15 January 2018

Bruegel: Bad news and good news for the Single Resolution Board

A first report on a key plank of the European Union’s banking union reflects on shortcomings thus far, but also suggests that recent improvements might ultimately lead the SRB to be successful in its critical missions.

The establishment in 2015 of the Single Resolution Board (SRB), a new agency of the European Union, counts as one of the most significant European banking reforms of recent years. The SRB was set up to quickly resolve banks that are failing or likely to fail, as part of a wider effort to break the vicious cycle between banks and sovereigns that nearly destroyed the euro area in 2011-12. A first assessment of this reform came up just before Christmas, when the European Court of Auditors (ECA) released a special report on the SRB. The report was discouraging at one level, citing many shortcomings of the new body. But there are also signs that the situation is improving, and that the SRB is on its way towards fulfilling its assigned mission. For both reasons, this report, which is rich in previously undisclosed information and insight, deserves extensive analysis and debate.

The ECA report appears to be the first public in-depth assessment of the SRB, in contrast to the SSM about which detailed reports have already been published by, among others and in chronological order, Bruegel, the ECA itself, Transparency International (as part of a broader assessment of the ECB), and the European Commission. From the report, it seems that most if not all of the ECA’s auditing work was completed by mid-2017. As is customary, the report includes a response from the SRB to the ECA’s observations and recommendations, presumably written in the fall of 2017, but not any response of the ECA to that SRB’s response.

The report contains both bad news and good news for the SRB. First, the bad news: it makes for painful reading. Essentially, the ECA demonstrates that the SRB was not ready to fulfil its mandate in its first year and a half of full authority, up to the end of the auditing phase around mid-2017. Resolution planning was not effectively achieved (§83 of the ECA report). Many crucial components of the planning process were not performed (e.g. §55, §56, §60, §63, §64, §65, §67, §68). The division of labor between the SRB and NRAs was left unsettled (§122). The flow of information from the ECB to the SRB was inadequate (§132). The SRB did not have a framework for making its own assessment on whether a bank is failing or likely to fail, a key task it has under BRRD and the SRM Regulation (§141) – this raises specific questions on whether the SRB played its role, for example, in the decision of precautionary recapitalization of Banca Monte dei Paschi di Siena in June-July 2017. There were no simulation exercises (“dry runs”) of resolution action, except an insufficient one (as it did not involve the NRAs) back in 2016 (§129).

Now for the good news. There are plausible indications of rapid improvements from the sorry state described by the ECA. The SRB’s response does not attempt to dispute the report’s findings and does not denote a siege mentality, which is a good sign. Furthermore, the SRB argues that a number of the problems the ECA identified have been tackled after the end of the auditing phase and are on course to be resolved. According to the SRB, the division of responsibilities with NRAs has recently been clarified, and a new memorandum of understanding with the ECB is expected to improve the inter-institutional information flow. Redundant information requests, e.g. on derivative exposures (§93 of the report), have been streamlined.

Full blog post

ECA_report

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