks a new era for the regulation of resolution that aims to
break the vicious circle between the sovereigns and the banks as well as to avoid taxpayers’ bailouts.
At the same time, the SRM reform has been the object of fierce negotiations between key political
players. The final adoption of the SRM Regulation is a welcome development in European banking
regulation. The SRM will eventually establish:
"a credible mechanism to proceed swiftly, orderly and efficiently in the resolution of banks that have
attained the point of non-viability." 143
This may be achieved in a system where there are four main constituents:
"(a) a single system, (b) a single authority with efficient decision-making procedures (c) a single fund
and (d) a backstop facility for bridge financing." 144
The creation of a European-wide substantive framework for the resolution of credit institutions is an
important breakthrough in EU law. Similarly, the establishment of a single institutional framework for
 Page20

regulating resolution in participating Member States constitutes an important achievement for the
functioning of the internal market in financial services as well as for the achievement of financial
stability in Europe. Overall, it appears a very welcome reform especially in light of the debt and
sovereign crisis.
However, critical questions are still open to debate as regards both the BBRD and the SRM. Three
main problems are raised.
Firstly, it is arguable whether the BRRD minimum harmonisation framework will be effective in
equipping national jurisdictions with an enforceable cross-border system of bank resolution and in
allowing Member States to implement the most important provisions of the Directive in a harmonised
fashion. The BRRD rules are very complex and raise questions on their interpretation in practice.
Secondly, it is still questionable whether the SRM will work effectively especially because of the
limited SRB mandate. The complex and adamantine decision-making process as well as the limited
extent of discretionary powers to the SRB make the SRM a problematic legal framework for speedy
and efficient "supranational" bank resolutions. Moreover, the SRB might risk being substantively
constrained between the Commission, the ECB, the Council and national authorities.
Thirdly, it is debatable whether the Single Fund will be ready to provide the required financing
resources for resolution and to create appropriate certainties in the financial markets. Its set-up
remains questionable as shown by the long transitional period for the pooling together of the financial
resources, by the methodology to raise contributions to resolution financing arrangements as well as
by the limited financial resources available, especially at the beginning.
Overall, it is uncertain whether the BRRD will be efficient in establishing efficient substantive rules for
the resolution of credit institutions and whether the SRM will work as a centralised "supranational"
system for orderly resolution in participating Member States. Nonetheless, the adoption of a
European resolution regime remains a cornerstone reform in Europe to stabilise financial markets and
to limit the use of public resources to bail out distressed credit institutions.
Gianni Lo Schiavo
PhD Researcher, King's College, London; Research Fellow, University of Florence, Florence
J.I.B.L.R. 2014, 29(11), 689-704

1. On the state of play of the SSM see http://www.ecb.europa.eu/ssm/html/index.en.html [Accessed August 24, 2014].

2. On the state of play of the SRM see

http://ec.europa.eu/internal_market/finances/banking-union/single-resolution-mechanism/index_en.htm [Accessed
August 24, 2014].

3. Council Regulation 1346/2000 on insolvency proceedings [2000] OJ L160/1.

4. Directive 2001/24 on the reorganisation and winding up of credit institutions [2001] OJ L125/15.

5. See Council Regulation 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating
to the prudential supervision of credit institutions [2013] OJ L287/63.

6. Regulation 806/2014 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 Resolution Fund and
amending Regulation 1093/2010 [2014] OJ L225/1 (SRM Regulation).

7. International agreement on the transfer and mutualisation of contributions to the Single Resolution Fund at
http://register.consilium.europa.eu/doc/srv?l=EN&f=ST%208457%202014%20INIT [Accessed August 24, 2014].

8. Directive 2014/59 and amending Council Directive 82/891, and Directives 2001/24, 2002/47, 2004/25, 2005/56,
2007/36, 2011/35, 2012/30 and 2013/36, and Regulations 1093/2010 and 648/2012 [2014] OJ L173/190.

9. See Seraina Grünewald, The Resolution of Cross-Border Banking Crises in the European Union. A legal study from the
Perspective of Burden Sharing (Kluwer, 2014).

10. Commission Communication of May 11, 1999, "Implementing the framework for financial markets: action plan"
COM(1999) 232 final.
 Page21

11. Directive 2001/24 on the reorganisation and winding-up of credit institutions [2001] OJ L 125/15.

12. For a comprehensive analysis of this Directive see Georgina Peters, "Developments in the EU" in Rosa Lastra,
Cross-border Bank Insolvency, (Oxford University Press, 2011), pp.128–160.

13. Rishi Goyal, A Banking Union for the euro area (IMF Staff discussion note, 2013), p.16. See generally Gianni Lo
Schiavo "State aids and credit institutions in Europe: what way forward?" E.B.L. Rev. 2014, 25(3), 427-457.

14. Report by the High-Level Group on Financial Supervision in the EU (de Larosière Report), Brussels, February 25, 2009.

15. See Emilios Avgouleas, Governance of Global Financial Markets. The Law, the Economics, the Politics (Cambridge:
Cambridge University Press, 2012), 394 onwards.

