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SRM: What To Expect From A European Banking Union

By Mani
Updated on

A successful Single Resolution Mechanism (SRM) can be key in building confidence in the euro, in the banks of the Eurozone and hence aiding growth in Eurozone economies, notes PwC in its report.

The SRM board is mandated to be fully operational from January 1st, 2015, points out PwC in its May 2014 report titled “Regulatory Briefing: SRM-What to expect from Banking Union”.

European Parliamentary adoption

The PwC report highlights that the European Parliament adopted all outstanding Banking Union legislation on April 15, 2014, including the Bank Recovery and Resolution Directive (BRRD), the Deposit Guarantee Scheme Directive (DGSD) and significantly, the Single Resolution Mechanism (SRM) Regulation.

The report notes the parliamentary passage of this package of rules provides clarity of intent viz.: resolution of banks in Europe should henceforth be based primarily on ‘bail-in’ of shareholders and creditors rather than ‘bailout’ by sovereigns.

To recapitulate, the concept of the European Banking Union rests on three pillars (i) the Single Supervisory Mechanism (SSM); (ii) the Single Resolution Mechanism (SRM); and (iii) a common system of deposit protection. The SSM is expected to be a strong and independent “supranational supervisor,” a body composed of representatives from the ECB as well as national competent authorities from the euro area. The SRM is a framework for resolving failing banks swiftly and impartially. The third is an introduction of harmonized depositor preference for eligible deposits in the EU.

The PwC report notes the SRM Board is mandated to be fully operational from January 1, 2015. The European Commission is tasked with setting it up and until such time as the SRM Board has the operational capability to implement its own budget, the European Commission will provide necessary support. However, the PwC report believes if the Commission takes up this role, there could be a conflict of interest between the Commission’s different roles, such as endorsing technical standards for BRRD, and preparing delegated acts for both BRRD and BRM versus running the SRM.

Operationalization of SRM

The PwC report points out that the effective operation of the SRM depends on the requirements of the BRRD being adopted into national law: for the next 18 months the SRM Board and national resolution authorities may be operating with a significant degree of legal uncertainty.

The PwC report points out that if its near-term challenges are seen to be satisfactorily met, the SRM could prove an important mechanism for attracting additional EU nations to opt into the SSM/SRM before they join the currency union.

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