Preparation for resolution of medium-sized and small banks in the euro area

During the financial and economic crisis that followed the fall of Lehman Brothers in September 2008, many governments of EU Member States stepped in with financial support. Different (often ad hoc) approaches were created to deal with failing banks. Often, this included public bailouts, which meant that taxpayers and national economies were affected. It became clear that an orderly and unified banking supervision framework was needed. In 2012, the European Union (EU) decided to set up a “European Banking Union” for the euro area.

The Banking Union consists of three pillars, two of which are operational. The Single Supervisory Mechanism (SSM, effective in 2014) aims to ensure the soundness of supervision on financial institutions, and the Single Resolution Mechanism (SRM, effective in 2016) aims to ensure the efficient resolution of failing financial institutions at minimum costs for taxpayers and the real economy. The Single Resolution Board (SRB) is the central resolution authority in the Banking Union responsible for the effective and consistent functioning of the Single Resolution Mechanism and the resolution of the most significant banks. The National Resolution Authorities (NRAs) are located in the EU Member States and they are responsible for the resolution of medium-sized and small banks in the respective Member State.  

In 2018, the Contact Committee of the Heads of Supreme Audit Institutions (SAIs) in the EU mandated a group of SAIs united in the Task Force “Banking Union” to initiate a parallel audit. The audit was carried out by most SAIs in the period of 2018 to 2019. The subject matter of the audit was the functioning of the Single Resolution Mechanism in the preparatory activities for the resolution of medium-sized and small banks under the remit of National Resolution Authorities in selected countries in the euro area.

The SAIs of Austria, Estonia, Finland, Germany, the Netherlands, Portugal and Spain participated in the parallel audit. This report combines the findings of the national audit activities and reports of the seven participating SAIs.

The Task Force “Banking Union” found that preparation for resolution activities of medium-sized and small banks is under way. However, the process and substance of resolution planning differ among the countries. 

Key findings and recommendations:

• Most of the data held by National Resolution Authorities on budget and staff does not distinguish between resolution activities for large banks on the one hand, and small and medium-sized banks on the other. Nor does the data provide information on the cost of their various other tasks. The Task Force recommends that National Resolution Authorities document the resources, in terms of budget and staff, allocated to resolution planning. This exercise should be done separately for large, medium-sized and small banks.
• Since the National Resolution Authorities perceived a lack of specific guidance from the Single Resolution Board for resolution planning related to medium-sized and small banks during the audit period, they developed their own internal guidance. This may lead to diverging approaches and practices in implementing resolution across the countries concerned, e.g. some topics are not equally or only to a limited extent addressed in resolution plans. The National Resolution Authorities, together with the Single Resolution Board, should therefore develop common resolution planning guidance for medium-sized and small banks in the euro area.
• Most National Resolution Authorities offered full cooperation to the SAIs as required in the respective national laws. The Single Resolution Board, however, placed conditions on the SAIs’ access to its documents for the purpose of this audit. The Task Force considers this a serious audit gap, which needs to be fixed shortly. 

Against this backdrop, the Contact Committee calls on all actors in charge at the European and national level to strengthen the independent external audit of banking resolution, in particular by making sure that the SAIs have unlimited access to the information they deem relevant for their audit work.