Graham Bishop's Blog: SRM – Deal cobbled together?

18 March 2014

The SRM decision is coming about in a very unsatisfactory way for a matter that is said by all concerned to be crucial to the continuing stability of the euro. What is all the sound and fury actually about?

In reality, the Commission already controls bank resolution until the SRM comes into force to the extent that any state aid is involved – and that function continues. So what will actually change - in all probability - for any significant cases? The complexity of the proposal, and the rush, is a bad way to make law but it can still be done – and then the scheduled review in 2016 can sweep up any nasty failings that do crystallise in the interim.

Bloomberg reported German Finance Minister Schäuble as saying “I can say the European Parliament has to make a lot of moves, otherwise we will not get a decision …and then we will have no regulation". Council has given the Greek Presidency some latitude in negotiations but there is little evidence yet that it has given sufficient. The pressure on the negotiators is being ratcheted up by the deadline of the Parliament’s dissolution, but several factors should be put into the equation of whether a deal should be done tomorrow:

• The run of reports about banks raising capital, passing national stress tests, etc. continues unabated. Though the losses now being reported look daunting, the shares seem to go up afterwards so bank shareholders continue their insouciance about the risk of the 'huge losses' that seem to haunt the politicians. If shareholders are right, the risk of major resolutions is quite modest.

• Last August, the Commission amended State aid crisis rules for banks. In principle, a bank needs to work out a restructuring plan, including a capital raising plan, which convincingly demonstrates how it will become profitable in the long term before it can receive recapitalisation measures. If the viability of the bank cannot be restored, an orderly winding down plan needs to be submitted instead. This announcement did not generate much political heat at the time but in practice is very far-reaching, as it changed instantly the ability of governments to contribute to the re-capitalisation of banks.
  
  Normally this is a crucial element of a rescue plan so, in reality, the Commission controls bank resolution until the SRM comes into force. In fact, the Commission proposal explicitly states that “the State aid competences of the Commission will be preserved in all resolution cases involving support which qualifies as State aid". If there are any major bank resolutions in the near future, it is almost inevitable that State aid will have a role until 'bail-in’ comes into force in 2016. So the Commission will run the procedure anyway. This could deal with the Parliament’s wish to have a Union body run the resolution process. The Parliament called for this to be the ECB but the Commission formally taking the decision should be acceptable as there will be no problem of delegated powers being challenged (under the famous Meroni doctrine).

• Finally, the proposal calls for a complete “review by 31 December 2016, and subsequently every five years thereafter, the Commission shall publish a report on the application of this Regulation, with a special emphasis on monitoring the potential impact on the smooth functioning of the internal market". Assuming the AQR does not reveal a swathe of banks that need resolution during 2015, the SRM may hardly be used except for small banks.

If the detractors of the complex procedure turn out to be right, then the SRM will be subject to a root and branch review almost immediately. With the benefit of hindsight, a calmer approach should result in a much improved, and thus credible, mechanism. So perhaps Parliament should hold its nose and let this through tomorrow.

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Graham Bishop - Consultant on EU Integration - Political, Financial, Economic, Budgetary

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