Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.6.1.6:2.6.1.6 Supranational funding instruments

Public funding of failing banks in the European Union (LBF vol. 19) 2020/2.6.1.6

2.6.1.6 Supranational funding instruments

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

There is a number of funding instruments available at supranational level, most notably within the SRM and therefore at Eurozone level. These funding instruments concern contributions by the SRF and the direct recap italisation instrument of the ESM (hereinafter referred to as ESM DRI).1

The SRMR provides that the SRF is built up to support the SRM.2 It is established for the purpose of ensuring the efficient application of the resolution tools and exercise of the resolution powers within the scope of the SRM.3 It is therefore only available to support the resolution of banks and banking groups that are established in the participating Member States in the SSM.4 The SRF is built up over a period of 8 years with contribu tions from banks and banking groups that are established in the Eurozone. For these banks, the SRF replaced the national resolution funds as from 1 January 2016. They are therefore not obliged to contribute to the national resolution funds.

An intergovernmental agreement has been entered into by the participating Member States of the SSM in respect of transferring the funds raised at national level towards the SRF as well as on a progressive merger of the different funds raised at national level to be allocated to national compartments of the SRF (the SRF Agreement). These compartments shall cease to exist at the end of the transitional period (at the beginning of 2024).5 The target level of the SRF is 1% of covered deposits by 2024.6

The ESM was established in 2012 by the Eurozone Member States in the ESM Treaty. The mission of the ESM is to provide financial assistance to Eurozone Member States experiencing or threatened by severe financing problems.7 In order to accomplish its mission, the ESM can use six differ ent instruments. It can grant a loan within a macroeconomic adjustment programme, it can conduct primary or secondary market purchases, it can provide a precautionary credit line, it can grant loans to a Eurozone Member State which are subsequently channelled to the beneficiary bank(s) by the relevant Member State (indirect recapitalisation) or it can directly recapitalise systemic banks. While the first five instruments are directed at and entered into with the Eurozone Member States, the sixth instrument (the ESM DRI) entails a direct recapitalisation by the ESM of a systemic bank established in the Eurozone. The ESM DRI is operational as of December 2014.

At the time of writing this dissertation, the ESM DRI had not yet been used by the ESM. This is different for the indirect bank recap italisation tool. In the case of indirect recapitalisation, the ESM provides funds to a Eurozone Member State whose government then uses the funds to recapitalise a bank. This tool has been applied by the ESM in relation to Spain. The ESM made available to Spain up to EUR 100 billion in assistance, although, in the end, Spain only needed EUR 41.3 billion. Two disbursements were made: in December 2012 and in February 2013. The funds were lent to the Spanish government – no ESM cash was disbursed directly to the banks. Spain used the ESM cash to modernise the banking sector. Ownership structures were reformed and risk management practices were improved.8

The ESM has a lending capacity of EUR 500 billion, of which EUR 60 billion is available for the ESM DRI. The ESM raises money it needs for lending operations in financial markets by issuing bills and bonds and through other funding tools. Investors in ESM securities are mainly institutional investors, such as commercial and central banks, pension funds, sovereign wealth funds, asset managers, and insurance companies. The ESM has a total capital of nearly EUR 705 billion. This consists of over EUR 80 billion in paid-in capital provided by the participating Member States and approximately EUR 624 billion in committed callable capital. A capital call will take place when the Board of Governors so decides by mutual agreement, to replenish paid-in capital to covers losses, or to avoid default on an ESM payment obligation to its creditors.9

Deze functie is alleen te gebruiken als je bent ingelogd.