The Emerging EU Framework for Bank Recovery and Resolution

Abstract

On the 6th January 2011, the European Commission’s DG Internal Market and Services issued an ambitious consultation document, Technical Details of a Possible EU Framework for Bank Recovery and Resolution which elaborates further on its bank rescue proposals. This paper critically reviews these proposals. Following the receipt of responses to this consultation, the EU proposes to release draft bank rescue legislation by June 2011. A harmonised European financial institution rescue regime is proposed to build upon national laws and national supervisory bodies. The proposed resolution framework will require adherence to seven key principles, including the reduction of moral hazard and risk reduction. Other principles include an emphasis upon prevention and preparation; providing credible resolution tools, enabling fast and decisive action by authorities and contributing to a smooth resolution of cross border groups. Investment firms that are not currently subject to prudential regulation will not be covered, but there will be new group resolution procedures. Due to the influence of prevailing laissez-faire market ideas, little room seems to exist in these proposals for continued state involvement in the banking sector, even though excessive adherence to these narrowly market-oriented ideas was a cause of the recent global financial crisis; some other parts of the world were able to more effectively weathered the storm of the recent financial crisis with some degree of government involvement in markets.

Keywords: Corporate rescue, EU banking failure, harmonisation in EU, cross-border issues

JEL Classification: G33, G34, F15, E58