Blog Post

European bank resolution plans are undermined by a lack of transparency

The discussions of the now-aborted merger of Germany’s two largest banks underlined supervisors’ concerns over creating banks that are too big or too complex to fail. While European banks are increasingly funded through securities that could be subject to a bail-in, transparency over how any resolutions would unfold is as yet very poor.

By: Date: May 15, 2019 Topic: Finance & Financial Regulation

Three factors seem essential in ensuring the success of Europe’s framework for bank resolution: sufficient loss-absorbing capacity; adoption of organisational structures that allow critical functions of banks in resolution to be preserved while other parts are wound down in resolution; and cooperation with resolution authorities outside the banking union that reflect the extensive ownership linkages of European banks.

While banks have made some progress in raising funds that could shelter the taxpayer from the costs of a potential failure, it is very unclear whether they have adopted internal structures and governance that would make a resolution a plausible scenario.

All banks submit to their supervisor so-called recovery plans, which lay out how to restore viability in times of financial stress. When the ECB reviewed the plans of the largest euro-area banks last year it found that banks were vastly over-optimistic about their capacity to raise additional capital and liquidity in a crisis. These extra buffers would surely be even further eroded in any systemic crisis. Such plans are not public, but the Single Supervisory Mechanism (SSM) seems to foster some sharing of best practice in the industry.

On this basis, the Single Resolution Board (SRB) has already drafted initial resolution plans, which address the ‘gone concern’ stage of a bank that is no longer viable.  The SRB’s 2019 work programme envisages that these plans will now be finalised for all banks under its remit, and that plans set by national bodies will be scrutinised (nearly 2,300 other banks need to develop such plans).

Barriers to ‘resolvability’

The SRM Regulation details elements of resolution plans which largely reflect principles put in place by the Financial Stability Board (FSB). Within the banking union, implementation is only now clarified in SRB policies. Key aspects should be:

  • through what tools resolution would be achieved, and specifically whether the bank would remain largely intact or whether individual parts would be wound down or sold off;
  • whether several or only a single resolution authority would be involved (given the extensive ownership stakes, including in emerging markets, a key question would be where bail-in capital is positioned, and what call local host-country authorities would have on such funds);
  • which parts of the institution would be deemed critical in a restructuring, and which could be subject to a wind-down (critical functions are provided to third parties, and their disruption would impact the real sector and/or financial stability);
  • how any resolution would be funded (market confidence that funding could be sustained throughout a resolution would, of course, depend on investors grasping the resolution scenarios and viability of the entity that emerges).

In its work with banks the SRB will now address any barriers to resolvability. Previous Bruegel research has highlighted that complex ownership structures (including ownership by other banks) and international operations would complicate any resolution. But very little is known about what obstacles to resolution the SRM has identified, and how it intends to fix them.

Transparency is essential

Markets of course take a keen interest in resolution scenarios, not least to gauge the risk to sub-ordinated funding that could be subject to a bail-in. But transparency is also in the public interest as it will make the resolution regime more effective.

Only once markets and other stakeholders can anticipate that resolution is credible, and which parts of a failing bank would not be deemed critical, will they offer funding in light of such risk. Otherwise the bank would still be perceived as too-big-to-fail, and the moral-hazard problems familiar from the past crisis would set in. In light of a resolution scenario contracts could be set up in such a way to ensure continuity.

The FSB already called on financial institutions to make their own recovery plans public. But for euro-area banks there has been very little transparency of recovery plans and even less for resolution plans. One insight came from the European Court of Auditors, which in its 2017 report criticised that resolution plans were late in materialising and did not meet many requirements from the ‘Single Rulebook’ of bank supervision. Resolution strategies appeared not to have been operationalised. Communication with stakeholders seemed slow and incomplete. Also, it seemed unclear how the SRB interprets the ‘public interest’ that justifies its intervention.

European practice is very different from the approach now proposed in the UK, and also the US, where the largest financial institutions with a balance sheet in excess of $50 billion need to submit living wills. Public versions of these plans are made available by the Federal Reserve. The bank itself drafts the resolution plan, though supervisors then publish feedback where necessary. This approach is designed to disseminate best practice in the industry.

Options for the SRB

Lack of transparency of resolution plans, and of the SRB’s own strategy for addressing barriers to resolvability, still bedevils the European quest to tackle ‘too-big-to-fail’. Banks remain large, in complex ownership structures and inter-linked. More openness would assist banks’ internal restructuring, and also industry reorganisation, including through cross-border mergers.

