EXPLANATORY MEMORANDUM

1. CONTEXT OF THE PROPOSAL

As outlined in the Communication from the Commission to the European Parliament and the Council ‘A Roadmap towards a Banking Union’[1], in the Communication from the Commission ‘A Blueprint for a Deep and Genuine Economic and Monetary Union Launching a European Debate’[2] and in the Four Presidents’ report ‘Towards a genuine economic and monetary union’[3] in 2012, an integrated financial framework or ‘Banking Union’ is a vital part of the policy measures to put Europe back on the path of economic recovery and growth.

Swift progress towards a Banking Union is indispensable to ensure financial stability and growth in the Euro Area and in the whole internal market. It is a crucial step to overcome the current financial fragmentation and uncertainty, to ease funding conditions for vulnerable sovereigns and banks and break the link between the two, and to re-launch cross-border banking activity in the internal market to the benefit of both Euro Area and non-Euro Area Member States. Building on the regulatory framework common to the 28 members of the internal market (single rulebook), the European Commission has therefore taken an inclusive approach and proposed a roadmap for the Banking Union with different instruments and steps, potentially open to all Member States but in any case including the 18 currently within the Euro Area.

In March 2013, the European Council committed to complete the Banking Union via the following steps. First, the remaining legislative procedures to set up the Single Supervisory Mechanism (SSM) conferring powers on the ECB to supervise Euro Area banks[4] should be concluded as a priority. Second, agreement should be reached in the summer months on how the European Stability Mechanism (ESM) could, following the establishment of the SSM and a review of bank balance sheets including the definition of “legacy assets”, recapitalise banks directly. Likewise in summer 2013, agreement should be reached on the Commission’s proposals for a Directive of the European Parliament and of the Council of [ ] establishing a framework for the recovery and resolution of credit institutions and investment firms (hereinafter ‘Directive [ ] of the European Parliament and of the Council’[5]). Finally, the Commission’s proposal for a Single Resolution Mechanism (SRM) together with appropriate and effective backstop arrangements should be examined as a matter of priority with the intention of adopting them during the current parliamentary cycle.

As established, the Banking Union will cover all Euro Area Member States and those non-Euro Area Member States that choose to join. The same EU-wide single rulebook of prudential requirements[6] and rules on bank resolution will apply within the Banking Union and in all other Member States. The integrity of the internal market will thus be preserved. The enhanced financial stability generated by the Banking Union will also boost confidence and the prospects for growth across the internal market. Central and uniform application of prudential and resolution rules in the Member States participating in the Banking Union will benefit all Member States. By overcoming the financial fragmentation currently hampering economic activity, it will help ensure fair competition for and remove obstacles to the free exercise of fundamental freedoms not only in the participating Member States but in the whole of the internal market.

1.1. A Single Resolution Mechanism and financing arrangements as key elements of Banking Union

The swift agreement on a Single Supervisory Mechanism in April 2012, only seven months after the Commission's proposal of September 2012 has laid the ground for a Banking Union, as integral part of the Economic and Monetary Union.

Reinforced supervision within the SSM will restore confidence in the health of banks. The ECB will assume ultimate responsibility for the supervision of all Euro Area banks in 2014. In practice, the ECB will directly supervise the largest and most internationally active banks with the possibility to “call up” direct supervision for the others, while the national authorities will be in charge of the day-to-day supervision of smaller banks.

Building on the SSM, in order to set up the sustainability of the banking markets in the participating Member States in the SSM, the EU must put in place a Single Resolution Mechanism to deal with failing banks. The risk of a bank experiencing a severe liquidity or solvency problem can never be totally excluded. It is therefore necessary to set out a framework that allows for the in-depth restructuring of banks by authorities whilst avoiding the very significant risks to economic stability and costs derived from their disorderly liquidation under national insolvency laws, and putting an end to the need to finance the process with public resources.

The Directive on Bank Recovery and Resolution, when adopted by the European Parliament and the Council, will determine the rules for how EU banks in serious financial difficulties are restructured, how vital functions for the real economy are maintained, and how losses and costs are allocated to the banks’ shareholders, creditors and uninsured depositors. Bail-in, a key instrument in the resolution directive, would sequentially allocate losses and write down the claims of shareholders, subordinated creditors, and senior creditors. Depositors below €100 000 are in any case excluded from suffering losses, their claims being protected by national Deposit Guarantee Schemes.

The directive relies on a network of national authorities and resolution funds to resolve banks. While this is a major step forward to minimise differing national approaches and to protect the integrity of the internal market, it is not sufficient for those Member States which share the supervision of credit institutions within the SSM. As recognised by the European Council, in the Banking Union, bank supervision and resolution need to be exercised by the same level of authority. Otherwise tensions between the supervisor (ECB) and national resolution authorities may emerge over how to deal with ailing banks, while market expectations about Member States’ (in)ability to deal with bank failures nationally could continue, reinforcing feedback loops between sovereigns and banks and fragmentation and competitive distortions across the internal market.

Compared to a network of resolution authorities, a Single Resolution Mechanism with a central decision-making body and a Single Bank Resolution Fund will provide key benefits for Member States, taxpayers, banks, and financial and economic stability in the entire EU:

· strong central decision-making will ensure that resolution decisions across participating Member States will be taken effectively and quickly, avoiding uncoordinated action, minimising negative impacts on financial stability, and limiting the need for financial support;

· a centralised pool of bank resolution expertise and experience will be able to deal with failing banks in a more systematic and efficient way than individual national authorities with more limited resources and experience;

· a Single Bank Resolution Fund will be able to pool significant resources from bank contributions and therefore protect taxpayers more effectively than national funds, while at the same time providing a level playing field for banks across participating Member States. A Single Fund will prevent coordination problems arising in the deployment of national funds and will be instrumental in eliminating the dependence of banks on sovereign creditworthiness.

The Single Resolution Mechanism must be created within the EU legal and institutional framework. The European Council Conclusions of 14 December 2012 state that “the process of completing EMU will build on the EU’s institutional and legal framework.” While the deployment of ad hoc inter-governmental tools outside the EU framework has been necessary to tackle exceptional market circumstances and governance flaws in the original construction of EMU, it threatens to undermine the democratic quality of EU decision-making and the coherence of the EU legal system. The creation of the SRM within the EU legal and institutional framework, like the SSM before it, is therefore a necessary step to complete EMU in line with the European Council’s conclusions and, more broadly, in order to protect the democratic and institutional order of the EU.

1.2. Transition to Banking Union

The Single Supervisory Mechanism is set to enter into force in mid-2014. The Single Resolution Mechanism meanwhile should commence operations in January 2015, when Directive [ ] which will provide the rulebook governing bank resolution across the internal market is set to enter into force[7]. The SRM would thereafter apply the rules of this Regulation which are in line with the rules of Directive [ ] for Member States participating in the Banking Union, while national authorities would apply the rules of Directive [ ] for those outside.

In any case the State aid rules on burden-sharing will apply if resolution actions involve government support. In order to implement the burden-sharing by shareholders and junior creditors, the SRM would be able to apply as of the entry into application of this Regulation, rules allowing the write down of shares and subordinated debt to the extent necessary in order to apply the State aid rules.

In addition, Member States may decide to implement the new rules set out in Directive [ ] in their national law, even before the deadline for transposition of that directive. In any event, the State aid competences of the Commission will be preserved in all resolution cases involving support which qualifies as State aid. In fact, to the extent that the use of the Single Bank Resolution Fund by the SRM does not constitute State aid pursuant to the specific criteria laid down by the Treaty those criteria would still remain applicable, by way of analogy, to ensure that where the Resolution Fund is used, the same rules apply to its intervention as if the national resolution authorities were to use national financing arrangements.

At the European level, this process of convergence is furthered, on the one hand, by the revised State aid guidelines for support to banks and, on the other hand, by the agreement on how the European Stability Mechanism could recapitalise ailing banks. The revised State aid guidelines impose stricter requirements for burden sharing for shareholders and junior creditors in any Member State providing public support to their banks. This would counter the on-going fragmentation of the internal market depending on the strength of the sovereign and the presence of legacy assets. The ESM guidelines would meanwhile specify under what conditions, and subject to State aid rules, Member States unable to provide public support to banks could get loans or if necessary how banks could be directly recapitalised by the ESM.

2. RATIONALE FOR A SINGLE RESOLUTION MECHANISM

The Commission has taken into account the analysis carried out in the Impact Assessment conducted for the adoption of the proposal for Directive [ ] which assessed operational and legal aspects relevant to the establishment of a single resolution mechanism (SRM).

