International parallel audit of bank resolution
Together with the supreme audit institutions in Austria, Estonia, Finland, Germany, Portugal and Spain, the Netherlands Court of Audit is auditing the preparations that have been made for the resolution of banks that are failing or likely to fail. Together, we are examining how the national resolution authorities approach the resolution of medium-sized and small banks in their countries, and how the respective Ministers of Finance supervise their national resolution authorities. The international parallel audit also identifies possible audit gaps encountered by the supreme audit institutions in performing their audits, resulting from the transfer of powers from a national to a European level. Coordinated by the supreme audit institutions of Germany and the Netherlands, a joint audit report is being prepared. The European Court of Auditors is also involved in these activities.
The Netherlands Court of Audit published its own national audit report on bank resolution in the Netherlands on 12 December 2019.
During the financial crisis, the governments of many European countries intervened in the banking sector to prevent banks from collapsing, often at the taxpayer’s expense. In order to minimise the risk of governments having to bail out banks in the future, and to reduce the interdependence between banks and governments, the EU created a banking union encompassing all euro-area countries. The banking union currently comprises a single supervisory mechanism, which came into effect in 2014, and a single resolution mechanism, which came into effect in 2016. The latter was put in place to ensure that banks that run into serious financial trouble are ‘resolved’ in an orderly fashion, reducing as much as possible any adverse impact on public finances, taxpayers and the economy. Under the single resolution mechanism, failing banks are either resolved through the normal insolvency proceedings, or are taken into resolution. This must be done without the taxpayer having to foot the bill and without this having a detrimental effect on the economy. The resolution of medium-sized and small banks in the euro area is the task of ‘national resolution authorities’. The body designated as the national resolution authority for the Netherlands is the Dutch central bank (De Nederlandsche Bank).
Why are we performing this audit?
We are performing this audit in order to examine whether this European mechanism is being applied along similar lines in all euro-area countries, i.e. whether there is a level playing field. This is important as it is the only way of preventing banks from failing at the taxpayer’s expense. Our joint audit identifies the similarities and differences in the design and application of the single resolution mechanism as it currently stands.
What are our audit questions?
The purpose of the audit is to provide an understanding of the current situation regarding the implementation of the European resolution mechanism for medium-sized and small banks. It is based on the following audit questions:
- How has the resolution task for medium-sized and small banks been structured since 2016, and how do the national resolution authorities perform this task in practice?
- What is the current status of decisions about the resolvability of medium-sized and small banks, and what do we know about the quality of the resolution plans?
- How do the Ministers of Finance discharge their responsibility for the operation of the resolution mechanism?
- Do supreme audit institutions encounter limitations in their audits of the resolution of medium-sized and small banks and, if so, how can these be overcome?