Blog Post

Urgent reform of the EU resolution framework is needed

In this blog, the authors argue that two aspects of the European resolution framework are particularly in need of reform – the bail-in regime and the resolution mechanism for cross-border banks – and propose a reform of both.

By: , and Date: April 16, 2021 Topic: European Macroeconomics & Governance

This republished blog originally appeared on VoxEU as a column contributing to ongoing debate on reform of the EU resolution framework.

VoxEU logo

The financial industry and regulators in the EU seem to have converged on the following:

  • Unlike in 2007-2008, the Covid crisis has not affected banks, at least not so far. This is explained by the fact that they were overall better capitalised than in the previous crisis and that governments have issued strong support to companies in various forms.
  • Once moratoria and other support measures are unwound, European banks will likely be confronted by a wave of non-performing loans (Kasinger et al. 2021). This would require higher provisions and would exert downward pressure on already weak profits.
  • If these risks were to increase, a wave of banking crises cannot be ruled out.

This column starts from this consensus and from the conviction that the existing European resolution framework, an essential part of the European banking union, is still largely deficient.

In our view, two aspects of the European resolution framework are particularly in need of reform: the bail-in regime and the resolution mechanism for cross-border banks.

The bail-in regime

To reduce the likelihood of bailouts, the 2014 Banking Recovery and Resolution Directive (BRRD) insists on a bail-in of 8% of a bank’s balance sheet, even under ‘extreme systemic stress’, as a necessary condition (1 since January 2016) for access to the Single Resolution Fund or even national public money. While the 8% rule is non-negotiable, financial instability concerns allow resolution authorities to exempt, next to secured liabilities, interbank debt expiring within seven days. This flexibility is limited, however, since: (1) the resolution outcome should respect the ‘no-creditor-worse-off’ (than in bankruptcy) principle; and (2) priority is (retroactively) granted to natural persons and SMEs over other unsecured claims (and among those, priority is granted to the deposit insurance fund).

Together, these two principles put ‘wholesale deposits’ at greater risk by (retroactively) making them junior to (uninsured and, even more, insured) retail deposits. This is a paradox, since the post-Lehman crisis showed that wholesale depositors ran much faster than retail ones. Aware of this risk, the BRRD mandates the Single Resolution Board to impose Minimum Requirements of own funds and Eligible Liabilities (MREL) targets that are specific to each bank. The problem is that, so far, many European banks do not have sufficient subordinated MREL claims, with the result that the 8% rule cannot be implemented without risking financial instability. So, the banking union has in theory a stricter bail-in regime than the one recommended globally by the Financial Stability Board (FSB), but one that it cannot implement in reality. In fact, to this day, the 8% bail-in rule has never been applied (in the Banco Popular Español case, only subordinated claims were bailed-in, as already prescribed by the 2013 State Aid guidelines).

Cross-border banks

Consolidation of the banking sector is, in principle, desirable as a vehicle for financial integration and as a potential driver of efficiency in EU banking. However, cross-border banks today are a potential source of financial stability risk. Intra-group (and liquidity) exposures are often exempted from large exposure limits by supervisors and could therefore become a conduit for cross-border contagion, as was the case for the interbank market during the global financial crisis. This problem is partly linked to a political stalemate involving countries which are home to the holdings and those which host the subsidiary (the so-called ‘home-host’ debate). At the core of this discussion is the concern that cross-border consolidation will present an unsurmountable challenge for orderly resolution involving national authorities from several jurisdictions due to conflicting interests.

How can we improve the current situation in these two areas?

Improving the bail-in regime

If Europe wants to enforce the 8% rule, 8% of the balance sheet of banks must be composed of long-term subordinated funds (equity and contingent and non-contingent subordinated long-term debt). The BRRD created a significant problem of sequencing: it imposed a bail-in threshold before allowing banks to build up enough long-term subordinated bail-inable claims.

By contrast, the bail-in rule promoted by the FSB, which applies only to global systemically important banks (G-SIBs), only kicks in after these banks have sufficient total loss-absorbency capacity (TLAC). Moreover, the rule ‘only’ imposes a new solvency ratio rather than an explicit restriction on bailouts. But while it ‘looks’ less ambitious than the BRRD regime, it has one big advantage: it is much more credible.

The 2019 BRRD revision made some progress by introducing two important innovations:

  1. stricter subordinated MREL requirements for banks whose balance sheets are larger than €100 billion (with a transition until 2024), and
  2. the ability for national resolution authorities to go below that number.