Additional analysis has been conducted on the proposed features of the SRM on the basis of updates of the information comprised in the Impact Assessment. With regard to the ability of the SRM to produce effective decisions, time is critical for two important reasons: ex-ante, to enhance the credibility of the newly-established SRM as a responsive tool, contributing to minimize the sources of uncertainty in the markets; and where resolution is triggered, for the SRM to preserve the value of the assets which can be eroded by unnecessary delays in the resolution process. A network of national authorities would require additional procedural time for each deliberation regarding cross-border institutions. On the contrary, the proposed division of responsibilities between a central decision-making level and local implementing authorities will result in time savings. At the national level, it will take shorter time than at the central level to accumulate all the expertise to manage implementation, because the applicable law is national; at the central level, there will be scope for a larger critical mass to attract and develop the best specialized human capital more promptly.

With regard to the ability of the SRM to produce efficient decisions, a central decision-making level will contribute to minimizing the costs of resolution both since it can attain significant advantages in terms of economies of scale over a network, and because it is instrumental to the enforceability and optimality of the resolution decision. Structurally, a system which does not overcome national authorities’ mandate to minimize the cost to their own Member State fails to fully consider cross-border externalities. A burden-sharing mechanism to minimize global welfare losses in these situations has been envisioned by Member States since the beginning of the crisis[8]. A single resolution mechanism is better suited than a network to guarantee the enforceability of burden transfers, a necessary condition for the functioning of a burden-sharing agreement. It will also guarantee the external enforceability of the optimal resolution policy, which allows agreeing on a burden-sharing rule ex-ante that allocates the costs of resolution according to equitable and balanced criteria.

3. LEGAL ELEMENTS OF THE PROPOSAL

3.1. Legal basis

The legal basis for this proposal is Article 114 of the TFEU, which allows the adoption of measures for the approximation of national provisions aiming at the establishment and functioning of the internal market.

The proposal aims to preserve the integrity and enhance the functioning of the internal market. Uniform application of a single set of resolution rules, together with access to a single European resolution fund by a central authority will restore the orderly functioning of the Union banking markets, will remove obstacles to the exercise of fundamental freedoms and will avoid significant distortion of competition at least in those Member States which share the supervision of credit institutions at the European level.

Whilst Directive [ ] brings a high level of harmonisation, it still allows flexibility to Member States which means that a certain fragmentation in the internal market could remain. The SRM provides instead for an integrated decision-making structure aligning resolution under the SRM with supervision under the SSM to eliminate the competitive disadvantage that banks in the participating Member States in the SSM have compared to banks in the non-participating Member States because of the lack of a centralized system to deal with failing banks. To ensure that all participating Member States have full confidence in the quality and impartiality of the bank resolution process notably as regards local economic implications, resolution decisions will be prepared and monitored centrally by a Single Resolution Board to ensure a coherent and uniform approach and the resolution process will be initiated by the Commission. The Commission will also decide on the framework of the resolution tools that shall be applied in respect of the entity concerned and on the use of the Fund to support the resolution action.

In addition, to support the resolution process and enhance its effectiveness, the proposed Regulation establishes a Single Bank Resolution Fund. The proposed regulation is directly enforceable in all Member States, but applies to all entities supervised by the SSM. The single rulebook established by Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms[9], Directive 2013/36/EU of 26 June 2013 of the European Parliament and of the Council on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms[10], and Directive [ ] will apply to the participating Member States as they apply within the whole internal market.

Article 114 of the TFEU is, therefore, the appropriate legal base.

3.2. Subsidiarity

Under the principle of subsidiarity set out in Article 5.3 of the TEU, in areas which do not fall within its exclusive responsibility, the Union should act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.

Only action at European level can ensure that failing banks are resolved with minimal spill over effects and in a consistent manner pursuant to a single set of rules. The SRM will bring significant economies of scale and will avoid the negative externalities that may derive from purely national decisions and funds. Substantial differences between resolution decisions taken at national level, and subject to local specificities and funding constraints, may undermine the stability and integrity of the internal market.

Whilst the establishment of the Single Supervisory Mechanism ensures a level playing field in the supervision of banks and diminishes the risk of forbearance, the SRM ensures that when a bank failure occurs, restructuring can be carried out at the least cost, creditors receive fair and equal treatment, and funding can be quickly deployed to its most productive use across the internal market.

Therefore, it is appropriate that the Union should propose the necessary legislative action to establish such resolution arrangement for banks supervised by the SSM. A regulation is the appropriate legal instrument to avoid discrepancies in national transposition and to ensure a unified institutional mechanism and level playing field for all the banks in the participating Member States.

3.3. Proportionality

Under the principle of proportionality, the content and form of Union action should not exceed what is necessary to achieve the objectives of the Treaties.

In the Banking Union, bank supervision and resolution need to be exercised by the same level of authority. Otherwise tensions between the European supervisor and national resolution authorities may emerge over how to deal with and cover the costs of ailing banks. These tensions could undermine the effectiveness of both supervision and resolution and distort competition between Member States.

The recent crisis highlighted the need for swift and decisive action backed by European level funding arrangements to avoid nationally conducted bank resolution from having disproportionate impacts on the real economy, and in order to curb uncertainty and prevent bank runs and contagion within the internal market. The Single Resolution Mechanism would ensure that the same rules are applied in the same manner to any failing bank in participating Member State. Adequate backup funding would mitigate problems in individual banks from translating into a loss of confidence in the entire banking system of the Member State or of others perceived by markets to be exposed to similar risks.

The added legal certainty, properly aligned incentives in the Banking Union context, and economic benefits of central and uniform resolution action entail that the proposal complies with the principle of proportionality and it does not go beyond what is necessary to achieve the objectives pursued.

This Regulation respects the fundamental rights and observes the principles recognised in the Charter of Fundamental Rights of the European Union, notably the right to the protection of personal data, the freedom to conduct a business, the right to an effective remedy and to a fair trial, and has to be implemented in accordance with those rights and principles.

4. DETAILED EXPLANATION OF THE PROPOSAL

4.1. A Single Resolution Mechanism

4.1.1. Principles, structure and scope

The Single Resolution Mechanism must entail decision-making structures which are legally sound and effective in times of crisis. Decision-making must ensure European decisions, but involving MS, recognising significance of bank resolution for national economies.

The Single Resolution Mechanism will apply the single Rulebook on bank resolution set out in the Bank Recovery and Resolution Directive in respect of ailing banks from the participating Member States in this mechanism. The Single Resolution Mechanism will consist of uniform rules and procedures to be applied by the Single Resolution Board (‘the Board’), together with the Commission and the resolution authorities of the participating Member States.

The European Commission will participate in the SRM only in so far as needed to perform specific tasks provided for in this Regulation and in relation to State aid scrutiny under the Treaty or for the purpose of application, by way of analogy, the criteria established for the application of Article 107 of the TFEU.

However, the Single Resolution Mechanism does not follow the differentiated approach of the Single Supervisory Mechanism for different types of banks due to the characteristics of the resolution process. Contrary to the on-going task of day-to-day supervision, only a number of banks are likely fail and be in resolution at any given time. Furthermore, a comprehensive scope for the Single Resolution Mechanism is fully consistent with the logic whereby the ECB can assume direct supervision for any bank in case of problems, including in view of its possible resolution. Finally, the crisis has shown that it is not only the large international banks that require a resolution framework at European level. The existence of differentiated resolution authorities for different sizes of banks would also imply differentiated funding and backstop mechanisms which could again entrench links between sovereigns and banks and distort competition.

4.1.2. Principles of SRM actions

To ensure an objective and fair resolution process, any discrimination by the Commission, the Board and the national resolution authorities against banks, their depositors, creditors or shareholders on grounds of nationality or place of business is forbidden. Resolution of cross-border groups is guided by a number of principles to ensure equality of treatment between the different entities of the group, to allow for proper consideration of the interests of the Member States involved in the resolution, to avoid that the cost imposed on the creditors goes beyond what it would be under normal insolvency proceedings. Where only parts of a group are under resolution, the proposal aims at ensuring that the resolution process will not negatively impact the entities of the group that are not under resolution. As a principle, the cost of resolution will be borne by bail-in and the banking sector. Therefore, the proposal ensures that the Commission, the Board and the national resolution authorities decide upon resolution funding arrangements in such a manner that the use of extraordinary public support is minimised.

4.1.3. Interaction with the State aid control of the Commission

Within the SRM, the State aid control of the Commission would be preserved in all circumstances. This means that once the ECB notifies the Commission and the Board that a bank or group is failing or likely to fail, the resolution procedure within the SRM should run in parallel with the State aid procedure where applicable, so that the Member State or Member States concerned should be invited to notify the envisaged measures to the Commission in accordance with Article 108 of the TFEU. This requires the establishment of a continuous cooperation and exchange of information between the Board and the Commission for the completion of the State aid procedure. Moreover, the decision of the Commission under State aid rules would be the precondition for the adoption by the Commission of a decision to place a bank under resolution. Where no State aid is present in the use of the Fund, the criteria established for the application of Article 107 of the TFEU should be applied, by way of analogy, as a precondition for the adoption of a decision to place a bank under resolution, in order to preserve the integrity of the internal market between participating and non-participating Member States.

