Controlling European money for failing banks: designing the European Stability Mechanism as banking union’s financial backstop

The Single Resolution Mechanism (SRM) was designed to create a common framework for the recovery and resolution of ailing banks headquartered in the euro area. The Single Resolution Fund (SRF) was created to be this mechanism’s financial backbone and to effectively break the doom loop between banks and governments. However, SRF funds were widely seen as insufficient in the event of the need to resolve one or more large banks. In early 2021, euro area member states agreed to changes to the European Stability Mechanism (ESM) so that it could become the financial backstop for the SRF. This paper analyses the existing and proposed arrangements on the SRF backstops, using elements of the principal–agent model. We argue that the proposed use of the ESM as the SRF’s backstop would allow euro area national governments significant control and veto possibilities through the addition of the ‘permanence of the legal framework’ clause.