Strengthening the EU’s financial system : bridge financing options for the Single Resolution Fund. Issue 02 / 2015, 09 November.
Date: 2016-11-17
Institutions: European Political Strategy Centre
Subjects: EU Member State, banking policy, banking system, euro area, financial policy, fund (EU), monetary policy

Five Presidents’ Report Series
Issue 02 / 2015  |  09 November

Strengthening the EU’s Financial System

Bridge Financing Options for  
the Single Resolution Fund

The Single Resolution Mechanism (SRM) for the Banking Union establishes a common set of rules to guide 
the unwinding of banks in participating Member States – either euro area countries or any other Member 
State joining voluntarily. The SRM regulation entered into force in August 2014. One of its key aspects is 
the creation of a Single Resolution Fund (SRF), financed by bank contributions. In the initial phase, the Fund 
is composed of ‘national compartments’, which will be merged after a transitional period of eight years. 
Managed by the Single Resolution Board (SRB), the Fund is expected to reach a target size of €55bn by 
2024 (See Figure 1 on the Single Resolution Board Capital Key, p. 2).1 Underlying its open nature, all EU 
Members States – bar Sweden and the UK - signed the founding SRF treaty. 

The Single Resolution Mechanism was part of a series of complementary and mutually reinforcing actions 
aimed at strengthening the EU’s financial system in the wake of the global financial crisis. Other measures 
include the Bank Resolution and Recovery Directive and the harmonisation of deposit guarantee schemes 
across the EU. Together, these measures constitute the so-called Banking Union, which seeks to break the 
link between sovereigns and their banking systems through (partial) risk-sharing at EU level. The Single 
Resolution Fund plays a crucial role in achieving this goal.

Bridge Financing is Needed to Fill 
Potential Gaps
As the Single Resolution Fund becomes operational 
at the start of 2016 but does not reach its targeted 
size before 2024, a swift agreement on a bridge 
financing mechanism for the Fund is necessary as a 
way to ensure that enough money is available if a 
bank needs to be unwound while Single Resolution 
Fund financing is not yet sufficient.

Three Options for Bridge Financing
There are three possible options for bridge 
financing: cross-lending by the Member States on 
the basis of their national funding for the Single 

Resolution Fund; borrowing from private sources 
using Member State guarantees; or public financial 
credit lines either by the European Stability 
Mechanism (ESM) and/or Member States. 

Accelerating Mutualisation
The ultimate solution will imply a combination of 
guarantees and credit lines by Member States and 
an acceleration of the Single Resolution Fund (SRF) 
mutualisation timeline. This could be complemented 
by a medium-term goal of a permanent credit line 
by the European Stability Mechanism, through a 
corresponding change in the ESM Treaty. The lesser 
the degree of mutualisation in the SRF, the more 
important a common ‘backstop’ becomes.

1

DisclaimerThe Five Presidents’ Report Series is produced by the European Political Strategy Centre (EPSC), the European Commission’s in-house think tank.  Its aim is to intellectually accompany the implementation of the Five Presidents’ Report on completing Europe’s Economic and Monetary Union. The views expressed are those of the authors and do not necessarily correspond to those of the European Commission.1. Bridge Financing: 
Commitments and Alternatives

Single Resolution Fund resources are to be tapped 
only after other sources of resolution funding have 
been exhausted. The Directive on Bank Recovery 
and Resolution outlines a hierarchy that starts with 
shareholders, followed by ‘bail-in able’ creditors, then 
any extraordinary national public financial support 
(bearing in mind EU state aid rules), and finally the 
resources of the national Deposit Guarantee Schemes. 
Only after the previously listed contributions reached 
at least 8% of the liabilities of the bank being resolved 
would available SRF funds be used. Furthermore, 
the need for bridge financing would only come into 
question after the existing SRF funds were exhausted. 
For example, in 2016 the total amount of resources 
available in the Single Resolution Fund would be only 
around €5.5bn. If the SRF contribution to the resolution 
of a bank is larger than this amount, additional 
resources via bridge financing would become necessary 
(Figure 2). A bridge financing setup is of essential 
importance given the long timeline until the full 
capitalisation of the Single Resolution Fund. It is also 
crucial in order to meet the potential costs associated 
with any resolution that may occur between now and 
the completion of the SRF. It is also a vital element to 
establish credibility among market participants.