4.1.4. Tasks and decision-making structure

The single resolution mechanism covers all key resolution tasks that are indispensable to resolve failing banks. Such tasks include, inter alia, the authorisation to apply simplified obligations in relation to the requirement of drafting resolution plans, drawing up resolution plans, reviewing resolution plans, assessing the resolvability of banks, deciding to place a bank under resolution, exercising resolution powers in relation to an institution under resolution, and implementing resolution schemes. Furthermore, the SRM covers decisions on the use of resolution funding.

The composition of the SRM ensures that its decision-making structures are legally sound and effective, including in times of crisis. They are designed to ensure that the decisions are European and involve Member States in view of the significance of bank resolution for national economies.

The decision-making structures of the Single Resolution Mechanism include the Single Resolution Board, the national resolution authorities of participating Member States and the European Commission. The tasks of the SRM are shared between Single Resolution Board and the national resolution authorities.

To ensure the effectiveness and accountability of the Single Resolution Mechanism and in compliance with legal requirements, the European Commission, as an EU institution, has the power to initiate the resolution of a bank, based on a recommendation by the Resolution Board or on its own initiative. If the Commission initiates a resolution procedure, it would also decide on the framework of the resolution tools that will be applied in each case and on the use of the Fund. The Single Resolution Board would take all other decisions under the SRM Regulation and would address them to the national resolution authorities for execution at the national level in accordance with the SRM Regulation and Directive [ ]. The Board would monitor the execution by the national resolution authorities of its decisions at the national level and, should a national resolution authority not comply with its decision, it could directly address decisions to banks.

4.1.5. Decision-making process

Pursuant to the Rulebook set out in Directive [ ], a bank would be placed into resolution when it is failing or likely to fail, when no private sector arrangement can avert failure, and when resolution is in the public interest because the bank is systemic in that its failure would damage financial stability. The objective of resolution is to ensure the continuity of the bank’s critical functions, to protect financial stability, to minimise reliance on taxpayers’ money, and to protect depositors.

Resolution is triggered following a process ensuring that a justified and impartial decision is taken in respect of any failing bank:

– the ECB, as bank supervisor, notifies that a bank is failing to Commission, to the Resolution Board and to the relevant national authorities and ministries;

– the Resolution Board assesses if there is a systemic threat and no private sector solution;

– if so, the Resolution Board recommends to the Commission to initiate resolution;

– the Commission decides to initiate resolution and indicates to the Resolution Board the framework for applying the resolution tools and for using the Fund to support the resolution action. The Resolution Board adopts, through a decision addressed to the national resolution authorities, a resolution scheme setting out the resolution tools, actions, and funding measures, and instructing the relevant national resolution authorities to execute the resolution measures;

– the national resolution authorities execute the resolution measures decided by the Board according to the national law. If the national resolution authorities do not comply with the decisions of the Board, the Board has the power to supersede the national resolution authorities and address certain decisions for the implementation of the resolution measures directly to the banks.

4.1.6. Accountability and budget

Each individual component of the Single Resolution Mechanism will be independent in the performance of its tasks and will be subject to strict accountability provisions to ensure that it uses its powers in a correct and impartial way, within the boundaries set by this regulation and Directive [ ]. The Resolution Board will therefore be accountable to the European Parliament and to the Council for any decisions taken on the basis of this proposal. The national Parliaments of the participating Member States will also be informed of the activities of the Resolution Board. The Board will have to respond to any observations or questions addressed to it by the national Parliaments of the participating Member States. The SRM budget, which includes the single resolution fund, is not part of the Union budget. Expenditures relating to the SRM tasks, the management and use of the Fund will be financed by contributions from the banking sector.

4.1.7. Relationship with non-participating Member States

Directive [ ] establishes resolution colleges among national resolution authorities for dealing with banking groups, ensuring appropriate and balanced involvement of the resolution authorities of all the Member States where the bank operates. The EBA has a mediation role where home and host national resolution authorities are in disagreement on the preparation of resolution plans and on the resolution itself. Within the SRM context, for entities and groups established only within the SSM participating Member States, the SRM replaces the resolution colleges provided for in the Directive [ ] establishing a framework for the recovery and resolution of credit institutions and investment firms. Instead, representatives from national resolution authorities are instead involved in the Resolution Board.

For banks established in non-participating Member States as defined by the SSM Regulation, Directive [ ] continues to apply fully. Similarly, the interaction between the SRM and national resolution authorities in non-participating Member States will be governed fully by Directive [ ]. Provisions on the interaction between different resolution funds (mutualisation and voluntary mutual borrowing and lending) also fully apply between the Single Resolution Fund and national resolution funds of non-participating Member States. The proposal also clarifies that the role of the EBA provided for by Directive [ ] and the EBA Regulation, including its mediation powers, will apply fully to the Resolution Board.

In addition, the proposal takes into account the situation of banks which are established in Member States that do not participate in the SRM in three ways.

First, the proposal sets out the principle of non-discrimination by any of the SRM components against credit institutions, deposit holders, investors or other creditors on grounds of their nationality or place of business.

Second, the proposal foresees that where a group includes credit institutions established in a participating Member State and in a non-participating Member State, the Board replaces the national resolution authorities of the participating Member States in the resolution colleges provided for under Directive [ ].

Third, non-participating Member States have always the possibility to join the SSM, and thereby also ensure that banks established within their territory are subject to the SRM.

4.1.8. Relationship with Directive [ ] of the European Parliament and of the Council of [ ] establishing a framework for the recovery and resolution of credit institutions and investment firms

Within the Single Resolution Mechanism, the Rulebook set out in Directive [ ] establishing a framework for the recovery and resolution of credit institutions and investment firms will apply to the participating Member States as it applies within the whole internal market. Exceptions to this can only be made where the procedures or provisions provided for in this Regulation supersede the relevant provisions of Directive [ ] (for example provisions on cross-border colleges, which are superseded by the decision-making within the SRM).

The SRM proposal integrates certain provisions which are parallel to Directive [ ], as the Resolution Board and the Commission must base their actions on directly applicable Union law. Other provisions of this proposal make specific cross-references to the Commission proposal on Directive [ ]. Some of these provisions have been amended by the report voted by the European Parliament’s ECON committee on May and by the Council’s general approach of 26 June. The SRM regulation must ultimately be fully in line with the agreement on Directive [ ] found between the European Parliament and the Council. This proposal refers to the Council general approach, as the latest available document. As the negotiations are on-going between the European Parliament and the Council and the Directive is not yet finalised, the objective of the Commission is to replace those substantial provisions with the final outcome of the negotiations between the co-legislators on Directive [ ].

For certain aspects already covered by Directive [ ], a further alignment is indispensable for the proper functioning of an SRM with a Single Bank Resolution Fund. First, the hierarchy of claims should be fully harmonised for resolution, based on the principle of depositor preference. Article 15 proposes to harmonise the hierarchy of claims in resolution, based on the principle of depositor preference. The Commission considers that such a harmonisation is necessary for all entities subject to Directive [ ], in order to ensure a level playing field within the internal market. Second, within an SRM any flexibility for the use of bail in must be tightly framed and subject to the same conditions for all banks. Article 24 of the proposal therefore includes an additional tight framing, based on the general approach of the Council of 26 June 2013, and excludes in this context the use of any derogations provided for by Directive [ ] (in particular on the calculation of the threshold for bail-in).

4.2. The Resolution Board

4.2.1. Governance

In order to ensure an effective and accountable resolution decision-making process, the structure and operating rules of the Resolution Board provide for the appropriate involvement of all directly concerned Member States. The Board is composed of the Executive Director, the Deputy Executive Director, the representatives appointed by the Commission and the ECB, and the members appointed by each participating Member States, representing the national resolution authorities. The Board, chaired by an Executive Director, will meet and operate in two sessions: an executive one and a plenary one. Observers could be invited to attend the Board meetings.

In its plenary session, the Board would take all decisions of general nature. In its executive session, the Board takes decisions in respect of individual entities or banking groups. Such decisions range from resolution planning, early intervention powers to decisions on resolution schemes, including on the use of the Fund for financing the resolution process, and instructing the national resolution on how to implement the resolution decisions.

In its executive session, the Board comprises the Executive Director, the Deputy Executive Director and representatives appointed by the Commission and the ECB.

Depending on the banks or groups to be resolved in each case, when meeting in its executive session, the Board will also convene in addition to the Executive Director, the Deputy Executive Director and representatives appointed by the Commission and the ECB, members appointed by the relevant national resolution authorities. Therefore, in case of resolution of cross-border banking groups, both the member appointed by the Member State in which the group level resolution authority is situated, and the members appointed by the Member States in which subsidiaries or entities covered by consolidated supervision are established participate in the meetings and the decision-making process. The voting rules applying to the Board take into account the need to consider the interest of all Member States concerned by a resolution decision. None of the participants in the deliberation has a veto.

