EU’s potential liability in winding up failing banks assessed as “remote”

The Single Resolution Board (SRB) and the European Commission - in line with accounting rules - did not disclose any contingent liabilities potentially arising from ongoing judicial proceedings against their role in winding up failing euro area banks, according to a new report by the European Court of Auditors i (ECA). At the same time, the SRB disclosed €90 million of contingent liabilities related to legal proceedings in EU i and national courts, in which banks challenge their upfront (“ex-ante”) contributions to the Single Resolution Fund (SRF).

When a bank in the euro area fails, the Single Resolution Mechanism (SRM) aims to manage the resolution process with minimal negative impact on the real economy and the taxpayer. The SRB is the central player under this mechanism (together with the Commission and the Council), and oversees the SRF, which can support bank resolutions.

At the end of 2018, there were over 100 outstanding judicial proceedings in EU courts against the SRB and the Commission concerning their bank resolution tasks, mainly related to the winding up of Banco Popular Español S.A. In accordance with applicable accounting rules, the SRB and the Commission would need to recognise liabilities or provisions, or disclose contingent liabilities in relation to these judicial proceedings in their accounts if they assessed the likelihood of an “outflow of economic resources” as “certain, probable or possible”. However, this is not the case, and both the SRB and the Commission assessed the likelihood of such an event to be “remote”. The auditors found no evidence that would contradict their assessments, but recommend that the SRB’s process should be strengthened further.

The Commission stated that no applicants can have sustained a loss, given that the alternative course of action would have been the bank’s insolvency. It also underlined that any shareholder or creditor that would have received better treatment under national insolvency proceedings will be compensated from the SRF. The SRB is currently verifying whether there were any such cases.

“Contingent liabilities and provisions reflect the financial risks to which the SRB, Council and Commission are exposed,” said Ildikó Gáll-Pelcz, the ECA Member responsible for the report. “But at this stage, it is difficult to make any predictions concerning the outcome of the judicial proceedings for bank resolutions, mainly because of the complex and unprecedented situation.”

Press Release: EU’s potential liability in winding up failing banks assessed as “remote”, say Auditors