These points are useful but insufficient. Including specific senior claims in MREL does not protect other senior unsecured claimholders, because bail-in should in principle be proportionally applied to all claims in a given priority class. Therefore, our recommendation is to go further and say that MREL should only consist of claims subordinated to non-MREL claims for all banks equal to at least 8% of their balance sheet, and that the 8% rule can apply only when this is done. Only this will prevent potential panics, because the ‘no bailout before 8% bail-in even under extreme stress’ rule is probably more credible/rigid in the euro area context than in a ‘normal country’, because of the higher aversion to bailouts mentioned above.

Another reason why the 2019 BRRD revision is insufficient is that it allows, but does not impose, national resolution authorities to accelerate MREL requirements for banks with less than €100 billion balance sheets. This means that the 8% rule remains inapplicable in large countries with many small banks, like Germany and Italy, and in small countries where banks are generally of small size.

But the bigger problem is the transition.  Raising subordinated funding to 8% of the balance sheet would be very costly for some banks, especially smaller ones that may have a hard time raising subordinated debt in a way that would not be too costly.  Even the new BRRD, which only goes part of the way, implies a significant capital raising exercise (which explains the long transition period).

We understand that, politically, the 8% rule is ‘sacred’ and is partly motivated by an aversion to turning the banking union into a transfer union, with the aggravating circumstance that bank bailouts are (understandably) not the most popular use of public money. The paradoxical result, however, is that in practice, because of the sequencing problem, it has got in the way of bank resolution and bail-ins since the introduction of the BRRD.  It would be much better to agree on a path towards 8%, say with a lower amount xt% at year t, and to replace the 8% rule by an xt% rule, possibly requiring that bailouts that do not satisfy the 8% rule have to be covered by national rather than European money, to make it politically acceptable.   Quantifying this transition path in the current uncertain times is beyond the scope of this column.

Solving the home-host impasse

In principle, the creation of the banking union and the establishment of the Single Resolution Board (SRB) should have solved the coordination problems between national authorities that typically plague cross-border resolution, especially when the single-point of entry (SPE) resolution strategy is chosen, which is the case for most banking groups in the banking union countries.

In reality, ‘host’ countries in the banking union continue to ring-fence foreign subsidiaries operating within their jurisdiction, which “defeats the purpose of the Banking Union” (Philippon and Salord 2017). This situation reflects a lack of trust in the system. In particular, small countries like Belgium or Luxembourg, which host important subsidiaries of foreign banks headquartered in larger euro area countries, fear ‘unfair’ treatment in case of resolution (e.g. Dewatripont et al. 2021).1 These host countries therefore insist on keeping their Options and National Discretions (ONDs) on liquidity and intra-group exposures, to the chagrin of home countries and European authorities. Of course, one should not a priori doubt the SRB’s aim to try and ensure fairness between countries. But the devil will be in the details.

Better to improve the rules of the game to constrain discretion and (perceived or actual) current potential bias by adopting a fully euro area-wide approach to resolution of cross-border banks. To do this, the simplest solution is to have resolution focused on burden-sharing at the holding level by adopting a structural subordination approach, which would separate business functions in operating subsidiaries from the pure financing functions of holding companies. Under the dominant SPE strategy, losses in subsidiaries are first transferred up to the holding company. If it fails or risks failing as a result, the group has to be resolved, and the holding company is bailed-in using appropriately calibrated pre-existing eligible liabilities (MREL). This would reassure host countries (which would then have to drop their ONDs), because losses would occur ‘at the top’, in the home country, and the group would stay together.

This solution is also the economically efficient thing to do: to avoid moral hazard, the decision-maker should be the residual claimant. This principle is consistent with the whole idea of prudential regulation, solvency ratios and no bailouts. And it is moreover consistent with ideas developed at the FSB by the architects of the FSB resolution principles (see Tucker 2018, who recommends structural subordination).


Our double proposal would strengthen the banking union by (1) making resolution of individual banks more credible, and (2) allowing cross-border banking to better contribute to the needed consolidation of the sector by trying to reconcile the concerns of countries motivated by a very heterogenous euro area banking sector (involving, in some cases, countries with many small and fragile banks as well as countries home to cross-border holdings and those which host subsidiaries). And while it would not fully prepare the banking union for a systemic banking crisis, it would help structure the urgently needed discussion on the nature of credible solutions to manage systemic crises (the nature of bail-in, the type and conditionality of (national and European) bailouts, and so on).


Ahmad, I, T Beck, K D’Hulster, P Lintner, and F D Unsal (2019), “Banking Supervision and Resolution in the EU – effects on small host countries in Central, Eastern and South Eastern Europe“, World Bank, FinSAC.

Dewatripont, M, M Montigny and G Nguyen(2021), “When trust is not enough: Bank resolution, SPE, Ring-fencing and group support”, mimeo.

Garicano, L (2020) “Two proposals to resurrect the Banking Union: The Safe Portfolio Approach and SRB+”,, 17 December.