However in view of the sovereignty of Member States to decide on the use of national budgets, the proposal explicitly foresees that the SRM cannot require Member States to provide extraordinary public support to any entity under resolution. Moreover, in order to take fully into account any fiscal implications on Member States, the members appointed by the relevant national resolution authorities in the Executive session of the Board may request one further deliberation to discuss such potential implications.

4.2.2. Powers

The Resolution Board centralises the information that the ECB and national resolution authorities have on the financial soundness of banks under their jurisdiction. Compared to a network of national authorities operating within national mandates, this allows assessing better the circumstances that might lead to the need to put a bank under resolution and avoid cross-border spill-overs. The proposal builds on the framework of the Bank Recovery and Resolution Directive and empowers the Resolution Board to intervene promptly where the financial situation of a bank or group is deteriorating.

The Resolution Board is vested with powers to determine when to recommend to the Commission to place a bank or a group under resolution. Once the Commission decides that the conditions are met and places a bank under resolution, the Board decides within the framework established by the Commission the details of the resolution tools to be applied and how to allocate the Fund resources. Such powers allow the Resolution Board to select and apply the resolution tools, rules and procedures in a uniform manner. In particular, where banks operate cross-border, this will lead to the elimination of the current divergences in Member States’ rules and approaches, together with the negative consequences they have on the functioning of the Union banking markets.

Such direct responsibility for the Resolution Board will ensure an equal treatment of banks across the participating Member States and the predictability and confidence in the implementation of the single Rulebook on bank resolution. This will increase legal certainty and better preserve the value of financial assets by avoiding unnecessary disruptions in the flow of funds. It will also ensure that the assets of the failing institution are used in the most productive way to minimise losses for creditors across the participating Member States, and not according to individual Member States’ concerns.

The Resolution Board ensures that the resolution decisions are implemented faithfully by the national resolution authorities, according to national law. For this purpose, the Board has the power to oversee and assess the implementation by the national resolution authorities by the ability, where necessary, to obtain information directly from banks or to perform investigations or on-site inspections. Where a national resolution authority does not implement a resolution decision according to the agreed resolution scheme, the Board is empowered to directly address certain decisions to the bank concerned requiring the necessary action for the implementation of the resolution decision.

4.2.3. European and international cooperation

For the purpose of carrying out its tasks, the Resolution Board will cooperate with the ECB and the other authorities empowered to supervise credit institutions within the SSM, as well as with other authorities which form part of the European System of Financial Supervision. The Resolution Board will also closely cooperate with the national resolution authorities as they play a key role in the preparation and implementation of resolution measures.

As many credit institutions operate not only within the Union, but internationally, the Resolution Board will be exclusively empowered to conclude, on behalf of the national authorities of the participating Member States, non-binding cooperation agreements with third country authorities.

4.3. The Single Bank Resolution Fund

4.3.1. Principles, establishment and missions

The principle underlying the action of the Board is that any losses, costs or other expenses incurred in connection with the use of the resolution tools shall be first borne by the shareholders and the creditors of the institution under resolution and ultimately, if necessary, by the financial industry. However, even if the cost of the restructuring of an institution should be allocated to their internal resources, there needs to be a mechanism enabling the institution (either in its original form, through a bridge bank or as an asset management vehicle – bad bank) to continue operating. It is therefore important to establish a bank resolution fund to ensure the effectiveness of the resolution actions, such as providing short term funding to an institution under resolution or guarantees to potential buyers of an institution under resolution.

The primary objective of the Single Resolution Fund is to ensure financial stability, rather than to absorb losses or provide capital to an institution under resolution. The Fund should not be considered as a bailout fund. There might be however exceptional circumstances where, after sufficiently having exhausted the internal resources (at least 8% of the liabilities and own funds of the institution under resolution), the primary objective could not be achieved without allowing the Fund to absorb those losses or provide the capital. It is only in these circumstances when the Fund could act as a backstop to the private resources.

The creation of the Single Resolution Fund is primarily justified by the fact that in integrated financial markets any financial support to resolve a bank enhances the financial stability and the health of other banks not only in the Member State concerned, but also in other Member States. Since banks throughout participating Member States are indirect beneficiaries of such support, contributions to finance the support should not be limited to banks from a single Member State.

In terms of effectiveness, the Fund’s ability to pool the resources from all Euro-area banks provides a much more effective buffer against banking crises where losses are concentrated asymmetrically in some Member States and in this regard serves as a Euro area-wide insurance mechanism. The recent crisis showed that losses arose in a differentiated manner in the Member States.

Since losses from any future shocks in the banking industry are likely to be concentrated at a specific moment of time in some Member States, a common European private backstop mechanism, as opposed to national backstops taken individually, will be more effective in absorbing such shocks through ex-ante and, in extreme cases, ex post contributions from the whole Euro-area banking industry. Therefore, by pooling resources at the European level, the Fund will provide a bigger “firepower” and will increase the resilience of the banking system. At the same time, spreading extraordinary ex-post contributions evenly across banks in all participating Member States will reduce the level of such contributions for each bank, limiting any pro-cyclical effect of such contributions.

Moreover, a mechanism where loss absorption reaches beyond national borders can effectively break the vicious circle of the interdependence between the banking crisis in a given Member State and the fiscal position of the sovereign. In this manner, the current burden on some Member States would have been mitigated if a Single Resolution Fund had existed since the start of the financial crisis.

Furthermore, a Single Resolution Fund having the ability to pool funds from the banking industry across the participating Member States will rely on a larger contribution base and therefore will have an increased reputational base allowing the Board, if needed, to borrow more on the market and at a lower cost. A greater ability to obtain finance externally on the market will reduce the need for the Fund to rely on public finances in extreme loss cases, which would further contribute to breaking the link between sovereigns and banks and to protecting taxpayers from the costs of resolution.

Finally, the proper alignment of incentives across the institutions of the Banking Union also calls for a single fund. If, especially in the case of cross-border banking groups, the means for covering the costs of resolution in excess of those absorbed by shareholders and creditors had to be provided by national funds, the effectiveness of not only the Single Resolution Mechanism but also of the Single Supervisory Mechanism would be impaired.

The establishment of a Single Resolution Mechanism requires that the Resolution Board have swift and effective access to a Single Bank Resolution Fund. The Fund creates a private external layer which can provide mid and long-term funding to avoid or minimise the use of public money in resolving banks. Moreover, it increases the effectiveness of the resolution process by preventing coordination issues that arise in the deployment of national funds, especially in the case of cross-border groups.

4.3.2. Financing of the Fund

To ensure sufficient funding, avoid the pro-cyclicality of pay-as-you go systems and minimise the need to request external financial support, the Fund needs readily available resources. To this end, the target size of the Fund should be at least 1% of covered deposits in the banking system of the participating Member States would be sufficient to ensure an orderly resolution in the future crisis provided that creditors are bailed in at least up to 8% of the total liabilities and own funds of the institution under resolution.

On the basis of 2011 data on banks and an estimated amount of covered deposits held in banks in the euro-area, the 1% target level for the Single Resolution Fund would correspond to around 55 billion Euros. The target size of the Fund in absolute amounts (Euros) will remain dynamic and will increase automatically if the banking industry grows.

A transitional period of 10 years is foreseen before the Fund reaches its full target level. This could be extended to 14 years if the Fund makes disbursements exceeding half of the target size of the Fund. If no disbursements are made from the Fund during the initial build-up phase, the banking industry would annually contribute around one tenth of the target amount or in absolute terms around 5.5 billion Euros.

After the initial phase to build-up the Fund, banks will be subject to additional contributions if their contribution basis grows or there are disbursements from the Fund. If available financial means of the Fund become lower than half of its target size, banks will become subject to a minimum annual contribution of at least one fifth of the total liabilities (excluding regulatory capital and covered deposits) of all banks in Member States participating in the Single Resolution Mechanism.

The contributions will be calculated in line with the Bank Recovery and Resolution Directive on the basis of bank’s liabilities excluding own funds and covered deposits, and adjusted to their risk profile. This means that banks which are financed almost exclusively by deposits will in practice have very low contributions. Of course, these banks will contribute to national deposit guarantee schemes.

Safeguards are foreseen in order to avoid that levying of contributions create financial stability issues in healthy institutions, i.e. temporary exemption from the obligation to pay ex-post contributions.

