The reform centres on what is known as the common backstop. The backstop allows the ESM, as a last resort, to provide loans to the Single Resolution Fund (SRF) in order to wind down banks that are in financial difficulties. The SRF is financed by contributions from the banking sector. If these contributions prove insufficient, the ESM can, under certain conditions, approve a loan for the Single Resolution Board, which is then repaid later via special retroactive contributions from the banking sector. The backstop will be fiscally neutral in the medium term to protect taxpayers. This is an important contribution to strengthening the banking union and maintaining financial stability in the monetary union.
In addition to the common backstop, the ESM reform provides for further measures to enhance the ESM’s firepower as a crisis management instrument. For example, the reform makes the existing precautionary credit lines more effective. In this way, ESM members who get into financial difficulties through no fault of their own can receive solidarity-based support. This in turn mitigates risks to the stability of the monetary union and improves its debt sustainability in the long term. The introduction of uniform single-limb collective action clauses by the member states also helps towards this goal, as they ensure greater legal certainty in the event of debt restructuring. Furthermore, the ESM’s cooperation with the European Commission has been reorganised in a way that gives the ESM a stronger role in designing, negotiating and monitoring future financial assistance programmes.