Failed banks will no longer be rescued by taxpayers

At the beginning of the year, the Single Resolution Mechanism (SRM) is fully formalized, created for the purpose of ‘painless’ restructuring or winding down troubled banks.

The first day of the new year usually sees various new rules come into effect, and the European Union is no exception. Most interesting is certainly the full formalization of the Single Resolution Mechanism (SRM – Single Resolution Mechanism), created for the purpose of ‘painless’ restructuring or winding down failed banks. The idea of more rigorous control of financial institutions has been rolling around various Brussels corridors since the financial crash of 2008, parts have been ‘released into circulation’ over the past few years, and at the beginning of this year, the SRM has fully come into effect. As stated in one of the few statements from the Brussels administration during the holiday period, the SRM will enhance the resilience of the financial system through timely restructuring of domestic banks and those with cross-border operations.

– The Banking Union already has the tools necessary for the supervision of banks within the eurozone. From January 1, the SRM will also be in effect, which means that we now have a system for the resolution of banks and the payment of their resolution so that taxpayers are protected from rescuing banks if they fail. The mistakes of banks will no longer have to be paid for by everyone else – commented Jonathan Hill, European Commissioner for Financial Stability, Financial Services and Capital Markets.

In order to better control unruly institutions, the EU has introduced a series of measures for better capitalization of banks, comprehensive supervision, and easier risk detection.

They are funding their own fund

If banks take one step too far, the SRM will ensure that they are quickly eliminated as a problem for the financial system, primarily by covering the costs they have incurred from a fund that they will finance themselves. Simply put, the SRM is an insurance policy that banks will pay for potentially harmful operations. The fund intended for sending banks that have fallen into business oblivion will be gradually filled over the next eight years. The mechanism is mandatory for all eurozone members, while other EU member states can decide for themselves whether to join. If they wish to be part of the Banking Union, they will have to accept three elements: bank supervision, SRM, and EDIS (European Deposit Insurance Scheme).

Supranational Committee

The system works in such a way that the SSM (Single Supervisory Mechanism) determines the failure of a bank, to which the SRB (Single Resolution Board) responds by preparing its dismantling, i.e., deciding whether and when the bank will enter the SRM and how this will be carried out. This plan goes for approval to the Commission or, in some cases, the Council, after which the bank is resolved through the national body responsible for it. The Board supervises the entire operation and can directly intervene if national bodies do not carry out the task as intended.