Figure 1. Single Resolution Fund Capitalisation 
Timeline 
% of the amount of covered deposits in all the participating  
Member States

SRM target level

Approximate fund capitalisation

1.2

1.0

0.8

0.6

0.4

0.2

0.0

2016

2017

2018

2019

2020

2021

2022

2023

Source: Single Resolution Board 

Figure 2. Total Initial SRF in Comparison with 
European Banks’ Capital 
Billion euro  

SRF capitalisation

BNP Paribas capital

Deutsche Bank capital

100

80

60

40

20

0

2016

2017

2018

2019

2020

2021

2022

2023

Source: Single Resolution Board

The following options could be considered as ways of 
providing bridge financing for the Single Resolution Fund:

Option 1: Inter-compartmental Member State 
lending (over and above what is already agreed during 
the transition period, see Box 1 on p. 3): the Fund will 
be composed of national compartments that will be 
gradually mutualised over eight years. In other words, 
the resources for resolution would initially be largely 
the responsibility of the Member State itself. However, 
if one Member State’s compartment is insufficient, 
it is possible for the other Member States’ national 
compartments to lend to each other, within pre-
agreed limits, during the transition phase. This is a 
way to lessen the initial exposure of Member States to 
resolution costs in other Member States. 

Option 2: Borrowing from private sources using 
Member State guarantees: a loan guarantee is a 
promise by one party to assume the debt obligation of 
a borrower if that borrower defaults. Given that they 
do not imply an actual immediate financial or fiscal 
commitment,2 they were widely used during the EU 
financial crisis as a way to support a number of national 
banking systems, and were also provided by Member 
States to multilateral institutions like the European 
Stability Mechanism and to funding facilities like the 
European Fund for Strategic Investment (EFSI).

Option 3: Public financial credit lines, by 
multilateral institutions and/or by the Member 
States: direct credit lines could be provided to the 
Single Resolution Fund by either Member States and/or 
by an institution like the European Stability Mechanism.

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Five Presidents’ Report SeriesSRF Bridge FinancingA combination of those three options is not 
only possible, but likely. Indeed, option 1 above is 
restricted, given the limited amount of funds available 
for intra-compartmental lending. It is also likely that 
the Single Resolution Board will not be ready to seek 
financing in the capital markets before the second half 
of 2016. Therefore, in order to ensure that the financial 
capacity of the SRB/SRF is perceived as sufficient from 

the onset, in early 2016, some sort of public bridge 
financing arrangement, possibly a combination of 
options 2 and 3, would be required. 

Assuming that the ultimate solution involves either 
Option 2 or 3, or a combination thereof, the focus needs 
to shift to operationalisation of this outcome.

   The Mutualisation Path of the Single Resolution Fund
The use of SRF resources for a bank resolution is to be progressively ‘mutualised’ – i.e. transformed from 
costs largely paid by the individual Member State concerned into costs shared by all euro area countries - 
over an eight year period. 

Concretely, bank resolution costs are to be paid:
•  if they happen in 2016, by using the total amount of funds available in the national compartments, and if 

this is not enough, by using up to 40% of the money in the other national compartments;

•  if a bank resolution happens in 2017, the cost is covered by the concerned national compartment by using 
up to 60% of the amount available in it, and if more money is needed, by using up to 60% of the money 
in other national compartments;

•  if a bank needs to be unwound in 2018, the concerned national compartment can use up to 40% of its 

resources and then, if more is needed, up to 2/3 of the money in the other national compartments can be used.

In the following years, so from 2019 onwards, the limit for use of the resources in the national 
compartments falls by an additional 6.66% each year, while the limit for use of all national compartments 
increases by 6.66% further each year, until full mutualisation is reached in 2024, meaning all resolution 
costs are fully shared.

2. Operationalising Option 
Two: Single Resolution 
Board Borrowing Backed by 
National Guarantees

One could consider establishing formally agreed and 
pre-committed individual guarantees, perhaps of 
a size equivalent to the national compartments in the 
Single Resolution Fund, whose share is equivalent to the 
national share of total euro area customer deposits.3 
These guarantees could be granted by each Member 
State to the Single Resolution Board for resolution 
operations on their territory during the transition period, 
and therefore used on an operation-by-operation basis. 

