The EU legal mechanisms on bank insolvency and resolution.
The global financial crisis of 2008 showed how raptly and forcefully problems in the financial sector can spread. It also indicated the effectiveness of the applying standards and rules of the European Monetary Union (EMU) at that time.
In light of these problems, the main objectives of the European Banking Union (EBU) are:
- To send to all markets a strong signal of unity against a looming financial fragmentation problem that was putting the euro on the ropes to preserve the single market by restoring the proper functioning of monetary policy in the Eurozone through restoring confidence in the European Banking Sector.
- For the European Central Bank (ECB) to assess banks to ensure that the same rules to all credit institution in the future. Rules and principles are adopted by EU after financial crisis to make the financial sector safer.
According to Article 127(1) TFEU, ECB, exercising its task on banking supervision, should identify sources of banking sector risk in cooperation with the national competent authorities (NCAs), to maintain f price stability. ECB can achieve this objective by taking measures that include the setting of interest rates and the supply of liquidity to the banking system
The Key Elements of EBU are the three main pillars. The first pillar is The Single Supervisory Mechanism (SSM), which is the new supervisory role of ECB it makes EU economy stable, help economy to recover, checks the banks if comply with the rules. The second pillar is Single Resolution Mechanism (SRM), which aims at maintaining stability of the financial banking system in EU. This mechanism appears in a case when banks failed or are at risk to fail, thus SRM comes into play with necessary tools to be resolved. The third pillar is the Deposit Guarantee Scheme (DGS), through which the banking system ensures that all deposits up to €100.000 are protected through national Deposit Guarantee Funds all over the EU.
A bank resolution may occur in situations when authorities determine that a credit institution is failing or is at risk to fail and cannot go through the normal insolvency proceedings without intervene and harming the public interest which directly affects the financial stability of the country.
Thus, to control the bank’s failure without interfering with the flow of banking system, authorities use the necessary resolution tools which helps and safeguard the stability and continuity of the bank’s critical functions. Therefore, the aim of these tools is to restore the viability of all the sector of the bank. In the meantime, if any credit institution cannot be made viable, must again go through the normal insolvency proceedings.
In the area of bank insolvency and resolution, the European Commission in coordination with the European Banking Authority introduced new regulatory frameworks and techniques to guide and ensure and demonstrate the impact of application of EU rules.
After the recent financial crisis, the EU adopted a number of measures to harmonise and improve the tools for dealing with bank crises in its member countries.
A new EU directive came into force Directive 2014/59/EU, providing rules for the recovery and resolution of credit institutions and investment firms. This Directive established a framework for recovery and resolution to the credit institutions and all the investments business. This Directive implements and came into force to help any credit institution facing problems, they must have a plan to be able to submit to its national competent authority.
Each national resolution authority has also designed and developed a resolution plan in case recovery plans are not effective anymore, this plan is set out in situation that credit institution run into difficulties and leading to failure. In this scenario, the national competent authority has the power to intervene, for instance to appointing a temporary administrator of the bank.
In addition, national resolution funds provide financial support for banks’ restructuring plans, Each EU Member State need to establish a national resolution fund financed in advance by credit institution and investments firms established in its territory. Thus, these funds are actually used to finance the restructuring of a failing bank. If the banks’s downward spiral continues, then the national authority has the power to minimise the cost of the taxpayers-citizens of the bank’s failure.
The most important factor is that national authorities have the power to require from the private sector to bear the expenses first rather the taxpayers, however the shareholders and the creditors are responsible for the expenses.
The necessity of European Financial Supervision which emerged during the financial crisis due to the fact, many credit institutions were independent bodies without being controlled from any authority. This had as a result that financial stability was not well established.
Supervision through mechanism helps the financial stability and confidence in Europe. Therefore, credit institution create the right condition to financial sector to lend to the real economy and increase growth,
