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.
Resolution of banking crises: a review
Late last year, the Bank of England’s Centre for Central Banking Studies hosted a research workshop for officials from a number of developed and emerging-market economies on banking crisis resolution. This article, which draws on the information provided in the workshop is based on a paper presented at its concluding conference. It describes some of the principles that authorities should and do consider when resolving banking crises, and possible resolution options. It also assesses the resolution practice in recent systemic banking crises.