Where the ex-ante contributions are not sufficient and the ex-post contributions not immediately accessible, additional backup funding may be needed, especially in the transitional phase, to ensure the continuity of systemic functions of the bank(s) throughout the restructuring process. The Fund will be able to contract borrowings or other forms of support from financial institutions or other third parties if necessary to finance resolution (including from the public resources). This support will be paid back in principle by the institution under resolution itself. However, should this be not possible, the Regulation foresees that the losses are allocated to all the banks subject to the mechanism by ex-post contributions. This will ensure that any use of public resources is neutral in the medium term.

To avoid creating a disadvantage for the Member States that have put in place a resolution fund upon the entry into force of this proposal, the Regulation leaves it up to the Member States concerned to decide in which manner the existing national resolution funds would be used for the purpose of fulfilling their banks’ obligations under this Regulation.

4.3.3. Role of deposit guarantee schemes in the context of resolution

Where a bank is resolved, the national deposit guarantee scheme to which the bank is affiliated will contribute, up to the amount of covered deposits, for the amount of losses that it would have had to bear if the bank had been wound up under normal insolvency proceedings. This is a role already fully provided for by Directive [ ].

Moreover, the SRM does not affect Institutional Protection Schemes and other intragroup financing support mechanisms set up by certain groups of credit institutions. The SRM will only intervene when such private sector solutions are not successful in dealing with a bank failure.

4.3.4. Role of the Fund in the resolution of groups involving institutions outside the SRM

For the purpose of resolution of groups involving both institutions subject to the SRM, the Fund’s contribution will correspond to the parts of the group that are subject to the SRM, while the national financing arrangements outside the SRM contribution will cover the rest.

To strengthen the resolution funding throughout the internal market, the proposal allows the Fund to borrow from or lend to other resolution financing arrangements, on a voluntary basis. This will allow the Fund to bear important disbursements not covered by ex-ante and ex-post contributions. It will also support resolution financing arrangements in Member States outside the SRM.

4.3.5. Replacement of national resolution financing arrangements

As the Fund replaces the national resolution financing arrangements of the Member States participating in it, Member States which have already established national resolution financing arrangements at the time of entry into force of this Regulation may decide upon the use of such arrangements according to their national law. Member States could also decide that those national resolution financing arrangements pay the contributions due to the Fund on behalf of their banks until those arrangements fully depleted.

5. BUDGETARY IMPLICATIONS

The Resolution Board will be fully financed from contributions from the financial institutions. However, there will be some minor implications on the Union’s budget in the start-up phase of the Board. The details are set out in the financial statement attached.

2013/0253 (COD)

Proposal for a

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national Parliaments,

Having regard to the opinion of the European Central Bank[11],

Having regard to the opinion of the European Economic and Social Committee[12],

Acting in accordance with the ordinary legislative procedure,

Whereas:

(1) Having a better integrated internal market for banking services is essential in order to foster economic recovery in the Union. However, the current financial and economic crisis has shown that the functioning of the internal market in this area is under threat and that there is an increasing risk of financial fragmentation. Interbank markets have become less liquid and cross-border bank activities are decreasing due to fear of contagion, lack of confidence in other national banking systems and in the ability of Member States to support banks.

(2) Divergences in national resolution rules between different Member States and corresponding administrative practices and the lack of a unified decision making process at Union level for the resolution of cross-border banks contribute to this lack of confidence and market instability, as they do not ensure certainty and predictability as to the possible outcome of a bank failure. Resolution decisions taken at the national level only may lead to distortions of competition and ultimately to the undermining of the internal market.

(3) In particular, the different practices of Member States in the treatment of creditors of banks in resolution and in the bail-out of failing banks have an impact on the perceived credit risk, financial soundness and solvency of their banks. This undermines public confidence in the banking sector and obstructs the exercise of the freedom of establishment and the free provision of services within the internal market because financing costs would be lower without such differences in practices of Member States.

(4) Divergences in national resolution rules between different Member States and corresponding administrative practices may lead banks and customers to have higher borrowing costs only because of their place of establishment and irrespective of their real creditworthiness. In addition, customers of banks in some Member States face higher borrowing rates than customers of banks in others irrespective of their own creditworthiness.

(5) As long as resolution rules, practices and approaches to burden-sharing remain national and the financial resources needed for funding resolution are raised and spent at national level, the internal market will remain fragmented. Moreover, national supervisors have strong incentives to minimise the potential impact of bank crises on their national economies by adopting unilateral action to ring-fence banking operations, for instance by limiting intra-group transfers and lending, or by imposing higher liquidity and capital requirements on subsidiaries in their jurisdictions of potentially failing parent undertakings. This restricts the cross-border activities of banks and thus creates obstacles to the exercise of fundamental freedoms and distorts competition in the internal market.

(6) Directive [ ] of the European Parliament and of the Council[13] has harmonised to a certain extent national bank resolution rules and has provided for cooperation among resolution authorities when dealing with the failure of cross-border banks. However, the harmonisation provided by the Directive [ ] is not complete and the decision making process is not centralised. Directive [ ] essentially provides for common resolution tools and powers available for the national authorities of every Member State but leaves discretion to national authorities in the application of the tools and in the use of national financing arrangements in support of resolution procedures. Directive [ ] does not avoid the taking of separate and potentially inconsistent decisions by Member States regarding the resolution of cross-border groups which may affect the overall costs of resolution. Moreover, as it provides for national financing arrangements, it does not sufficiently reduce the dependence of banks on the support from national budgets and does not prevent different approaches by Member States to the use of the financing arrangements.

(7) Ensuring effective uniform resolution decisions for failing banks within the Union, including on the use of funding raised at Union level, is essential for the completion of the internal market in financial services. Within the internal market, the failure of banks in one Member State may affect the stability of the financial markets of the whole Union. Ensuring effective and uniform resolution rules and equal conditions of resolution financing across Member States is in the best interest not only of the Member States in which banks operate, but also of all Member States in general as a means to preserve competition and improve the functioning of the internal market. Banking systems in the internal market are highly interconnected, bank groups are international and banks have a large percentage of foreign assets. In the absence of a single resolution mechanism, bank crises in Member States participating in the Single Supervisory Mechanism (SSM) would have stronger negative systemic impact also in non-participating Member States. The establishment of the single resolution mechanism will increase stability of the banks of the participating Member States and prevent the spill-over of crises into non-participating Member States and will thus facilitate the functioning of the whole of the internal market.

(8) Following the establishment of the SSM by Council Regulation (EU) No …/… [14] where banks in the participating Member States are centrally supervised by the European Central Bank (ECB), there is a misalignment between the Union supervision of such banks and the national treatment of those banks in the resolution proceedings pursuant to Directive [ ].

(9) Whilst banks in Member States remaining outside the SSM benefit at national level from supervision, resolution and financial backstop arrangements which are aligned, banks in Member States participating in the SSM are subject to Union arrangements for supervision and national arrangements for resolution and financial backstops. This misalignment creates a competitive disadvantage for the banks in the Member States participating in the SSM compared to those in the other Member States. Because supervision and resolution are at two different levels within the SSM, intervention and resolution in banks in the Member States participating in the SSM would not be as rapid, consistent and effective as in banks in the Member States outside of the SSM. This has negative repercussions on the funding costs for these banks and creates a competitive disadvantage with detrimental effects for the Member States in which those banks operate and for the overall functioning of the internal market. Therefore, a centralised resolution mechanism for all banks operating in the Member States participating in the SSM is essential to guarantee a level playing field.

(10) The sharing of resolution responsibilities between the national and the Union levels should be aligned to the sharing of supervision responsibilities between those levels. As long as supervision remains national in a Member State, that Member State should remain responsible for the financial consequences of a bank failure. The single resolution mechanism should therefore only extend to banks and financial institutions established in Member States participating in the SSM and subject to the supervision of the ECB within the framework of the SSM. Banks established in the Member States not participating in the SSM should not be subject to the single resolution mechanism. If such Member States became subject to the single resolution mechanism, this would create the wrong incentives for them. In particular, supervisors in these Member States may become more lenient towards banks in their jurisdictions as they would not have to bear the full financial risk of their failures. Therefore, in order to ensure parallelism with the SSM, the single resolution mechanism should apply to Member States participating in the SSM. As Member States join the SSM, they should also automatically become subject to the single resolution mechanism. Ultimately, the single resolution mechanism is expected to extend to the entire internal market.

(11) A single bank resolution fund (hereinafter referred to as the ‘Fund’) is an essential element without which a single resolution mechanism could not work properly. Different systems of national funding would distort the application of uniform bank resolution rules in the internal market. The Fund should help to ensure a uniform administrative practice in the financing of resolution and to avoid the creation of obstacles for the exercise of fundamental freedoms or the distortion of competition in the internal market due to divergent national practices. The Fund should be financed directly by banks and should be pooled at Union level so that the resolution resources can be objectively allocated across Member States thus increasing financial stability and limiting the link between the perceived fiscal position of individual Member States and the funding costs of banks and undertakings operating in those Member States.

