Calling the Single Resolution Mechanism an “inelegant step in the right direction”, this Commentary singles out the Single Resolution Fund, with its considerable mutualisation of risk, as the key advance – but one that will require changes over time in the extremely complex decision-making mechanisms agreed

Gros, Daniel.

English

Archive of European Integration

 Daniel Gros is Director of the Centre for European Policy Studies. 
CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. 
The views expressed are attributable only to the author in a personal capacity and not to any 
institution with which he is associated. 
Available for free downloading from the CEPS website (www.ceps.eu)  © CEPS 2013 
Centre for European Policy Studies ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ 
http://www.ceps.eu 
The Bank Resolution Compromise: 
Incomplete, but workable? 
Daniel Gros 
19 December 2013 
 
he Finance Ministers of the eurozone have finally agreed to disagree. Their 
compromise solution on the Single Resolution Mechanism (SRM) is clearly incomplete 
and extremely complex. But these problems are likely to be resolved over time given 
that in future the resolution of large banks will be financed by a Single Resolution Fund 
(SRF).  
This common fund constitutes the key advance. It implies a considerable mutualisation of 
risks and will require changes over time in the extremely complex decision-making 
mechanisms agreed today. The intergovernmental nature of the separate SRF Treaty is of 
course not ideal. But there was a real, albeit only ‘tail’ risk that the existing Treaty might not 
have provided a sufficient legal basis for an SRF and a Resolution Board based on the 
Community institutions. But this is also likely to be revisited because the next ten years will 
give ample time to investigate all the legal problems and, hopefully, also allow for a revision 
of the Treaties which would put the banking union on a sound legal basis. 
The decision-making mechanism of the future Resolution Board is so complex that in 
practice it will work quite differently from what one would imagine by looking at the formal 
rules. In an emergency the people with the necessary information will decide and all the 
others who are formally also involved will probably just have to agree. 
Today’s SRM compromise is also incomplete because there is no explicit agreement on how 
to provide the SRF with a backstop in case of a really large crisis. But once the SRF is up and 
running, the incentives will change. At that point the member states participating in the 
SRM/SRF will have a common interest in backing up their common investment in case of 
need. 
It will take some time (ten years) for the SRF to reach its target of €55 billion. But a long 
transition period was unavoidable given that one could not expect the creditor countries to 
accept a mutualisation of the risks from the past. The gradual increase in the degree of 
mutualisation agreed corresponds exactly to the proposal made by Gros & Schoenmaker 
(2012). 
The size of SRF has often been criticised as being insufficient. But this is wrong. A fund of 
€55 billion would be enough to resolve all but the very largest banks in Europe; and would 
also be sufficient to deal with even a systemic crisis in small- to medium-sized countries 
(Spain needed €40 billion from the ESM). 
T
2 | DANIEL GROS 
 
The SRM is of course relatively small compared to the overall assets of SSM banking system 
(which amount to over €25,000 billion) and also small relative to the overall capital of the 
sector (about €1,000 billion). But one cannot expect a resolution fund to deal with the chronic 
undercapitalisation of the European banking sector (see also Gros, 2013). The resources of the 
SRF will be significant relative to the capitalisation of most individual banks (the 30 German 
banks directly under the SSM have on average a capitalisation of only €10 billion). Moreover, 
the resources of the SRF will loom large relative to the budget of any single member state, 
bar the largest ones. 
Any restructuring fund can only be a first-aid kit dealing with a single accident. A systemic 
crisis always requires a fiscal back-up. Implicitly this exists as experience has shown; when 
there was a need for public funds, they were found. The process was of course slow and 
cumbersome and this made the crisis even worse. But this memory is likely to lead to an 
agreement that the natural backstop of the SRF must be the ESM whose full lending capacity 
should be available once the current programmes have ended and been reimbursed.  
This compromise on the SRM is an inelegant step in the right direction. It leaves as many 
problems unresolved as it addresses. The riders on the European bicycle will have to 
continue to pedal for some time.  
 
References 
Gros, Daniel (2013), “The Asset Quality Review and Capital Needs: Why re-capitalise banks 
with public money?”, CEPS Policy Brief No. 311, CEPS, Brussels, 19 December. 
Gros, Daniel and Dirk Schoenmaker (2012), “Cleaning up the mess: Bank resolution in a 
systemic crisis”, CEPS Commentary, CEPS, Brussels, 7 June. 
 


