Failing banks and investment firms: rules and procedures

SUMMARY OF:

Regulation (EU) No 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

WHAT IS THE AIM OF THE REGULATION?

Regulation (EU) No 806/2014 sets out the structure of the Single Resolution Board (SRB). It is made up of a chair, a vice-chair, four permanent members and the authorities from all participating European Union (EU) Member States. It operates in the following ways.
- Executive sessions attended by the chair, four further independent full-time members, two permanent observers appointed by the European Commission and the European Central Bank (ECB) and, in specific cases, representatives of national resolution authorities of participating countries or other observers.
- Plenary sessions attended by the full board, as above, and representatives of all national resolution authorities of participating countries.
It introduces uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms through a Single Resolution Mechanism and the use of a Single Resolution Fund.
While the regulation applies to euro-area countries, other Member States are also allowed to participate.
Amending Regulation (EU) 2019/877 incorporates into EU legislation international standards on loss absorption and recapitalisation for banks set by the Financial Stability Board.
Amending Regulation (EU) 2021/23 excludes central counterparties from the scope of Regulation (EU) No 806/2014, to avoid duplication of requirements.

KEY POINTS

The Single Resolution Board

When a bank is deemed to be in a crisis situation, the board may put together a resolution scheme that is passed on to the Commission for formal approval. If the Commission has no objections, the scheme should be adopted within 24 hours. In some specific cases, the Commission can request that the Council of the European Union approve its amendments to the scheme.
A resolution scheme using less than €5 billion from the Single Resolution Fund is decided in executive session board meetings, which only include the national resolution authority from the Member State where the bank in crisis is located.
When more than €5 billion is needed, decisions are taken by the plenary session.

The Single Resolution Fund

Funded by banks from 2016 onwards, the Single Resolution Fund amounts to 1% of insured deposits in all participating Member States (for a total of around €55 billion) in 2024. Along with Regulation (EU) No 806/2014, an intergovernmental agreement was signed between participating Member States. This allows for:
- the transfer of banks’ contributions to national compartments of the fund; and
- the progressive mutualisation* of those contributions in the fund.

Single Resolution Mechanism

Together, the SRB and the Single Resolution Fund make up the Single Resolution Mechanism. This system and the Single Supervisory Mechanism, which gives supervisory powers to the ECB, are the foundations of the EU’s banking union, which applies to euro-area countries. Other Member States may also participate.

Banks covered

The SRB is responsible for the resolution of all banks that are supervised by the ECB. As in the case of the Single Supervisory Mechanism, the SRB is directly responsible for the largest banks that are directly supervised by the ECB and for other cross-border banks.
Other banks remain under the direct responsibility of their national resolution authorities. However, they remain under the indirect responsibility of the SRB, and the SRB may step in if their resolution scheme requires the use of the Single Resolution Fund.

Calculation of individual institutions’ contributions

An implementing act, Regulation (EU) 2015/81, lays down rules relating to the obligation of the SRB to calculate the contributions for individual institutions and the methodology for their calculation.

Loss-absorbing and recapitalisation capacity of credit institutions and investment firms

In incorporating international standards on loss absorption and recapitalisation into EU law for global systemically important banks and in amending the existing rules for other banks, amending Regulation (EU) 2019/877 sets out the rules for banks to deal with losses by ensuring that they hold enough capital and other liabilities to minimise as much as possible any taxpayer bailouts.

FROM WHEN DOES THE REGULATION APPLY?

Regulation (EU) No 806/2014 has applied since 1 January 2016. However, some rules, such as those relating to the start of the board’s activities, have applied since 1 January 2015.
Amending Regulation (EU) 2019/877 has applied since 28 December 2020.

BACKGROUND

For more information, see:

Single Resolution Mechanism (European Commission)
Single Supervisory Mechanism (European Commission).

KEY TERMS

Mutualisation. The process by which the costs of restructuring are shared by the participating banks.

MAIN DOCUMENT

Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 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 (EU) No 1093/2010 (OJ L 225, 30.7.2014, pp. 1–90).

Successive amendments to Regulation (EU) No 806/2014 have been incorporated into the original text. This consolidated version is of documentary value only.

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