EU bank resolution: 2019 risk disclosures are appropriate, but EU auditors highlight potential future risks

Source: European Court of Auditors i, published on Monday, November 30 2020.

The European Court of Auditors i (ECA) has an obligation to report each year on any financial risk arising, in particular from legal proceedings, relating to the Single Resolution Mechanism (SRM), the EU i system managing the orderly winding-up of failing banks within the Banking Union. For the 2019 financial year, the Single Resolution Board (SRB) reported contingent liabilities relating to ongoing legal challenges. However, the auditors draw attention to the possible financial implications of certain subsequent legal judgments, as well as some arising from new judicial challenges.

The SRM aims to manage the winding-up of a failing bank with minimal negative impact on the real economy and on taxpayers. The SRB plays a central role in this mechanism, together with the European Commission, the Council and the national resolution authorities. The legal framework governing resolution is relatively new, and has created a complex and specific legal landscape for which no precedents exist. There are currently a number of legal disputes pending before EU and national courts in relation to the SRM Regulation.

Contingent liabilities and provisions reflect the financial risk to which an entity is exposed. For 2019, the SRB disclosed contingent liabilities amounting to €2 047 million, while the Commission and the Council did not disclose any. The contingent liabilities reported by the SRB relate to legal disputes against the contributions banks pay upfront (ex-ante) to finance the Single Resolution Fund (SRF). However, no possible outflow of resources was identified in relation to actual resolution decisions, because the SRB and the Commission considered this eventuality to be remote. The auditors saw no evidence that would contradict that assessment.

In 2019, the SRB’s disclosure of financial risk was appropriate,said Rimantas Šadžius, the member of the European Court of Auditors responsible for the report. “But a number of recent judgments and new legal cases may pose additional financial risks. Anticipating such risks is a principle of good and prudent administration of public money. This is why we recommend that the SRB should carry out a thorough reassessment of its risks for the 2020 accounts”.

Press Release: EU bank resolution: 2019 risk disclosures are appropriate, but EU auditors highlight potential future risks