A milestone on building the Banking Union for the euro area was reached on New Year’s Day. At that time, the Single Resolution Mechanism for the euro zone Banking Union became fully operational.

The SRM will bolster the resilience of the financial system and help avoid future crises by providing for the timely and effective resolution of crossborder and domestic banks.

The EU has taken significant steps to address the root causes of the financial crisis, to ensure that banks are now much better capitalized and more effectively supervised and to identify risks that may be building in the system. But despite closer supervision and a greater emphasis on crisis prevention, there may still be cases of banks getting into difficulty. The SRM Regulation establishes the framework for member states participating in the Banking Union when banks need to be resolved.

“The Banking Union already has the tools it needs to supervise the banks within the euro area,” said European Commissioner Jonathan Hill. “The Single Resolution Mechanism means that we now have a system for resolving banks and of paying for resolution so that taxpayers will be protected from having to bail out banks if they go bust. No longer will the mistakes of banks have to be borne on the shoulders of the many.”

The Single Supervisory Mechanism (SSM), as the supervisor, would signal when a bank in the euro area or established in a member state participating in the Banking Union is in severe financial difficulties and needs to be resolved. The Single Resolution Board (SRB), consisting of representatives of national authorities, the SSM, and the European Commission, will carry out specific tasks to prepare for and carry out the resolution of a bank that is failing or likely to fail. The SRB decides whether and when to place a bank into resolution and sets out a framework for the use of resolution tools and the Single Resolution Fund (SRF).

The resolution scheme can then be approved or rejected by the commission or, in certain circumstances, by the European Council within 24 hours. Under the supervision of the SRB, national resolution authorities will be in charge of the execution of the resolution scheme while the SRB oversees the resolution.

The SRM provides that the Single Resolution Fund (SRF) will be built up over a period of eight years with contributions from the banking industry. EU Member states agreed to define some of the rules, particularly relating to the transfer of those contributions from National Resolution Authorities to the SRF, and for their use over time in an inter-governmental agreement (IGA).

The Banking Union is mandatory for all euro area states and consists of 19 members: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.