16. Communication from the Commission to the European Parliament, the Council, the European Economic and Social
Committee, the European Court of Justice and the European Central Bank, "An EU Framework for Cross-Border Crisis
Management in the Banking Sector" October 20, 2009 COM(2009) 561 final.

17. Communication from the Commission to the European Parliament, the Council, the European Economic and Social
Committee, the European Court of Justice and the European Central Bank, "An EU Framework for Cross-Border Crisis
Management in the Banking Sector" October 20, 2009 COM(2009) 561 final, pp.2–3.

18. European Commission, "An EU framework for crisis management in the financial sector" (2010) COM 579.

19. See, "Commission seeks views on possible EU framework to deal with future bank failures" Press Release IP/11/10,
January 6, 2011 at http://europa.eu/rapid/press-release_IP-11-10_en.htm?locale=en [Accessed August 24, 2014].

20. European Commission, Paper on the debt write-down tool—bail-in, at

http://ec.europa.eu/internal_market/bank/docs/crisis-management/discussion_paper_bail_in_en.pdf [Accessed August
24, 2014].

21. Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and
resolution of credit institutions and investment firms and amending Council Directives 77/91 and 82/891, Directives
2001/24, 2002/47, 2004/25, 2005/56, 2007/36 and 2011/35 and Regulation 1093/2010, COM/2012/0280 final, Brussels,
June 6, 2012.

22. See Council of the European Union, "Council agrees position on bank resolution" June 27, 2013.

23. See "Commissioner Barnier welcomes trilogue agreement on the framework for bank recovery and resolution"
MEMO/13/1140, December 12, 2013.

24. See European Commission, "Finalising the Banking Union: European Parliament backs Commission’s proposals"
Statement/14/119, April 15, 2014.

25. See in this sense Seraina Grünewald, The resolution of cross-border banking crises in the European Union, pp.13–15.

26. BRRD art.2 para.1(1).

27. BRRD art.2 para.1(47): normal insolvency proceedings are defined as "proceedings which entail the partial or total
divestment of a debtor and the appointment of a liquidator or an administrator normally applicable to institutions under
national law and either specific to those institutions or generally applicable to any natural or legal person".

28. See Commission proposal, art.2 para.1 defining resolution "as the restructuring of an institution in order to ensure the
continuity of its essential functions, preserve financial stability and restore the viability of all or part of that institution".

29. BRRD Commission Proposal, Explanatory Memorandum 4.3.

30. BRRD art.2.

31. BRRD art.1 para.2.

32. See BRRD art.3.

33. BRRD Recital 15.

34. BRRD art.3 para.3.

35. See in this sense Seraina Grünewald, The resolution of cross-border banking crises in the European Union, p.89.

36. For a more general picture on preventive resolution powers see Jacopo Carmassi et al, "Overcoming too-big-to fail: a
regulatory framework to limit moral hazard and free riding in the financial sector" CEPS Report, Brussels, 2010.

37. See BRRD Annex Section A.

 Page22

38. BRRD art.5.

39. BRRD art.6 para.2(a).

40. BRRD art.6 para.2(b).

41. BRRD art.6 para.6.

42. BRRD art.10.

43. BRRD art.15.

44. However, these powers are not absolute. See the limits under BRRD Recital 29.

45. BRRD art.17 para.5.

46. See among others BRRD art.4 para.6 and 11, art.5 para.10, art.6 para.8, art.7 para.8, art.10 para.9, art.15 para.4.

47. BRRD Recital 40.

48. BRRD art.27.

49. BRRD art.29.

50. BRRD art.29 para.8.

51. BRRD art.29 para.7.

52. BRRD art.27 paras 4 and 5.

53. See the definition as resulting from the objectives under BRRD art.31 para.2.

54. BRRD art.31 para.3.

55. BRRD art.32 para.1. Public interest under condition (c) is defined as a situation where a resolution action achieves and
is proportionate to one or more of the resolution objectives, while the winding up of the institution pursuant to normal
insolvency proceedings would not meet the same resolution objectives. See BRRD art.32 para.5.

56. See Seraina Grünewald, The resolution of cross-border banking crises in the European Union, p.89.

57. BRRD Commission proposal art.27 para.5.

58. See BRRD Recital 50.

59. BRRD art.38 para.1.

60. BRRD art.38 para.3.

61. BRRD art.39.

62. BRRD art.40 para.1.

63. BRRD art.40 para.2.

64. BRRD art.40 para.5.

65. BRRD art.42 paras 1 and 2.

66. BRRD Recital 66.

67. See Seraina Grünewald, The resolution of cross-border banking crises in the European Union, pp.42–45.

68. BRRD Recital 47.

69. Commission Communication 2010, p.5.

70. For a practical analysis of bail-in see Chris Bates and Simon Gleeson, "Legal aspects of bail-ins" Clifford Chance, May
2011, pp.7–10.

71. BRRD art.44 para.3.

72. Commission, Communication, 11.

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73. Discussion Paper on the debt write-down tool, 3.