(12) It is therefore necessary to adopt measures to create a single resolution mechanism for all Member States participating in the single supervisory mechanism in order to facilitate the proper and stable functioning of the internal market.

(13) A centralised application of the bank resolution rules set out in Directive [ ] by a single Union resolution authority in the participating Member States can only be ensured where the rules governing the establishment and functioning of a single resolution mechanism are directly applicable in the Member States to avoid divergent interpretations across the Member States. This should bring benefits to the internal market as a whole because it will contribute to ensuring fair competition and to preventing obstacles to the free exercise of fundamental freedoms not only in the participating Member States but in the whole internal market.

(14) Mirroring the scope of the Council Regulation (EU) No …/…, a single resolution mechanism should cover all credit institutions established in the participating Member States. However, within the framework of a single resolution mechanism, it should be possible to resolve directly any credit institution of a participating Member State in order to avoid asymmetries within the internal market in the treatment of failing institutions and creditors during a resolution process. To the extent that parent undertakings, investment firms and financial institutions are included in the consolidated supervision by the ECB, they should be included in the scope of the single resolution mechanism. Although the ECB will not supervise those institutions on a solo basis, it will be the only supervisor that will have a global perception of the risk to which a group, and indirectly the individual members, is exposed to. To exclude entities which form part of the consolidated supervision within the scope of the ECB from the scope of the single resolution mechanism would make it impossible to plan for the resolution of banking groups and to adopt a group resolution strategy, and would make any resolution decisions much less effective.

(15) Within the single resolution mechanism, decisions should be taken at the most appropriate level.

(16) The ECB, as the supervisor within the SSM, is the best placed to assess whether a credit institution is failing or likely to fail and whether there is no reasonable prospect that any alternative private sector or supervisory action would prevent its failure within a reasonable timeframe. The Board, upon notification of the ECB, should provide a recommendation to the Commission. Given the need to balance the different interests at stake the Commission should decide whether or not to place an institution under resolution and should also decide on a clear and detailed resolution framework establishing the resolution actions to be taken by the Board. Within this framework, the Board should decide on a resolution scheme and instruct the national resolution authorities on the resolution tools and powers to be executed at national level.

(17) The Board should be empowered to take decisions, in particular, in connection with resolution planning, the assessment of resolvability, the removal of impediments to resolvability and the preparation of resolution actions. National resolution authorities should assist the Board in resolution planning and in the preparation of resolution decisions. In addition, as the exercise of resolution powers involves the application of national law, national resolution authorities should be responsible for the implementation of resolution decisions.

(18) It is instrumental for the good functioning of the internal market that the same rules apply to all resolution measures, regardless of whether they are taken by national resolution authorities under Directive [ ] or within the framework of the single resolution mechanism The Commission will assess those measures under Article 107 of the TFEU. Where the use of resolution financing arrangements does not involve State aid pursuant to Article 107 (1) of the TFEU, the Commission should, in order to ensure a level playing field within the internal market, assess those measures by analogy to Art 107 of the TFEU. If a notification under Article 108 of the TFEU is not necessary as no state aid pursuant to Article 107 of the TFEU is entailed in the proposed use of the Fund by the Board, in order to ensure the integrity of the internal market between participating and non-participating Member States, the Commission should apply the relevant State aid rules under Article 107 of the TFEU by way of analogy when assessing the proposed use of the Fund. The Board should not decide on a resolution scheme until the Commission has ensured, by way of analogy with State aid rules, that the use of the Fund follows the same rules as interventions by national financing arrangements.

(19) In order to ensure a swift and effective decision making process in resolution, the Board should be a specific Union agency with a specific structure, corresponding to its specific tasks, and which departs from the model of all other agencies of the Union. Its composition should ensure that due account is taken of all relevant interests at stake in resolution procedures. The Board should operate in executive and plenary sessions. In its executive session, it should be composed of an Executive Director, a Deputy Executive Director, and representatives of the Commission and the ECB. Considering the missions of the Board, the Executive Director and Deputy Executive Director should be appointed by the Council on a proposal from the Commission and after hearing the European Parliament. When deliberating on the resolution of a bank or group established within a single participating Member State, the executive session of the Board should also convene and involve in the decision-making process the member appointed by the Member State concerned representing its national resolution authority. When deliberating on a cross-border group, the members appointed by the home and all host Member States concerned representing the relevant national resolution authorities should also be convened and involved in the decision-making process of the executive session of the Board. However, home authorities and host authorities should have a balanced influence on the decision, so host authorities should have jointly one single vote. Observers, including a representative of the ESM and of the Euro Group, may also be invited to attend the meetings of the Board.

(20) In the light of the Board’s missions and the resolution objectives which include the protection of public funds, the functioning of the Board should be financed from contributions paid by the institutions in the participating Member States.

(21) The Board and the Commission, where relevant, should replace the national resolution authorities designated under Directive [ ] in respect of all aspects related to the resolution decision-making process. The national resolution authorities designated under Directive [ ] should continue to carry out activities related to the implementation of resolution schemes adopted by the Board. In order to ensure transparency and democratic control, as well as to safeguard the rights of the Union institutions, the Board should be accountable to the European Parliament and to the Council for any decisions taken on the basis of this proposal. For the same reasons of transparency and democratic control, national parliaments should have certain rights to obtain information about the activities of the Board and to engage in a dialogue with it.

(22) Where Directive [ ] provides for the possibility of applying simplified obligations or waivers by the national resolution authorities in relation to the requirement of drafting resolution plans, a procedure should be provided for whereby the Board could authorise the application of such simplified obligations.

(23) To ensure a uniform approach for institutions and groups the Board should be empowered to draw up resolution plans for such institutions and groups. The Board should assess the resolvability of institutions and groups, and take measures aimed at removing impediments to resolvability, if any. The Board should require national resolution authorities to apply such appropriate measures designed to remove impediments to resolvability in order to ensure consistency and the resolvability of the institutions concerned.

(24) Resolution planning is an essential component of effective resolution. The Board should therefore have the power to require changes to the structure and organization of institutions or groups in order to remove practical impediments to the application of resolution tools and ensure the resolvability of the entities concerned. Due to the potentially systemic nature of all institutions, it is crucial in order to maintain financial stability that authorities have the possibility to resolve any institution. In order to respect the right to conduct business laid down by Article 16 of the Charter of Fundamental Rights, the Board's discretion should be limited to what is necessary to simplify the structure and operations of the institution solely to improve its resolvability. In addition, any measure imposed for such purposes should be consistent with Union law. Measures should neither directly nor indirectly be discriminatory on ground of nationality, and should be justified by the overriding reason of the public interest in financial stability. To determine whether an action was taken in the general public interest, the Board, acting in the general public interest, should be able to achieve the resolution objectives without encountering impediments to the application of resolution tools or its ability to exercise the powers conferred on it. Furthermore, an action should not go beyond the minimum necessary to attain the objectives.

(25) The single resolution mechanism should be constructed on the frameworks of Directive [ ] and the SSM. Therefore, the Board should be empowered to intervene at an early stage where the financial situation or the solvency of an institution is deteriorating. The information that the Board receives from the national resolution authorities or the ECB at this stage is instrumental in making a determination on the action it might take in order to prepare for the resolution of the institution concerned.

(26) In order to ensure rapid resolution action when it becomes necessary, the Board should closely monitor, in cooperation with the relevant competent authority or the ECB, the situation of the institutions concerned and the compliance of those institutions with any early intervention measure taken in their respect.

(27) In order to minimise disruption to the financial market and to the economy, the resolution process should be accomplished in a short time. The Commission should, throughout the resolution procedure, have access to any information which it deems necessary to take an informed decision in the resolution process. Where the Commission decides to put an institution under resolution, the Board should immediately adopt a resolution scheme establishing the details of the resolution tools and powers to be applied, and the use of any financing arrangements.

(28) Liquidation of a failing institution under normal insolvency proceedings could jeopardise financial stability, interrupt the provision of essential services, and affect the protection of depositors. In such a case there is a public interest in applying resolution tools. The objectives of resolution should therefore be to ensure the continuity of essential financial services, to maintain the stability of the financial system, to reduce moral hazard by minimising reliance on public financial support to failing institutions, and to protect depositors.

(29) However, the winding up of an insolvent institution through normal insolvency proceedings should always be considered before a decision could be taken to maintain the institution as a going concern. An insolvent institution should be maintained as a going concern for financial stability purposes and with the use, to the extent possible, of private funds. That may be achieved either through sale to or merger with a private sector purchaser, or after having written down the liabilities of the institution, or after having converted its debt to equity in order to do a recapitalisation.

(30) When exercising resolution powers, the Commission and the Board should make sure that shareholders and creditors bear an appropriate share of the losses, that the managers are replaced, that the costs of the resolution of the institution are minimised, and that all creditors of an insolvent institution that are of the same class are treated in a similar manner.

