The Eurogroup finally agreed to turn the European Stability Mechanism (ESM) into a backstop to the Single Resolution Fund (SRF). This is an important step forward in completing the European bank crisis management framework but it must not be the last one. THREAD

Since its introduction in 2015, the European bank crisis management framework has been lacking credibility. Member States often opted for bailing out banks with public money instead of applying the available resolution tools.

One major concern has been the limited firepower of the SRF that could not suffice to finance the resolution of one or several large banks. The ESM backstop mitigates this concern by doubling the funds available to finance bank resolution and safeguard financial stability.

The Eurogroup agreed to activate the ESM backstop to the SRF in 2022, two years earlier than initially envisaged. At this stage, it is not clear whether this will be early enough to cater for a potentially systemic banking crisis following the Corona-induced economic fallout.

The governance of the ESM backstop is far from ideal as it depends on a lengthy procedure and high hurdles must be overcome before any money can flow to the SRF. However, the mere existence of the backstop will increase market confidence which is key in times of crisis.

Even with the activation of the ESM backstop, the European bank crisis management framework is not fit for purpose (see paper below). Decision-makers must continue work on making the framework more credible and prepare it for a possibly systemic crisis https://www.delorscentre.eu/en/publications/detail/publication/prepare-for-the-worst-making-europes-bank-crisis-management-fit-for-purpose

Most pressing issues are: Deal with the failure of banks that are too small to be resolved and too big to be liquidated; Provide liquidity to banks undergoing resolution; Minimise the impact of bail-in on the real economy; Insure deposits at European level.

Although the Banking Union is still not complete, the agreement on the ESM backstop shows that the EU is alive and able to move integration forward – at least in times of crisis