Single Resolution Fund and Emergency Liquidity Assistance: status quo and reform perspectives on emergency financial support in the Banking Union

Xanthoulis, Napoleon (2019) Single Resolution Fund and Emergency Liquidity Assistance: status quo and reform perspectives on emergency financial support in the Banking Union. In, Schiavo, Gianni Lo (ed.) The European Banking Union and the role of law. (The European Banking Union and the Role of Law) Edward Elgar Publishing. (doi:10.4337/9781788972024.00022).

Abstract

This chapter examines the provision of emergency financial support to credit institutions in light of the EU Banking Union. Emergency liquidity provision can be regarded as an integral component of both Banking Union pillars, namely the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The Eurozone’s crisis management toolbox is richer in the post-crisis era. A comprehensive centralized supervisory system of credit institutions is already in place. It sits next to an integrated bank resolution regime, whose efficiency, however, is yet to be tested in a systemic crisis. Both the supervisory and resolution pillars are integrally connected to emergency liquidity provision. First, in the event of a bank’s failure, and if it is found to be in the public interest, the SRM can decide on the ordinary resolution of that bank by relying on the fiscal backstop of the SRF. However, at present, there is no adequate common backstop for the Banking Union. Secondly, emergency liquidity support is central for prudential supervision in two aspects. On the one hand, the existence of the SRF contributes to assessing the solvency of banking institutions without being under pressure that a finding that a bank is failing or likely to fail may trigger a systemic risk for the stability of the euro area’s banking sector. On the other hand, the ECB’s ‘in house’ knowledge on the financial status of banks across the euro area can strengthen the credibility and efficiency of ELA operations. Whether these reforms are sufficient to prevent a negative sovereign–bank loop between banking and sovereign debt crisis would have to be tested in practice. What is clear is that certain safeguards are still to be put in place to ensure the financial soundness of sovereigns and the systemic banks. The SRF has not yet been fully financed. Also, the ELA tool remains decentralized. Two additional reforms are debated at Union level, but their fate remains uncertain at the time of writing. The first pertains to the creation of EDIS. The second is the setting up of the EMF, whose realization depends not only on the political will of Member States to accept the mutualization of the relevant risks, but also on whether the Union legislator would agree to the Commission’s proposal to set it up without Treaty reform.

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Contributors

Author: Napoleon Xanthoulis

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