Download publication

Policy Contribution

The impact of the legal and operational structures of euro-area banks on their resolvability

Following the financial crisis, the question of how to handle a big bank’s collapse has come to the fore. This Policy Contribution evaluates the obstacles to resolvability that the legal and operational structures of the large euro-area banks could pose to the European Union’s new resolution regime.

By: and Date: December 6, 2016 Topic: European Parliament

This material was originally published in a paper provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned by the Directorate-General for Internal Policies of the Union and supervised by its Economic Governance Support Unit (EGOV).

The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament.

The original paper is available on the European Parliament’s webpage.

© European Union, 2016.

In the aftermath of the financial crisis, the question of how to handle a big bank’s collapse has arisen. Large banks perform functions that if disrupted could seriously damage the financial sector and the real economy.

The European Union’s new resolution regime introduced by the Bank Recovery and Resolution Directive (BRRD) aims at orderly resolution of banks, with creditors – and to greatest the extent possible, not the taxpayer – bearing the cost of bankruptcy, while the banking functions crucial to the financial system and the economy continue to be performed. The Single Resolution Board (SRB) has been set up exactly to carry out this task in the banking union.

This Policy Contribution evaluates the obstacles to resolvability that the legal and operational structures of the large euro-area banks could present, assuming that it is possible to liquidate smaller and medium-sized banks through transfer of their relevant activities to other banks.

Dirk Schoenmaker classifies the large euro-area banks according to their number of legal entities, foreign assets and their governance. From this, he identifies three groups of banks:

  1. domestic banks with a limited number of entities;
  2. domestic cooperative banks with more complicated legal and decision-making structures;
  3. cross-border banks with complex structures operating in multiple jurisdictions.

The paper focuses on specific aspects of the SRB’s resolvability assessment process.

  • The legal and operational structures of banks should facilitate the separation of critical and non-critical bank operations. Non-critical operations should be liquidated when a bank is in resolution. The SRB should take a strict line on critical functions and, if necessary, overrule national resolution authorities (NRAs).
  • The SRB should not only simplify complex legal structures but also streamline protracted decision-making procedures within banks.
  • Only when effective cooperation arrangements with foreign resolution authorities are in place, should the SRB rely on the efficient single-point-of-entry (SPE) approach. Otherwise, a multiple-point-of-entry (MPE) approach is more realistic. Within the banking union, the SRB should promote the more efficient SPE approach in cooperation with NRAs.

There is currently no clarity on the provision of liquidity to a resolved bank. Liquidity is important if the resolved bank is to re-open for business. Dirk Schoenmaker recommends that the European Central Bank should clarify that it is prepared to provide emergency liquidity assistance (ELA) to properly resolved banks.

Read article More on this topic More by this author
 

Podcast

Podcast

Can central banks save the planet?

“We are not going to lead our society to a low-carbon economy by continuing to finance the status quo. “

By: The Sound of Economics Topic: Energy & Climate Date: February 24, 2021
Read article More on this topic More by this author
 

Blog Post

A brown or a green European Central Bank?

The European Central Bank portfolio is skewed towards the brown economy, reflecting a bias in the market. Can and should the bank deviate from the market allocation?

By: Dirk Schoenmaker Topic: Energy & Climate Date: February 24, 2021
Read article More on this topic More by this author
 

Opinion

Central banking’s brave new world

Ever since the 2008 financial crisis, central bankers have been busy developing new policy instruments to fight fires and ward off emerging threats. Nonetheless, many secretly dreamed of returning to the good old days of cautious conservatism (with financial stability taken seriously).

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: February 24, 2021
Read article More on this topic More by this author
 

Blog Post

US separates climate concerns from financial oversight in contrast to EU activism

Different EU and US supervisory approaches to climate risk may hamper efforts to work together and risk fragmenting global markets.

By: Rebecca Christie Topic: Finance & Financial Regulation Date: February 18, 2021
Read article More on this topic More by this author
 

Blog Post

Continuing fiscal support and the risk of inflation

Ongoing fiscal support in the United States is not expected to provoke inflation risks. There are no immediate inflationary risks in the euro area either.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: February 17, 2021
Read about event More on this topic
 

Upcoming Event

Mar
25
14:00

The state of the policy debate on the EU crisis management and deposit insurance framework

This members-only event welcomes Elke Koenig, Chair of the Single Resolution Board for an conversation with an invited audience.

Speakers: Elke König and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

Disruption or transformation: the impact of a digital euro on the financial system

How would a digital Euro impact the financial system?

Speakers: Fabio Panetta and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: February 10, 2021
Read about event More on this topic
 

Past Event

Past Event

In search of a fitting monetary policy: the ECB's strategy review

The ECB is reviewing its monetary policy strategy. How to ensure monetary policy is fit for purpose in a fast changing world?

Speakers: Maria Demertzis, Philip Lane, Reza Moghadam and Erik F. Nielsen Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 27, 2021
Read article More on this topic More by this author
 

Blog Post

Can the gap in the Europe’s internal market for banking services be bridged?

The European Union has made significant progress to a more unified banking market but frictions remain between euro and non-euro countries. Without a coordinated approach to remaining issues in completing banking union, the gap could widen.

By: Thomas Wieser Topic: Finance & Financial Regulation Date: December 7, 2020
Read article More on this topic More by this author
 

Opinion

How to minimise the impact of the coronavirus on the economy

COVID-19 is a global killer. Austerity needs to succumb.

By: Rebecca Christie Topic: Global Economics & Governance Date: December 2, 2020
Read article Download PDF
 

External Publication

European Parliament

Monetary policy in the time of COVID-19, or how uncertainty is here to stay

The COVID-19 crisis has compounded the uncertainty that has come to characterise the European economy. We explore how this uncertainty manifests itself in terms of ECB decision-making and the long-run challenges the ECB faces.

By: Maria Demertzis and Marta Domínguez-Jiménez Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 12, 2020
Read article More on this topic
 

Blog Post

Growth uncertainty, European Central Bank intervention and the Italian debt

European Central Bank intervention provides a buffer against the uncertainty faced by European Union economies in the face of COVID-19. For the time being, this intervention has alleviated concern about Italy's debt, but without it Italy is vulnerable to a debt crisis.

By: Andrea Consiglio and Stavros Zenios Topic: European Macroeconomics & Governance Date: October 28, 2020
Load more posts