(31) The limitations on the rights of shareholders and creditors should comply with Article 52 of the Charter of Fundamental Rights. The resolution tools should therefore be applied only to those institutions that are failing or likely to fail, and only when it is necessary to pursue the objective of financial stability in the general interest. In particular, resolution tools should be applied where the institution cannot be wound up under normal insolvency proceedings without destabilizing the financial system and the measures are necessary in order to ensure the rapid transfer and continuation of systemically important functions and where there is no reasonable prospect for any alternative private solution, including any increase of capital by the existing shareholders or by any third party sufficient to restore the full viability of the institution.

(32) Interference with property rights should not be disproportionate. As a consequence, affected shareholders and creditors should not incur greater losses than those which they would have incurred had the institution been wound up at the time that the resolution decision is taken. In the event of partial transfer of assets of an institution under resolution to a private purchaser or to a bridge institution, the residual part of the institution under resolution should be wound up under normal insolvency proceedings. In order to protect existing shareholders and creditors of the institution during the winding up proceedings, they should be entitled to receive in payment of their claims not less than what it is estimated they would have recovered if the whole institution had been wound up under normal insolvency proceedings.

(33) In order to protect the right of shareholders and ensure that creditors do not receive less than what they would receive in normal insolvency proceedings, clear obligations should be laid down concerning the valuation of the assets and liabilities of the institution and sufficient time should be allowed to estimate properly the treatment that they would have received if the institution had been wound up under normal insolvency proceedings. There should be the possibility to start such a valuation already in the early intervention phase. Before any resolution action is taken, an estimate should be carried out of the value of the assets and liabilities of the institution and of the treatment that shareholders and creditors would receive under normal insolvency proceedings.

(34) It is important that losses be recognised upon failure of the institution. The guiding principle for the valuation of assets and liabilities of failing institutions should be their market value at the moment when the resolution tools are applied and to the extent that markets are functioning properly. When markets are truly dysfunctional, valuation should be performed at the duly justified long term economic value of assets and liabilities. It should be possible, for reasons of urgency, that the Board makes a rapid provisional valuation of the assets or liabilities of a failing institution which should apply until an independent valuation is carried out.

(35) So as to ensure that the resolution process remains objective and certain, it is necessary to lay down the order in which unsecured claims of creditors against an institution put under resolution should be written down or converted. In order to limit the risk of creditors incurring greater losses than if the institution had been wound up under normal insolvency proceedings, the order to be laid down should be applicable both in normal insolvency proceedings and in the write down or conversion process under resolution. This would also facilitate the pricing of debt.

(36) The Commission should provide the framework for the resolution action to be taken depending on the circumstances of the case and should be able to designate for use all necessary resolution tools. Within that clear and precise framework, the Board should decide on the detailed resolution scheme. The relevant resolution tools should include the sale of business tool, the bridge institution tool, the bail-in tool and the asset separation tool, which are also provided for by Directive [ ]. The framework should also make it possible to assess whether the conditions for the write-down and conversion of capital instruments are met.

(37) The sale of business tool should enable the sale of the institution or parts of its business to one or more purchasers without the consent of shareholders.

(38) The asset separation tool should enable authorities to transfer under-performing or impaired assets to a separate vehicle. That tool should be used only in conjunction with other tools to prevent an undue competitive advantage for the failing institution.

(39) An effective resolution regime should minimise the costs of the resolution of a failing institution borne by the taxpayers. It should also ensure that even large institutions of systemic importance can be resolved without jeopardising financial stability. The bail-in tool achieves that objective by ensuring that shareholders and creditors of the entity suffer appropriate losses and bear an appropriate part of those costs. To this end, statutory debt write down powers should be included in a framework for resolution as an additional option in conjunction with other resolution tools, as recommended by the Financial Stability Board.

(40) In order to ensure the necessary flexibility to allocate losses to creditors in a range of circumstances, it is appropriate that the bail-in tool be applicable both where the objective is to resolve the failing institution as a going concern if there is a realistic prospect that the institution’s viability may be restored, and where systemically important services are transferred to a bridge institution and the residual part of the institution ceases to operate and is wound up.

(41) Where the bail-in tool is applied with the objective of restoring the capital of the failing institution to enable it to continue to operate as a going concern, resolution through bail-in should always be accompanied by the replacement of management and a subsequent restructuring of the institution and its activities in a way that addresses the reasons for its failure. That restructuring should be achieved through the implementation of a business reorganisation plan.

(42) It is not appropriate to apply the bail-in tool to claims in so far as they are secured, collateralised or otherwise guaranteed. However, in order to ensure that the bail-in tool is effective and achieves its objectives, it should be possible to apply it to as wide a range of the unsecured liabilities of a failing institution as possible. Nevertheless, it is appropriate to exclude certain kinds of unsecured liability from the scope of application of the bail-in tool. For reasons of public policy and effective resolution, the bail-in tool should not apply to those deposits that are protected under Directive 94/19/EC of the European Parliament and of the Council[15], to liabilities to employees of the failing institution or to commercial claims that relate to goods and services necessary for the daily functioning of the institution.

(43) Depositors that hold deposits guaranteed by a deposit guarantee scheme should not be subject to the exercise of the bail-in tool. The deposit guarantee scheme, however, contributes to funding the resolution process to the extent that it would have had to indemnify the depositors. The exercise of the bail-in powers would ensure that depositors continue having access to their deposits which is the main reason why the deposit guarantee schemes have been established. Not providing for the involvement of those schemes in such cases would constitute an unfair advantage with respect to the other creditors which would be subject to the exercise of the powers by the resolution authority.

(44) In order to implement the burden-sharing by shareholders and junior creditors, as required under State aid rules, the single resolution mechanism would be able to apply, by way of analogy, as of the entry into application of this Regulation, the bail-in tool.

(45) To avoid institutions structuring their liabilities in a manner that impedes the effectiveness of the bail in tool, the Board should be able to establish that the institutions hold an aggregate amount of own funds, subordinated debt and senior liabilities subject to the bail-in tool expressed as a percentage of the total liabilities of the institution, that do not qualify as own funds for the purposes of Regulation (EU) No 575/2013 of the European Parliament and of the Council[16] and of Directive 2013/36/EU of 26 June 2013 of the European Parliament and of the Council[17], which institutions should have at all times.

(46) The best method of resolution should be chosen depending on the circumstances of the case and for this purpose, all the resolution tools provided for by Directive [ ] should be available.

(47) Directive [ ] has conferred the power to write down and convert capital instruments on national resolution authorities, since the conditions for the write-down and conversion of capital instruments may coincide with the conditions for resolution and in such a case, an assessment is to be made of whether the sole write-down and conversion of the capital instruments is sufficient to restore the financial soundness of the entity concerned or it is also necessary to take resolution action. As a rule, it will be used in the context of resolution. The Commission should replace national resolution authorities also in this function and should therefore be empowered to assess whether the conditions for the write-down and conversion of capital instruments are met and to decide whether to place an entity under resolution, if the requirements for resolution are also fulfilled.

(48) The efficiency and uniformity of resolution action should be ensured in all the participating Member States. For this purpose, the Board should be empowered in exceptional cases and where a national resolution authority has not or not sufficiently applied the decision of the Board to transfer to another person specified rights, assets or liabilities of an institution under resolution or to require the conversion of debt instruments which contain a contractual term for conversion in certain circumstances. Any action by national resolution authorities that would restrain or affect the exercise of powers or functions of the Board should be excluded.

(49) In order to enhance the effectiveness of the single resolution mechanism, the Board should closely cooperate with the European Banking Authority in all circumstances. Where appropriate the Board should also cooperate with the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority and the European Systemic Risk Board, and the other authorities which form part of the European System of Financial Supervision. Moreover, the Board should closely cooperate with the ECB and the other authorities empowered to supervise credit institutions within the SSM, in particular for groups subject to the consolidated supervision by the ECB. To effectively manage the resolution process of failing banks, the Board should cooperate with the national resolution authorities at all stages of the resolution process. Thus, cooperation with the latter is necessary not only for the implementation of resolution decisions taken by the Board, but also prior to the adoption of any resolution decision, at the stage of resolution planning or during the phase of early intervention.

(50) Since the Board replaces national resolution authorities of the participating Member States in their resolution decisions, the Board should also replace those authorities for the purposes of the cooperation with non-participating Member States as far as the resolution functions are concerned. In particular, the Board should represent all authorities from the participating Members in the resolution colleges including authorities from non-participating Member States.

(51) As many institutions operate not only within the Union, but internationally, an effective resolution mechanism needs to set out principles of cooperation with the relevant third country authorities. Support to third country authorities should be provided in accordance with the legal framework provided by Article 88 of Directive [ ]. For this purpose, as the Board should be the single authority empowered to resolve failing banks in the participating Member States, the Board should be exclusively empowered to conclude non-binding cooperation agreements with those third country authorities, on behalf of the national authorities of the participating Member States.

