8.7.1 Centralisation of public funding

As long as Member States remain necessary for the provision of public funding to failing banks, it remains within the remit of the Member States to award this funding. In the author’s view, this is undesirable, because it makes banks dependent on their Member States. The author therefore argues that public funding should be centralised within the European Banking Union (see this section), while the SRB becomes the authority that decides on the use of this public funding with the approval of the Commission (see section 8.7.2).

Steps have already been taken to create centralised public funding within the European Banking Union. One could think of the SRF, with the ESM DRI being transformed into its future backstop, the potential development of ERL and the intended introduction of the EDIS. There are, however, some further steps that could be taken.

First, ELA could be provided by the ECB instead of the national central banks. Should ERL be established in the form of a liquidity facility that can be provided by the ECB in resolution, centralisation of ELA may help to best coordinate the provision of liquidity. Since ELA prevents a bank from needing to be resolved due to only a temporary liquidity shortage, it regulates the access to ERL. It therefore makes sense that both ELA and ERL are overseen by the ECB. Also Mario Draghi, the President of the ECB, clearly called for a change of the existing ELA rules in the Eurosystem, saying, “I personally have argued several times toward a centralization of ELA. This is a remnant of a past time”.1

In addition, a facility could be introduced to provide public funding for precautionary recapitalisation and guarantees within the European Banking Union. This could potentially be the SRF. In that case, the SRB can decide on the use of the precautionary guarantee and precautionary recapitalisation tools, instead of the Member States. This would also contribute to the introduction of ‘rescue resolution’ (as described in section 8.6.5), as the Member States would no longer be involved in providing the funding that is required for the ‘precautionary guarantees and precautionary recapitalisation tools’.

Lastly, a facility could be introduced for the insolvency phase that can assist in the winding up of a bank in an orderly manner– or the integration of the economic activities of the bank in the organisation of a buyer as part of the winding up process. Currently, the Member States provide this assistance, also in the absence of harmonised insolvency proceedings in the EU. If a bank liquidation tool is introduced (see section 8.7.4), creating a central insolvency facility could be part of that.