Resolution funds – the funding model emerges

Resolution funds – the funding model emerges

The European Commission has finalized a Delegated Act setting out how credit institutions will pay into national resolution funds.

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The European Commission has finalized (subject to Council and Parliament non-objection) a Delegated Act setting out how credit institutions will pay into national resolution funds (and the banking union area single resolution fund) under the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM).

The annual payment (until the fund has reached 1% of total covered deposits) will be based on an institution’s liabilities excluding own funds and guaranteed deposits, but then adjusted by a factor of between 0.8 and 1.5 depending on the riskiness of the institution (where lower risk is measured by higher capital, leverage and liquidity ratios; a smaller share of interbank loans and deposits; and smaller values of trading activities, off-balance sheet activities, derivatives and complexity).

On this basis, the Commission calculates that larger banks will pay in proportionately more than smaller banks, thereby meeting a key objective of the European Parliament.

Meanwhile, a Council implementing regulation has been published setting out how the single resolution fund will be phased in over eight years, while national resolution funds in the banking union area are phased out. During this transition period, banks in the banking union will pay into the single resolution fund using a combination of metrics which combine (a) the basis on which banks would have continued to pay into their national resolution funds and (b) the basis on which banks will pay into the single resolution fund. During the eight years, the contributions based on (a) will decline from 60% of the payments to zero, while those based on (b) will increase from 40% to 100%.

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