Single Resolution Mechanism

The 2007–08 financial crisis showed that banks in distress, especially systemically important institutions and those with cross-border activities, could not be wound up under national insolvency procedures because that could put financial stability at risk. At that time, no rules and instruments were in place to ensure the orderly market exit or restructuring of banks. There were no provisions to resolve failing systemically important banks, i.e. for maintaining certain “critical functions” (banking services that are critical to the economy, such as payment services and lending). For this reason, many banks were rescued using public funds. The bank resolution system was designed to ensure that shareholders and creditors pay for the failure of banks (with minimal cost to taxpayers), when authorities determine that a failing bank cannot be wound up under national insolvency proceedings without harming public interest and causing financial instability.

As such, the Single Resolution Mechanism (SRM) complements the Single Supervisory Mechanism (SSM). The SRM is based on two legislative acts:

  • the Single Resolution Mechanism Regulation (SRMR)
  • and the Bank Recovery and Resolution Directive (BRRD), which was transposed into Austrian law by the Austrian Bank Recovery and Resolution Act (BaSAG)

At the heart of the SRM’s institutional framework is the Single Resolution Board (SRB), which controls the Single Resolution Fund (SRF).

Single Resolution Board

The Single Resolution Board (SRB) is an EU agency with legal personality that has its seat in Brussels. On January 1, 2016, it became fully operational, taking over its responsibilities in resolution planning (including assessing and facilitating an institution’s resolvability) and the resolution of institutions that are failing or likely to fail.

Similar to the SSM, the SRM is organized as a decentralized system: There is a clear division of tasks between the SRB and the national resolution authorities. In Austria, the national resolution authority is the Financial Market Authority (FMA). The SRB is responsible for those institutions that are directly supervised by the ECB (significant institutions), for cross-border groups, and for banks that receive SRF funding. All other institutions are within the remit of the national resolution authorities.

In performing its tasks, the SRB cooperates closely with the national resolution authorities.

Single Resolution Fund

In addition to the SRB, a Single Resolution Fund (SRF) was created to ensure the efficient application of resolution tools for resolving failing banks, after other options, such as the bail-in tool, have been exhausted. The SRF is owned and managed by the SRB and is financed by contributions from the banking sector, with the level of a bank’s contribution depending on its size and risk profile. In 2023, the SRF for the first time reached its target size of 1% of covered deposits of all banks in EU member states participating in the SRM.

EU bank resolution legislation

The Bank Recovery and Resolution Directive (BRRD) provides the regulatory framework for crisis management in the EU financial sector. It establishes uniform rules for bank resolution across Europe, addressing three crucial areas: prevention, early intervention and resolution.

The BRRD was transposed into Austrian law by the BaSAG.

Prevention:
Banks must have recovery plans in place in which they explain what measures they would take if their financial situation were to deteriorate. These recovery plans are reviewed and assessed by the competent supervisory authorities. In parallel, the resolution authorities (in Austria, the FMA) draw up resolution plans in which they describe how an institution can be resolved or restructured in an orderly way. If the resolution plans reveal potential obstacles to a successful resolution, the institution concerned will be requested to take measures to remove them (e.g. by changing its legal or operational structure, selling off certain assets, limiting certain activities).

Early intervention:
Supervisory authorities are entrusted with far-reaching powers of intervention. They can intervene early, not only when requirements have been breached but also when such a breach is likely. For instance, institutions may be required to hold additional capital and implement measures and arrangements set out in the recovery plan.

Resolution:
​​​​​​​If prevention measures and early intervention prove ineffective, institutions can either undergo national insolvency proceedings or be resolved. Resolution can only be done under specific circumstances: The institution is failing or likely to fail, e.g. because it is in financial difficulties; there are no feasible alternative private sector measures available to rescue the institution; and resolution is in the public interest. If these conditions are not met, the institution must be wound up under normal insolvency proceedings.

The BRRD provides resolution authorities with a number of specific resolution tools. The core element of the harmonized legal framework is the bail-in of shareholders and creditors. The bail-in tool cannot be applied, however, to deposits protected by deposit guarantee schemes (DGSs), secured or collateralized liabilities and liabilities to employees of the failing institution.

Additional resolution instruments and powers include the sale of the institution under resolution, the transfer of assets to a bridge institution, and the transfer of assets to an asset management vehicle (“bad bank”).

Implementation in Austria

Austria implemented the BRRD by adopting the BaSAG, thereby creating a national legal framework for how to deal with banks that are failing or likely to fail.  The BaSAG is aimed at ensuring an orderly market exit of banks without causing substantial negative impacts for financial stability while protecting depositors and other customers and keeping the taxpayers’ burden to a minimum.

Based on the BRRD, the BaSAG contains the above-mentioned provisions that require banks to draw up recovery plans, mandate the resolution authority to develop resolution plans and allow supervisors to intervene early in response to financial and economic problems (early intervention).

The provisions on recovery plans and early intervention are addressed to supervisory authorities, while the provisions on bank resolution are relevant to resolution authorities. The BaSAG mandates the FMA as Austria’s competent resolution authority. In this capacity, it cooperates closely with the OeNB on specific issues; this arrangement follows the dual approach pursued in supervision.