A system of pro-rata guarantees - say, equivalent 
to the size of their national compartment in the Single 
Resolution Fund - is another possibility. All participating 
states would provide a pro-rata guarantee to the Single 
Resolution Board under a specific pre-established 
contribution key. In case of a shortfall, guarantees 
would be called from each Member State in proportion 

to the key. As such, the guarantees would be based on 
individual rather than joint responsibility. However, as 
the Single Resolution Board will borrow from markets 
as a single legal entity, and not as an individual 
national compartment, this effectively would follow the 
mutualisation logic of the Single Resolution Board.

Finally, one could also design a guarantee system that 
progressively moves from a set of individual 
guarantees by Member States to a set of pro-rata 
guarantees over a transition period.

Given the legally binding nature of the guarantee, Member 
States would probably need some sort of national, even 
parliamentary approval in each of these cases. 

Given that one of the main aims of the Banking Union 
is to break the bank-sovereign feedback loop, individual 
guarantees would be the least effective way forward. 
Mutualised solutions would be much more effective.4 
Also, the effect of using national guarantees will be 
that, in practice, Member States would collectively 
back an ever-shrinking share of the total SRF. 
Therefore, if this option is chosen, it is essential 
that the Member States also begin discussions 
on a more robust mutualised credit line/backstop, 

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Five Presidents’ Report SeriesSRF Bridge Financing 
possibly via the European Stability Mechanism. 
Another important consideration with these options is how 
much the Single Resolution Fund will be able to borrow 
from the markets without endangering its prospective 
credit rating (presumably, the Single Resolution Fund 
would aim for a credit rating at least as high as that of 
the European Stability Mechanism, which is currently AA/
Aa1, depending on which of the big three credit ratings 
agencies is used as a reference).5 The borrowing amount 
possible for any given credit rating would of course 
depend on the nature of the guarantee provided amongst 
the options above, and on its size.

3. Operationalising Option 
Three: A Multilateral or 
National Credit Line to the SRF 

As an alternative to – or possibly in combination with - 
guarantees, the Single Resolution Fund could also 
receive a direct credit line. Even if the European Stability 
Mechanism currently has an unused lending capacity of 
around €370 billion, since it was established with the 
objective to provide financial assistance to European 
Stability Mechanism Member States only, it cannot lend to 
the Single Resolution Fund under the current ESM treaty. 

Were the Single Resolution Fund to spearhead the 
resolution of a bank with subsidiaries in non-ESM 
Member States, this could create a situation where 
credit would be provided by the European Stability 
Mechanism outside the euro area.

Furthermore, the procedures for granting financial 
support stipulated in the ESM treaty would not fit well 
even if an entirely new instrument were created for 
the specific purpose of lending to the Single Resolution 
Board. For example, the ESM treaty requires country-
specific conditions to be attached to a rescue programme, 
set out in a Memorandum of Understanding. Since the 
Single Resolution Board would use the funds to finance 
resolutions in various banking systems or to support 
the financing of their debt, such a prerequisite cannot 
be applied. The ESM treaty also requires it to conduct a 
debt sustainability assessment and establish a Financial 
Assistance Facility agreement with the beneficiary 
Member State, conditions that would again prove out 
of context for an SRB credit line. Hence, the credit line 
cannot be implemented through a simple review of the 
list of financial assistance instruments (an option that 
would be allowed by the current ESM treaty). 

Alternatively, instead of creating a new credit facility, 
non-euro area Member States could enter into a parallel 
agreement with the European Stability Mechanism, 
which would enable financial support to the Single 

4

Resolution Board. This would also be possible through 
the establishment of an ESM subsidiary, supported by 
the ESM and the non-euro area sovereigns.

Nevertheless, in any of the cases above, the ESM 
treaty would need to be revised. This would certainly 
imply a political agreement among all ESM members, 
and could conceivably either precede or coincide with 
the ESM being brought under EU law.6 In any case, this 
option would still be more likely in the medium term.

On the other hand, credit lines by members, either 
individualised or mutualised, and presumably backed by 
bank levies (and hence fiscally neutral for the Member 
State over the medium term, making them compatible 
with the Stability and Growth Pact) have already been 
politically agreed at the level of the Economic and 
Financial Committee, but the operationalisation of this 
decision is still ongoing. While they might need different 
types of national-level approval, they would likely not 
face the same legal constraints and delays in terms 
of implementation that an ESM credit line would, and 
therefore be more feasible as short-term options.

