Euro area leaders agreed at the Euro summit on 29 June 2018 that the European Stability Mechanism (ESM) will be strengthened and will provide the common backstop to the Single Resolution Fund (SRF). This represents an important step towards the completion of the banking union and should ultimately contribute towards strengthening the EU financial system.

A reserve of funds

A common backstop to the Single Resolution Fund is one of the missing components of the banking union. It is an essential element to ensure that the EU's single resolution mechanism is sufficiently robust and maintains real credibility. In very general terms, the backstop would be a sort of 'safety net'. If the Single Resolution Fund were to lack the resources needed to deal with a bank crisis, a reserve of additional funds would be available from which it can borrow as a last resort.  

The agreement follows proposals for deepening Europe's Economic and Monetary Union (EMU), which were put forward by the European Commission in December 2017. That package of measures included a number of initiatives, including a proposal to transform the European Stability Mechanism into a European Monetary Fund.

Features of the backstop

The backstop will act as a last-resort instrument, which should only be used once the Single Resolution Fund has been depleted. The backstop should also be 'fiscally neutral'. In other words, there should be no costs to taxpayers and any use of the backstop should be repaid by the banking sector.

The backstop should also cater for 'equivalent treatment'. This means that when a Member State joins the banking union, it should have the same rights and obligations as the existing banking union Member States.

The outcome of the Euro summit is a step towards completing the banking union and work will now continue on the details of the ESM reform and the implementation of the backstop role it will have. Over the coming months, the Eurogroup will discuss some of the key issues, such as the governance and decision-making procedures for the backstop and certain technical details. By December the Eurogroup is expected to have prepared an outline of the key features of the reinforced ESM.

Read more on the common backstop and the banking union