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Can the single resolution mechanism ensure Europe’s financial stability?

The Single Resolution Mechanism becomes fully operational to bolster the resiliency of banks in the European Union. This is the second of three conditions for the establishment of a Banking Union, in which all 19 euro member states must join.

January 14, 2016 | Angelito Bautista Jr.

The European Union started 2016 with optimism as the Single Resolution Mechanism (SRM) came on stream on January 1, 2016, which will implement a system-wide bank recovery and resolution directive in the euro area.

The new framework was a result of the global financial crisis of 2008, during which individual governments resorted to giving financial support or bail-outs to companies (or countries) financially struggling or facing bankruptcy. The crisis, sparked by the collapse of several investment banks in the United States, resulted in a series of taxpayer-funded financial market bail-outs by governments like Germany, the Netherlands, and the United Kingdom. The European Commission allowed the release 592 billion euros (€) ($640.81 billion) worth of state aid within four years (2008–2012) to shore up weak and failing banks. However, this resulted to higher government debt. As the crisis evolved and turned into the European debt crisis, some weaknesses within the European shared economy were exposed and realised.

Single Resolution Mechanism

The SRM was first proposed by the European Commission in July 2013 and adopted by the European Parliament in 2014 as part of a bigger framework to respond to financial crises and strengthen Europe’s financial system. The SRM is aimed at complementing the Single Supervisory Mechanism (SSM), which designates the European Central Bank (ECB) as the lone supervisor of all banks in the euro area. Both mechanisms are important foundations of the Banking Union, an initiative designed to integrate the banking system of the 19 states in the euro area so that they can better absorb the impact of economic panic and reinforce financial stability within the system.

For the European Commission, the SRM, in rare cases that banks fail despite stronger supervision, will help manage bank resolutions more effectively through a Single Resolution Board (SRB) and a Single Resolution Fund (SRF).

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Financial Institutions, Government Finance, Liquidity Risk, Regulation, Risk and Regulation

Keywords:European Union, European Commission, Financial Crisis, SRM, SRF, SRB, Bail-out, Italy, Portugal, ASEAN