Conclusion 

Although bridge financing is merely an additional 
source of funding for the Single Resolution Fund, whose 
normal resources would only be used after several other 
sources of resolution funding have been depleted, it is a 
fundamental tool to enable the Single Resolution Fund 
to fulfil its mission. The ultimate solution will imply a 
combination of the provision of guarantees and conditional 
credit lines by the Member States – all with fairly marginal 
actual fiscal implications - and an acceleration of the 
Single Resolution Fund mutualisation path, not only of the 
Fund itself, but also possibly of the guarantees. 

To emphasise the common euro area nature of the 
Single Resolution Fund, speeding up the mutualisation 
timeline in the short term (i.e. within Stage 1 of the 
implementation of the Five Presidents’ Report), combined 
with the accelerated provision of pro-rata guarantees by 
the Member States, may be the most desirable outcome. 
It would go a long way to maximise the objective of 
further weakening the bank-sovereign feedback loop.

This could be complemented by a medium-term goal 
(already at the beginning of Stage 2, ‘completing EMU’): 
the provision of a permanent credit line by the European 
Stability Mechanism to provide the now missing 
‘backstop’ to the resolution fund, through a change 
in the ESM treaty, possibly introduced even before its 
incorporation into the EU Treaty. As highlighted above, 
the lesser the degree of mutualisation in the SRF, the 
more important a common ‘backstop’ becomes.7

Five Presidents’ Report SeriesSRF Bridge FinancingAnnex

Comparative Table of SRF Bridge-Financing Funding

Expand inter-
compartmental 
MS lending

Market borrowing using MS guarantees

An ‘Informal’ 
Public Guarantee

Formally Agreed Guarantees Between the SRB 
and MS

Formal 
Individual 
Guarantees

Full Pro-Rata 
Guarantees

No increases 
in public 
debt, greater 
credibility gains 
and stronger 
weakening of the 
Sovereign-bank 
link, as effectively 
stronger 
mutualisation 
outcome

MS-level 
approval needed

Uses existing 
framework

No increases in 
public debt

No increases in 
public debt

o
r
P

n
o
C

Limited 
additional 
resources

Notes

Likely 
coordination 
questions, MS-
level approval 
needed, limited 
credibility 
gains and 
weakening of 
the Sovereign-
bank link

Likely 
coordination 
questions, MS-
level approval 
needed, limited 
credibility 
gains and 
weakening of 
the Sovereign-
bank link

Combined 
Individual and  
Pro-Rata 
Guarantees in 
Line with the SRF 
Mutualisation Path

No increases 
in public 
debt, greater 
credibility gains 
and stronger 
weakening of the 
Sovereign-bank 
link, as effectively 
stronger 
mutualisation 
outcome

Longer 
timeframe 
towards 
mutualisation, 
MS-level 
approval needed

Public credit 
lines, by 
multilateral 
institutions  
and/or MS

Very large 
amount of 
resources 
(ESM), structural 
mutualisation 
solution 
‘breaking the 
link’ (ESM)

Need to change 
ESM treaty, 
so likely more 
time-consuming, 
MS approval 
needed, if only 
MS credit line, 
Sovereign-bank 
links still there 
(if those MS-
credit lines are 
not mutualised)

1.  This amount is roughly equivalent to 1% of the amount of covered 
deposits of all credit institutions authorised in all the participating 
Member States. As a reference, the 2014 total shareholders’ equity 
of two of the largest euro area banks, Deutsche Bank and BNP 
Paribas was, respectively, €68.4 and €89.4 billion.

2.  They are so-called ‘contingent liabilities’: even though data on these 
are collected by Eurostat, they are not part of the government debt 
(as defined in Council Regulation (EC) No 479/2009 of 25 May 2009).

3.  Informal guarantees by the MS would also be possible. However, 

any informal, ad-hoc option implies coordination questions that may 
lead to delays. As this would cause both practical implementation 

problems and fail to effectively anchor market expectations, this 
seems an undesirable option.

4.  Véron, N., (2015) ‘Europe’s Radical Banking Union’.

5.  See ratings on http://www.esm.europa.eu/investors/rating/index.htm. 

6.  Namely, the Five Presidents’ Report proposes for ‘Stage 2’ the 

integration of the ESM into the EU Treaty, which would necessarily 
imply a change in the ESM treaty.

7.  A consideration that lends support to the ESM option (as opposed to 
Member State ones) is that a large pool of resources available via 
simple and transparent arrangements would increase the chances 
that markets would react positively to the chosen setup.

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Five Presidents’ Report SeriesSRF Bridge Financing