74. BRRD art.45.

75. BRRD art.46.

76. BRRD art.48 para.2.

77. Common Equity Tier 1 as defined in the CRR arts 26 and following.

78. BRRD art.48 para.1.

79. See BRRD art.56.

80. BRRD arts 53 and 54.

81. BRRD art.130.

82. BRRD art.99.

83. BRRD art.103.

84. BRRD art.104.

85. BRRD art.105.

86. BRRD art.102.

87. BRRD art.101.

88. See Proposal for a Single Resolution Mechanism for the Banking Union—frequently asked questions, MEMO/13/675,
July 10, 2013.

89. Rishi Goyal, "A Banking Union for the Euro Area" IMF Discussion Note (2013), p.16.

90. Communication from The Commission to the European Parliament and the Council, "A Roadmap towards a Banking
Union", COM/2012/0510 final.

91. Communication from The Commission to the European Parliament and the Council, "A Roadmap towards a Banking
Union", COM/2012/0510 final, 3.2.

92. Four Presidents’ Report, December 5, 2012, p.7 at

http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/134069.pdf [Accessed August 24, 2014].

93. Proposal for a 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 1093/2010 of the European Parliament and of the Council, COM/2013/0520 final.

94. ECOFIN Council, Council agrees general approach on Single Resolution.Mechanism at

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/140190.pdf [Accessed August 24, 2014].

95. SRM Regulation art.1.

96. SRM Regulation art.1.

97. Regulation 1093/2010 establishing a European Supervisory Authority (European Banking Authority), amending
Decision 716/2009 and repealing Commission Decision 2009/78 [2010] OJ L331/12, Regulation 1094/2010 establishing
a European Supervisory Authority (European Insurance and Occupational Pensions Authority), amending Decision
716/2009 and repealing Commission Decision 2009/79 [2010] OJ L331/48, Regulation 1095/2010 establishing a
European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and
repealing Commission Decision 2009/77 [2010] OJ L331/84, all in Directive 2010/78 amending Directives 98/26,
2002/87, 2003/6, 2003/41, 2003/71, 2004/39, 2004/109, 2005/60, 2006/48, 2006/49 and 2009/65 in respect of the
powers of the European Supervisory Authority (European Banking Authority), the European Supervisory Authority
(European Insurance and Occupational Pensions Authority) and the European Supervisory Authority [2010] OJ
L331/120.

98. Regulation 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation
648/2012 [2013] OJ L176/1; Directive 2013/36 on access to the activity of credit institutions and the prudential
supervision of credit institutions and investment firms, amending Directive 2002/87 and repealing Directives 2006/48
and 2006/49 [2013] OJ L176/338.

99. Regulation 648/2012 on OTC derivatives, central counterparties and trade repositories [2012] OJ L201/1.
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100. Regulation 236/2012 on short selling and certain aspects of credit default swaps [2012] OJ L86/1.

101. TFEU art.127 para.6.

102. SRM Regulation art.4.

103. See Regulation 1024/2013 art.2 and art.7.

104. The SRM Regulation refers to the distinction between "significant" and "less significant" credit institutions in Regulation
1024/2013 art.6.

105. SRM Regulation art.7 para.2 letter (a).

106. SRM Regulation art.7 para.3 second sentence.

107. SRM Regulation arts 8 and 9.

108. SRM Regulation art.13.

109. SRM Regulation arts 24, 25, 26, 27. See above for the substantive aspects of the new resolution tools in the BRRD.

110. See above on BRRD resolution tools.

111. SRM Regulation art.42.

112. SRM Regulation art.48.

113. SRM Regulation art.43.

114. SRM Regulation arts 49 onwards.

115. SRM Regulation art.50.

116. See SRM Regulation arts 53 onwards.

117. SRM Regulation art.45.

118. SRM Regulation art.18 para.1.

119. SRM Regulation art.18 para.1.

120. SRM Regulation art.18 para.6.

121. SRM Regulation art.18 para.7.

122. See Commission proposal art.20 and Explanatory Memorandum 4.1.5.

123. SRM Regulation art.38.

124. SRM Regulation art.39.

125. SRM Regulation Recital 19.

126. SRM Regulation art.69.

127. SRM Regulation art.70.

128. SRM Regulation art.70.

129. SRM Regulation art.77.

130. SRM Regulation art.76.

131. SRM Regulation art.71.

132. SRM Regulation art.72.

133. SRM Regulation art.73.

134. Intergovernmental Agreement Preamble 11.

135. Intergovernmental Agreement art.5.

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136. See further Intergovernmental Agreement art.5 para.1 letters (a), (b), (c), (d) and (e).

137. Intergovernmental Agreement art.8. The UK and Sweden are the only non-euro area Member States that did not sign
the Intergovernmental Agreement.

138. Intergovernmental Agreement art.9.

139. Intergovernmental Agreement art.15.

140. SRM Regulation art.99 para.2.

141. SRM Regulation art.99 paras 3, 4 and 5.

142. Vítor Constâncio, "Banking Union and European integration" May 12, 14, Speech at
http://www.ecb.europa.eu/press/key/date/2014/html/sp140512.en.html [Accessed August 24, 2014].

143. Vítor Constâncio, "Banking Union and European integration" May 12, 14.

144. Vítor Constâncio, "Banking Union and European integration" May 12, 14.

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