The Bank Resolution Compromise: Incomplete, but workable?  CEPS Commentary, 19 December 2013

 Daniel Gros is Director of the Centre for European Policy Studies. CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. The  views  expressed  are  attributable  only  to  the  author  in  a  personal  capacity  and  not  to  any institution with which he is associated. Available for free downloading from the CEPS website (www.ceps.eu)  © CEPS 2013 Centre for European Policy Studies ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ http://www.ceps.eu The Bank Resolution Compromise: Incomplete, but workable? Daniel Gros 19 December 2013  he  Finance  Ministers  of  the  eurozone  have  finally  agreed  to  disagree.  Their compromise solution on the Single Resolution Mechanism (SRM) is clearly incomplete and extremely complex. But these problems are likely to be resolved over time given that in future the resolution of large banks will be financed by a Single Resolution Fund (SRF).  This common fund constitutes the key advance. It implies a considerable mutualisation of risks  and  will  require  changes  over  time  in  the  extremely  complex  decision-making mechanisms agreed today. The intergovernmental nature of the separate SRF Treaty is of course not ideal. But there was a real, albeit only ‘tail’ risk that the existing Treaty might not have  provided  a  sufficient  legal  basis  for  an  SRF  and  a  Resolution  Board  based  on  the Community institutions. But this is also likely to be revisited because the next ten years will give ample time to investigate all the legal problems and, hopefully, also allow for a revision of the Treaties which would put the banking union on a sound legal basis. The  decision-making  mechanism  of  the  future  Resolution  Board  is  so  complex  that  in practice it will work quite differently from what one would imagine by looking at the formal rules. In an emergency the people with the necessary information will decide and all the others who are formally also involved will probably just have to agree. Today’s SRM compromise is also incomplete because there is no explicit agreement on how to provide the SRF with a backstop in case of a really large crisis. But once the SRF is up and running, the incentives will change. At that point the member states participating in the SRM/SRF will have a common interest in backing up their common investment in case of need. It will take some time (ten years) for the SRF to reach its target of €55 billion. But a long transition period was unavoidable given that one could not expect the creditor countries to accept  a  mutualisation  of  the  risks  from  the  past.  The gradual  increase  in  the  degree  of mutualisation agreed corresponds exactly to the proposal made by Gros & Schoenmaker (2012). The size of SRF has often been criticised as being insufficient. But this is wrong. A fund of €55 billion would be enough to resolve all but the very largest banks in Europe; and would also be sufficient to deal with even a systemic crisis in small- to medium-sized countries (Spain needed €40 billion from the ESM). T2 | DANIEL GROS  The SRM is of course relatively small compared to the overall assets of SSM banking system (which amount to over €25,000 billion) and also small relative to the overall capital of the sector (about €1,000 billion). But one cannot expect a resolution fund to deal with the chronic undercapitalisation of the European banking sector (see also Gros, 2013). The resources of the SRF will be significant relative to the capitalisation of most individual banks (the 30 German banks directly under the SSM have on average a capitalisation of only €10 billion). Moreover, the resources of the SRF will loom large relative to the budget of any single member state, bar the largest ones. Any restructuring fund can only be a first-aid kit dealing with a single accident. A systemic crisis always requires a fiscal back-up. Implicitly this exists as experience has shown; when there was a need for public funds, they were found. The process was of course slow and cumbersome and this made the crisis even worse. But this memory is likely to lead to an agreement that the natural backstop of the SRF must be the ESM whose full lending capacity should be available once the current programmes have ended and been reimbursed.  This compromise on the SRM is an inelegant step in the right direction. It leaves as many problems  unresolved  as  it  addresses.  The  riders  on  the  European  bicycle  will  have  to continue to pedal for some time.   References Gros, Daniel (2013), “The Asset Quality Review and Capital Needs: Why re-capitalise banks with public money?”, CEPS Policy Brief No. 311, CEPS, Brussels, 19 December. Gros, Daniel and Dirk Schoenmaker (2012), “Cleaning up the mess: Bank resolution in a systemic crisis”, CEPS Commentary, CEPS, Brussels, 7 June.  

Cleaning up the mess: Bank resolution in a systemic crisis”,

The Asset Quality Review and Capital Needs: Why re-capitalise banks with public money?”,

http://aei.pitt.edu/46345/1/DG_Bank_Resolution_Compromise.pdf

The Bank Resolution Compromise: Incomplete, but workable? CEPS Commentary, 19 December 2013

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