Reviving financial markets – a critical assessment of the single resolution mechanism

ABSTRACT

The creation of the Banking Union, set to be an integrated financial framework for the Eurozone, should be better understood as part of a larger process of governing through financial markets, where policy-makers resort to market-based instruments and policies for governance purposes, thus forming an alignment with the interests of financial elites. This paper assesses the Single Resolution Mechanism and highlights overlooked aspects of its design and decision-making process that are actively strengthening and further integrating market-based finance in the European banking system. The resolution framework and its underlying conditionalities imposed by the limited public intervention toolkit and the European State Aid regime are promoting banking capital concentration and the marketization of more traditional banking systems. Meanwhile, the discretionary decisions imposed by the European technocratic body reinforces the integration agenda, with often detrimental effects for the member states of the Southern Periphery. While the Banking Union has the overall goal of financial stability and increased convergence between member states, the outcomes of the Single Resolution Mechanism point to an increase in market-based finance and riskier business models at the expense of smaller and more traditional banking systems, fostering too-big-to-fail institutions and further deepening the already rooted intra-euro divergences.

KEYWORDS:

• Single Resolution Mechanism
• bank failures
• banking concentration
• marketization
• governing through financial markets
• financial instability

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. See Posner and Veron (2010).

2. See de Grauwe (2016, 108): Booms, busts and the governance of the Eurozone, in A European Social Union after the Crisis (160–191).

3. One that could provide a safe asset reference for all member states. The creation of a single safe asset at a supranational level is a key point of discussion in the EMU’s architecture, with a current duality of views. The ‘technocratic’ reflects the European institutional position and pushes for the single asset for integrated capital markets, whereas the ‘Nordic’ view supports a controlled use of national sovereigns as the safe asset. See Gabor and Vestergaard (2018), The Single Safe Asset: a Progressive View For a ‘First Best EMU’, FEPS Policy Brief, May 2018. https://www.feps-europe.eu/Assets/Publications/PostFiles/621_1.pdf.

4. A failure to comply with MREL requirements may not lead to a direct declaration of FOLTF. The consequences of breaches of the minimum requirement for own funds and eligible liabilities are established in article 45k of BRRDII. See Vestergaard and Retana (2014), Quaglia (2019), Hardie and Howarth (2009) for a discussion on the discretionary nature of the Asset Quality Reviews and Stress Tests under the Banking Union and its asymmetric effects across national banking systems.

5. After Banif’s assets were separated, a state-owned ‘bad bank’ was created while the quality assets were sold to Santander, which increased its market share in Portugal by 2,5pp to 14,5%. The Portuguese sold 75% of Novo Banco to the private equity firm Lone Star Fund with a contingent capital mechanism (similar to a guarantee) of €3,9bn and lost the right to be represented in the executive board of directors. In both cases, the Committees of Inquiry constituted by the Parliament verified the veracity of the threat of liquidation and its role in the selling conditions.

6. See also Asimakopoulos (2018) on the liquidation of the two Veneto Banks.

7. Article 27 (3) and article 44(2) BRRD determine the scope of the bail-in. BRRD was amended by the Directive (EU) 2017/2399 that clarifies the ranking of unsecured debt instruments in solvency hierarchy.

8. Article 27(3) SRM and article 44(2) BRRD.

9. Statement of the Eurogroup in inclusive format on the ESM reform and the early introduction of the backstop to the Single Resolution Fund (30 November 2020).

10. SRM Regulation (Article 76).

11. See also Financial Times: Germany’s Scholz gives ground on eurozone banking union plan, 5 November 2019; Politico: Germany says nein to eurozone banking safeguards, June 15, 2021

12. Nicolaides (2021) provides a thorough review of the differences and potential contradictions between State Aid rules and the resolution framework.