Kasinger, J, J-P Krahnen, S Ongena, L Pelizzon, M Schmeling and M Wahrenburg (2021), “Preparing for a wave of non-performing loans”,, 1 April.

Philippon, T and A Salord (2017), Bail-ins and Bank Resolution in Europe: A Progress Report, Geneva Reports on the World Economy Special Report 4.

Tucker, P (2018), “Resolution policy and resolvability at the centre of financial stability regimes ?”, paper presented at the IADI/BIS FSI conference, Basel, 1 February.

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 More on this topic

Upcoming Event


Prospects for improving securities and financial reporting oversight in the EU

This members-only event welcomes Eva Wim­mer, Head of the Directorate-General for Financial Market Policy at the German Federal Ministry of Finance, for a conversation with an invited audience.

Speakers: Nicolas Véron and Eva Wimmer Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF

Policy Contribution

Accounting for climate policies in Europe’s sovereign debt market

Sovereign debt will be vital in stimulating sustainable investment, but information is lacking on how green public spending actually is.

By: Marta Domínguez-Jiménez and Alexander Lehmann Topic: Energy & Climate, Finance & Financial Regulation Date: May 3, 2021
Read about event More on this topic

Past Event

Past Event

Covid-19 and the geopolitics of the Balkans

How have China, Russia, Turkey and others stepped up their activities in the Balkans at a time when the prospect of enlargement is diminished?

Speakers: Michael Leigh, Pierre Mirel, Aleksandra Tomanić, Justyna Szczudlik and Catherine Wendt Topic: Global Economics & Governance Date: April 29, 2021
Read article More on this topic More by this author

Blog Post

Confronting the risks: corporate debt in the wake of the pandemic

As European economies emerge from lockdowns, it is becoming clearer that corporate debt has reached critical levels. A new French scheme, in which the state guarantees portfolios of subordinated debt, shows how financial support could be targeted better.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: April 28, 2021
Read article More on this topic


The ECB needs political guidance on secondary objectives

While EU Treaties clearly stipulate that the ECB “shall support the general objectives of the European Union”, it is not appropriate to simply stand by, wishing that the ECB will use its discretionary power to act on them. Political institutions of the EU should prioritise the secondary goals to legitimise the ECB’s action.

By: Pervenche Béres, Grégory Claeys, Nik de Boer, Panicos O. Demetriades, Sebastian Diessner, Stanislas Jourdan, Jens van ‘t Klooster and Vivien Schmidt Topic: European Macroeconomics & Governance Date: April 22, 2021
Read article More by this author


We need more bias in artificial intelligence

What makes one vision more desirable than another is not its neutrality, but whether it can better serve one’s goals in the context of where those goals are being pursued.

By: Mario Mariniello Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: April 21, 2021
Read about event More on this topic

Past Event

Past Event

Taking stock of global sustainability reporting

This closed-door event will discuss standards for the measurement and disclosure of climate-related exposures.

Speakers: Carole Crozat, Sonja Gibbs, Piers Haben, Lucile de la Jonquière, Alexander Lehmann, Sara Lovisolo, Fayyaz Muneer and Lee White Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 20, 2021
Read article More on this topic More by this author


More Europe or less Europe?

Europe is often a ship with multiple captains. The boat moves forward in calm seas, but when the slightest wind puts it off course, it is not easy to steer that boat. It is not so much a question of more Europe rather than less, but of achieving ‘one Europe’. A ‘more-or-less Europe’ is an invitation to go nowhere.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: April 14, 2021
Read article More on this topic More by this author



Keeping momentum on good governance

Transparency, human rights and good governance: a conversation with Katalin Cseh MEP

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 17, 2021
Read about event More on this topic

Past Event

Past Event

Presentation of the Euro Yearbook 2021

Join us for the launch of the eighth edition of the 'Euro Yearbook'

Speakers: Maria Demertzis, Fernando Fernández, Fiona Maharg-Bravo, Antonio Roldán and Jorge Yzaguirre Topic: European Macroeconomics & Governance Date: March 12, 2021
Read article More on this topic More by this author


Asset bubbles won’t help our post-pandemic recovery

An unintended consequence of the virus has been ‘one of the wildest bull markets in recent economic history’ but a worsening of income distribution will have a negative impact further down the line.

By: Alicia García-Herrero Topic: Finance & Financial Regulation Date: February 23, 2021
Read about event More on this topic

Past Event

Past Event

How could regulators address financial firms’ dependency on cloud and other critical IT services providers?

At this closed-door event Dirk Clausmeier, Head of IT security at the German Ministry of Finance will discuss financial institutions use of cloud service providers.

Speakers: Dirk Clausmeier and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 28, 2021
Load more posts