Auditors call for continued vigilance on the financial risks of the EU’s bank resolution system

The European Court of Auditors has an obligation to report each year on any financial risk relating to the Single Resolution Mechanism (SRM), the EU system managing the orderly winding-up of failing banks within the Banking Union. For the 2021 financial year, the Commission and the Council did not report any contingent liabilities, while the Single Resolution Board (SRB) has reported some related to pending litigation concerning banks’ contributions to the Single Resolution Fund (SRF), a fund which can be used to support bank resolutions. The auditors consider these disclosures appropriate, but recommend improvements to the monitoring of financial risk and to the method for calculating possible reimbursements of legal costs.

“The European Court of Justice has now issued judgments on five key legal cases contesting the SRB’s first resolution decision – that of Banco Popular Español”, said Rimantas Šadžius, who led the audit during his mandate as an ECA member. “In our report, we note that the resulting legal certainty has decreased the level of financial risk to the Banking Union. We provide a detailed overview of the remaining risks, and recommend further improvements to the monitoring and calculation of possible financial consequences.”

Since the resolution of Banco Popular Español in 2017, litigation has been brought at EU and national level on numerous occasions. Earlier this year, the European Court of Justice dismissed five key cases against the resolution decision. Although the SRB had previously assessed the probability of losing these cases as being remote, the dismissal of the cases contesting the resolution decision has further reduced the financial risks to the SRB. For the 2021 financial year, the SRB reported no related contingent liabilities from any cases at EU level. The auditors found no evidence that would contradict this assessment. For cases at national level, the SRB relies on reporting from the Spanish national resolution authority. However, the relevant reporting was received after the SRB’s accounts had been closed. For the 2022 accounts, this type of information should be collected earlier and incorporated into the process, the auditors recommend.

As for litigation about the calculation of banks’ contributions to the SRF, the auditors note that, following the recommendation from the previous year’s audit report, the SRB reassessed the related contingent liabilities and reported a significantly lower amount than in 2020. For 2021, the SRB disclosed contingent liabilities of €5.5 million relating to 63 legal cases at EU level, and did not disclose any related to national proceedings, in line with a Court of Justice judgment which found that national courts do not have jurisdiction to annul these decisions. A sum of €2.55 million was disclosed in the accounts as possible compensation for legal costs. The method used to quantify these costs should be refined, the auditors say, particularly by taking into account the characteristics of individual cases. Furthermore, the SRB should enhance its disclosures on contingent liabilities for those cases where the risk of disbursement from the Single Resolution Fund is assessed as being “possible” but the financial exposure cannot be reliably estimated.