(52) In order to carry out its tasks effectively, the Board should have appropriate investigatory powers. It should be able to require all necessary information either directly or through national resolution authorities, and to conduct investigations and on-site inspections, where appropriate in cooperation with national competent authorities. In the context of resolution, on-site inspections would be available for the Board to effectively monitor implementation by national authorities and to ensure that the Commission and the Board take their decisions on the basis of fully accurate information.

(53) So as to ensure that the Board has access to all relevant information, the employees should not be able to invoke professional secrecy rules to prevent the disclosure of information to the Board.

(54) In order to ensure that decisions adopted within the framework of the single resolution mechanism are respected, proportionate and dissuasive sanctions should be imposed in case of infringement. The Board should be entitled to instruct national resolution authorities to impose fines or periodic penalty payments on undertakings for failure to comply with obligations under its decisions. In order to ensure consistent, efficient and effective enforcement practices the Board should be entitled to issue guidelines addressed to national resolution authorities concerning the application of fines and penalty payments.

(55) Where a national resolution authority infringes the rules of the single resolution mechanism by not using the powers conferred on it under national law to implement an instruction by the Board, the Member State concerned may be liable to make good any damage caused to individuals, including where applicable to the entity or group under resolution, or any creditor of any part of that entity or group in any Member State, in accordance with that case law.

(56) Appropriate rules should be laid down governing the budget of the Board, the preparation of the budget, the adoption of internal rules specifying the procedure for the establishment and implementation of its budget, and the internal and external audit of the accounts.

(57) There are circumstances when the effectiveness of the resolution tools applied may depend on the availability of short-term funding for the institution or a bridge institution, the provision of guarantees to potential purchasers, or the provision of capital to the bridge institution. It is therefore important to set up a fund to avoid that public funds are used for such purposes.

(58) It is necessary to ensure that the Fund is fully available for the purpose of the resolution of failing institutions. Therefore, the Fund should not be used for any other purpose than the efficient implementation of resolution tools and powers. Furthermore, it should be used only in accordance with the applicable resolution objectives and principles. Accordingly, the Board should ensure that any losses, costs or other expenses incurred in connection with the use of the resolution tools are first borne by the shareholders and the creditors of the institution under resolution. It is only if the resources from shareholders and creditors are exhausted, that the losses, costs or other expenses incurred with the resolution tools should be borne by the Fund.

(59) As a rule, contributions should be collected from the financial industry prior to and independently of any operation of resolution. When prior funding is insufficient to cover the losses or costs incurred by the use of the Fund, additional contributions should be collected to bear the additional cost or loss. Moreover, the Fund should be able to contract borrowings or other forms of support from financial institutions or other third parties where its available funds are not sufficient to cover the losses, costs and other expenses incurred by the use of the Fund and the extraordinary ex post contributions are not immediately accessible.

(60) In order to reach a critical mass and to avoid pro-cyclical effects which would arise if the Fund had to rely solely on ex post contributions in a systemic crisis, it is indispensable that the ex-ante available financial means of the Fund amount to a certain target level.

(61) An appropriate time frame should be set to reach the target funding level for the Fund. However, it should be possible for the Board to adjust the contribution period to take into account significant disbursements made from the Fund.

(62) Where participating Member States have already established national resolution financing arrangements, they should be able to provide that the national resolution financing arrangements use their available financial means, collected from institutions in the past by way of ex-ante contributions, to compensate institutions for the ex-ante contributions which those institutions should pay into the Fund. Such restitution should be without prejudice to the obligations of Member States under Directive 94/18/EC of the European Parliament and of the Council[18].

(63) In order to ensure a fair calculation of contributions and provide incentives to operate under a model which presents less risk, contributions to the Fund should take account of the degree of risk incurred by credit institutions.

(64) In order to ensure the proper sharing of resolution costs between deposit guarantee schemes and the Fund, the deposit guarantee scheme to which an institution under resolution is affiliated may be liable, up to the amount of covered deposits, for the amount of losses that it would have had to bear if the institution had been wound up under normal insolvency proceedings.

(65) So as to protect the value of the amounts held in the Fund, these amounts should be invested in sufficiently safe, diversified and liquid assets.

(66) The Commission should be empowered to adopt delegated acts in accordance with Article 290 TFEU in order to determine the type of contributions to the Fund and the matters for which contributions are due, the manner in which the amount of the contributions is calculated and the way in which they are to be paid; specify registration, accounting, reporting and other rules necessary to ensure that the contributions are fully and timely paid; determine the contribution system for institutions that have been authorized to operate after the Fund has reached its target level; determine the criteria for the spreading out in time of the contributions; determine the circumstances under which the payment of contributions may be advanced; determine the criteria for establishing the annual contributions; determine the measures to specify the circumstances and modalities under which an institution may be partially or entirely exempted from ex post contributions, and the measures to specify the circumstances and modalities under which an institution may be partially or entirely exempted from ex-post contributions.

(67) To preserve the confidentiality of the work of the Board, its members, staff of the Board, including the staff exchanged with or seconded by participating Member States for the purpose of carrying out resolution duties should be subject to requirements of professional secrecy, even after their duties have ceased. For the purpose of carrying out the tasks conferred upon it, the Board should be authorized, subject to conditions, to exchange information with national or Union authorities and bodies.

(68) In order to ensure that the Board is represented in the European System of Financial Supervision, Regulation (EU) No 1093/2010 should be amended in order to include the Board in the concept of competent authorities established by that Regulation. Such assimilation between the Board and competent authorities pursuant to Regulation No 1093/2010 is consistent with the functions attributed to EBA pursuant to Article 25 of Regulation No 1093/2010 to contribute and participate actively in the development and coordination of recovery and resolution plans and to aim at the facilitation of the resolution of failing institutions and in particular cross border groups.

(69) Until the Board is fully operational, the Commission should be responsible for the initial operations including collecting contributions necessary to cover administrative expenses and the designation of an interim executive director to authorise all necessary payments on behalf of the Board.

(70) This Regulation respects the fundamental rights and observes the principles recognised in the Charter of Fundamental Rights of the European Union, notably the right to property, the protection of personal data, the freedom to conduct a business, the right to an effective remedy and to a fair trial, and has to be implemented in accordance with those rights and principles.

(71) Since the objectives of this Regulation, namely setting up an efficient and effective single European framework for the resolution of credit institutions and ensuring the consistent application of resolution rules, cannot be sufficiently achieved at the Member State level and can therefore be better achieved at the Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Regulation does not go beyond what is necessary in order to achieve those objectives.

HAVE ADOPTED THIS REGULATION:

PART I GENERAL PROVISIONS

Article 1 Subject matter

This Regulation establishes uniform rules and a uniform procedure for the resolution of the entities referred to in Article 2 that are established in the participating Member States referred to in Article 4.

Those uniform rules and procedure shall be applied by the Commission together with a Board and the resolution authorities of the participating Member States within the framework of a single resolution mechanism established by this Regulation. The single resolution mechanism shall be supported by a single bank resolution fund (hereinafter called the Fund).

Article 2 Scope

This Regulation shall apply to the following entities:

(a) credit institutions established in participating Member States;

(b) parent undertakings established in one of the participating Member States, including financial holding companies and mixed financial holding companies when subject to consolidated supervision carried out by the ECB in accordance with Article 4(1)(i) of Council Regulation (EU)No[ ] conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions;

(c) investment firms and financial institutions established in participating Member States when they are covered by the consolidated supervision of the parent undertaking carried out by the ECB in accordance with Article 4(1)(i) of Council Regulation (EU)No[ ].

Article 3 Definitions

For the purposes of this Regulation, the definitions laid down in Article 2 of Directive [ ] and Article 3 of Directive 2013/36/EU of 26 June 2013 of the European Parliament and of the Council[19] shall apply. In addition, the following definitions shall apply:

(1) ‘national competent authority’ means any national competent authority as defined in Article 2(2) of Council Regulation (EU)No[ ];

(2) ‘national resolution authority’ means an authority designated by a Member State in accordance with Article 3 of Directive [ ];

(3) ‘resolution action’ means the application of a resolution tool to an institution or an entity referred to in Article 2, or the exercise of one or more resolution powers in relation to it;

(4) ‘covered deposits’ mean deposits which are guaranteed by deposit guarantee schemes under national law in accordance with Directive 94/19/EC and up to the coverage level provided for in Article 7 of Directive 94/19/EC;

(5) ‘eligible deposits’ means deposits defined in Article 1 of Directive 94/19/EC which are not excluded from protection according to Article 2 of that Directive, regardless of their amount;

(6) ‘group level resolution authority’ means the national re