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Back-to-back funding

A method of funding loans to programme countries whereby the cash flows of the funding exactly match the cash flows of the loans to the beneficiary country. 
This strategy is used for specific purposes, such as bank recapitalisation, in addition to the EFSF’s and ESM’s predominant diversified funding strategy.

Bad bank

A bad bank is a private or state-owned entity, established to separate bad assets (e.g. non-performing loans or foreclosed properties) owned by a bank from good quality assets. The bad bank is usually set up with a pre-defined lifespan, during which the bad assets are sold off in order to recover as much of their value as possible. Meanwhile the good assets remain with the “good bank”, which can continue to provide banking services, but is usually first temporarily nationalised or sold outright to another bank.


Bail-in – a legal procedure that may be used for bank resolution. If a bank is failing or likely to fail, carrying out a bail-in means that the shareholders and creditors of a bank are forced to accept losses incurred by the bank. This is a major shift away from the concept of bail-out, where national governments (and through them, taxpayers) support banks with funds to prevent their failure. In the case of bail-in, it is the bank’s shareholders and creditors, rather than the taxpayers, who  carry the costs of bank failure. The use of bail-in is an important element of the Bank Recovery and Resolution Directive.

Bank holiday

A period during which banks are temporarily closed by the national government or banking authority. This may occur during a systemic banking crisis, in order to prevent bank customers from withdrawing their deposits on a mass scale (which could potentially lead to the bank’s or banking system’s collapse).

Banking union

Banking union – The European framework for banking supervision, restructuring and resolution of banks. It consists of the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and funding arrangements, which include the Single Resolution Fund and the ESM direct bank recapitalisation instrument. The BRRD directive, although applying to national resolution authorities, is also an important element of the new European framework for bank resolution.

Base rate (ESM loans)

The cost of funding by the ESM, derived from a daily computation of the actual interests accrued on all bonds, bills and other funding instruments issued by the ESM. This cost is passed on to ESM Members receiving financial assistance. The base rate is the main component of interest paid on ESM/EFSF loans by beneficiary countries.

Benchmark bond

(i) A bond that provides a standard against which the performance of other bonds can be measured. (ii) The latest issue within a given maturity and size. (iii) According to bond market convention, a bond which delivers  a certain size, liquidity and reputation: benchmark size is generally meant to be at least €3 billion for maturities up to 10 years and at least €1 billion for maturities above 10 years. 

Bid/cover ratio
The ratio of the value of all bids received for a newly issued bond/bill to the value of the bids accepted. It is used as a measure of the demand for securities offered by an issuer.
A short-term debt security with a maturity of less than one year. The ESM currently issues 3- and 6-month bills by auction.
Board of Auditors

An independent organ of the ESM that inspects the ESM accounts and verifies that ESM’s operational accounts and balance sheet are in order. The Board of Auditors consists of five members appointed by the Board of Governors and includes two members from the supreme audit institutions of the euro area countries - with a rotation between the latter - and one from the European Court of Auditors. The Board of Auditors may inform the ESM Board of Directors at any time of its findings and draws up a report, on an annual basis, to the Board of Governors. This report also becomes accessible to the national parliaments and supreme audit institutions of the euro area countries and to the European Court of Auditors. 

Board of Directors

The Board of Directors takes decisions as provided for in the ESM Treaty or delegated to it by the Board of Governors and ensures  that the ESM is run in accordance with the ESM Treaty and its by-laws. As an example, the  Board of Directors decides on disbursements to programme countries.  Each Governor appoints one Director and one alternate Director from among people of high competence in economic and financial matters. The European Commission and ECB may each appoint a (non-voting) observer. The Board of Directors meets whenever called for by the affairs of the ESM.  

Board of Governors

The Board of Governors forms the highest governing body of the ESM and comprises ministers of finance of the euro area countries as voting members. The European Commissioner for Economic and Monetary Affairs and the ECB President may participate in meetings of the Board of Governors as (non-voting) observers.

The most important decisions taken by the Board of Governors require mutual agreement (unanimity). These include decisions to provide stability support to countries, the choice of instruments, conditions and terms of such support, changing the authorised capital stock and adapting the maximum lending volume. The Board of Governors meets at least once every year and whenever needed.

Bond auction

A method of selling bonds and bills on the primary market, usually by national governments and sovereigns, where financial institutions place bids on the yield or price of the bond or bill being offered. The ESM and the EFSF are the only supranational issuers using this method.

Borrowing costs

The costs an issuer  has to pay on debt securities it has issued, such as bills and bonds. It is determined by the combined yields on the securities.

BRRD (Bank Recovery and Resolution Directive)

A directive establishing a common framework of rules and powers for EU Member States to intervene in the case of failing banks. The directive gives broad powers to national authorities to prevent, intervene early and conduct the resolution of troubled banks. Such powers include selling the bank (in whole or in parts), setting up a temporary bridge bank, and bailing in shareholders and creditors of the bank.