The SRB should become more open about its own standards, what barriers it has identified, and how it goes about addressing them. As a young institution which had to quickly establish its role in the banking union, the SRB may have decided against disclosure of potentially market-sensitive information. But the US experience has shown that banks can be asked to produce a public version of their crisis plans, and that it may be in their interest to do so. This would likely bolster confidence that risks to the taxpayer are indeed limited, and guide the industry to reorganise into a more crisis-resilient structure.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event

Past Event

Past Event

The Sound of Economics Live: The State of the Union going forward

In the first Sound of Economics Live episode after summer we look at the State of the Union address delivered by Ursula von der Leyen.

Speakers: Giuseppe Porcaro, André Sapir, Guntram B. Wolff and Alicia García-Herrero Topic: Energy & Climate, European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 16, 2020
Read article More on this topic More by this author


Without good governance, the EU borrowing mechanism to boost the recovery could fail

The European Union recovery fund could greatly increase the stability of the bloc and its monetary union. But the fund needs clearer objectives, sustainable growth criteria and close monitoring so that spending achieves its goals and is free of corruption. In finalising the fund, the EU should take the time to design a strong governance mechanism.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 15, 2020
Read about event More on this topic

Past Event

Past Event

Tackling too-big-to-fail banks: have the reforms been effective?

Evaluation of the global reforms implemented to deal with "too-big-to-fail banks".

Speakers: Alexandre Birry, Claudia M. Buch and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 9, 2020
Read article Download PDF

Policy Brief

Rebooting Europe: a framework for a post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance Date: May 13, 2020
Read article More on this topic More by this author

Blog Post

Banks in pandemic turmoil

The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complacency.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: March 24, 2020
Read about event More on this topic

Past Event

Past Event

The resurrection of the European Banking Union

At this event, Luis Garicano, member of the European Parliament, presented his two proposals to resurrect the European Banking Union: "a Safe Portfolio" and "a Single Resolution Board +".

Speakers: Tom Dechaene, Luis Garicano, Michala Marcussen and Guntram B. Wolff Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 20, 2020
Read article More on this topic More by this author

Blog Post

The EU’s poverty reduction efforts should not aim at the wrong target

The EU cannot meet its ‘poverty’ targets, because the main indicator used to measure poverty actually measures income inequality. The use of the wrong indicator could lead to a failure to monitor those who are really poor in Europe, and a risk they could be forgotten.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 18, 2020
Read article More on this topic

Blog Post

A European anti-money laundering supervisor: From vision to legislation

In fighting anti-money laundering, the European Commission should act fast toward creating a central supervisory authority.

By: Joshua Kirschenbaum and Nicolas Véron Topic: European Macroeconomics & Governance Date: January 24, 2020
Read article Download PDF More on this topic More by this author

External Publication

European Parliament

Impediments to resolvability of banks

This paper gives an overview of the seven aspects of resolvability defined in 2019 by the Single Resolution Board, and then assesses progress in two key areas, based on evidence gathered from public disclosures made by the 20 largest euro-area banks. The largest banks have made good progress in raising bail-in capital. Changes to banks’ legal and operational structures that will facilitate resolution will take more time. Greater transparency would make it easier to achieve the policy objective of making banks resolvable.

By: Alexander Lehmann Topic: European Parliament Date: December 18, 2019
Read about event More on this topic

Past Event

Past Event

Recovery and Resolution Planning for Europe’s cross-border banks

This workshop will discuss recovery and resolution plans in the CEE countries

Speakers: Sebastiano Laviola, Alexander Lehmann, Boris Vujčić, Alexander Benkwitz, Roland Mechtler, Sofia Toscano Rico, Krzysztof Broda, Radek Urban, Dejan Vasiljev, Emil Vonvea and Guntram B. Wolff Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 6, 2019
Read about event More on this topic

Past Event

Past Event

Better governance, better economies

This event will feature the presentation of the 2019 EBRD Transition report, which focuses on governance in the EBRD regions.

Speakers: Daniel Daianu, Beata Javorcik, Zsuzsanna Lonti and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Press Club Brussels Europe, Rue Froissart 95, 1000 Brussels Date: November 20, 2019
Read article Download PDF More by this author

Policy Contribution

Crisis management for euro-area banks in central Europe

Euro-area bank integration has decreased as post-financial crisis national rules require banks to hold more capital at home. It might be undermined further by bank resolution planning. Either a Single Resolution Board takes the lead for the entire banking group or independent local intervention schemes need to be developed for crisis resolution.

By: Alexander Lehmann Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: November 19, 2019
Load more posts