The Bank Resolution Recovery Directive (BRRD) and Single Resolution Mechanism (SRM) aim to end taxpayer-financed bank bailouts, by bailing in bank equity and bondholders, relying on creditors for at least 8% of a lender’s liabilities alongside a bank-financed resolution scheme and a harmonised deposit guarantee programme which came into force on January 1.
But events in Italy and Portugal at the end of last year, before the BRRD came into force, raised questions about both governments’ commitment to new bailout rules and, by extension, the credibility of the new resolution authority.
In November, Italy used an industry-financed bailout fund which was provided with a short-term loan guaranteed by a state-owned postal savings bank Cassa Depositi e Prestiti (CDP) to inject €3.6 billion into four small banks. The intervention wiped out shareholders and junior creditors, while senior bondholders and depositors were protected. Italian officials deny fiscal backing, but there are questions over whether or not the bailout structure would have complied with BRRD rules against discretionary state backing.
More controversially, in Portugal, leading lawyers and bank investors argue that the bail-in of senior bondholders of Novo Banco last December breaches BRRD norms on the equal treatment of senior creditors and on the transfer of bonds to a third party.
Nicolas Véron, senior fellow at Bruegel explains: "Bank insolvency law remains national, and so is the insolvency court system. Since bank resolution is defined as an alternative to court-ordered insolvency ('no creditor worse off’), this means that we are still far from a genuine single resolution mechanism. Taxation, consumer protection, housing finance, pensions, accounting and auditing are among the other areas that are still entirely or significantly national. We are still very far from a pure, complete banking union."
In a speech last November, Danièle Nouy, President of the Supervisory Council at the European Central Bank stressed: "There are still a lot of challenges ahead, most notably in terms of achieving the main goal of the SSM: ensuring fully harmonised prudential banking supervision in the euro area."
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