The Single Resolution Mechanism of the European Banking Union: its structure and functioning
The recent financial crisis showed that the institutions of the European Union (EU) and its member states are poorly prepared for solving current problems of banks, which are experiencing financial difficulties in European markets. In order to be able to further provide services for citizens and companies, member states’ governments had to support banks with public finances and provide guarantees on an unprecedented scale. It did help to avoid a collapse of banks and a disturbance of the economy, but only by putting the burden on taxpayers and thereby causing deterioration in public finances. An agreement about the right course of action in the face of these difficulties experienced by cross-national banks has not been reached either. The major situation changer should be the European Banking Union (EBU), also called the Integrated Financial System, which is in the process of being created. The foundations for it have been laid during Lithuanian presidency of the Council of the EU in the second half of 2013. For Lithuania and all other EU member states, joining the banking union will mean handing over important national state powers to the European Union institutions.
Controlling Moral Hazard in Bank Resolutions: Comparative Policies & Considerations in System Design
This paper reviews the key legal and policy measures designed to limit moral hazard in bank insolvency systems and compares and explores how existing national insolvency systems have implemented these principles. While many legal systems include prohibitions or limitations on the use of public money to bailout a failing bank, many systems do not provide effective alternatives to a bailout. As a consequence, in crises policymakers often have little choice but to resort to broad public guarantees that maximize the disincentives to market discipline. The history of recent bank failures around the world shows that by itself a simple prohibition on public funding or a limitation to least, lesser or liquidation costs does not work. The paper argues that for cost controls to be effective regulatory authorities must have real alternatives to a bailout or liquidation. This requires balancing cost limitations or bans on public bailouts with a flexible system of bank resolution that allows continuation of key banking functions despite the collapse of the bank.
General guidance for the resolution of bank failures
Since its establishment in 2002, the mission of the International Association of Deposit Insurers (IADI) has been to ‘contribute to the enhancement of deposit insurance effectiveness by promoting guidance and international cooperation.’ As part of its mission, IADI undertakes research projects to provide guidance on deposit insurance issues. In order to deal in a timely and effective manner with the impact of individual bank failures or systemic banking crisis, many countries are seeking to enhance their mechanisms for dealing with failing or failed banks. Although the responsibilities of deposit insurers for various aspects of the resolution framework vary from country to country, the manner in which failed banks are resolved has a major impact on all deposit insurers. The objective of this paper is to develop general guidance for deposit insurers and other safety-net participants interested in establishing or enhancing their mechanisms for the resolution of failed or failing banks. It was prepared by the IADI Sub-committee on Developing Guidance for the Resolution of Bank Failures and is designed to take into account different country circumstances, settings and structures. The guidance developed is based on the judgment of IADI's members and the experiences of deposit insurers involved in the resolution of bank failures. Key sources of information used were the responses from a survey questionnaire distributed by the sub-committee in June 2004. The paper also draws on relevant reports and other literature available on the subject.