Shadow Resolutions as a No-No in a Sound Banking Union

Abstract

The credit crisis has generated much debate on the bailout or resolution of larger banks. By contrast, little attention has been paid to resolution procedures being generally circumvented when it comes to smaller banks. We describe how supervisory leniency and political considerations often result in public officials nudging viable banks into acquiring smaller, failing banks and show how this weakens supervision, distorts competition, and gives resolution a bad name. Recent reforms have provided EU authorities with significant incentives to follow formal resolution procedures rather than to operate in their shadow, but this is much less the case at the member state level. We propose a step-by-step approach to get national authorities to subject smaller banks to timely resolution, especially in ‘good’ non-financial crisis times.

Keywords: Bank Resolution, Banking Union, Single Supervisory Mechanism, Single Resolution Mechanism, Shadow Resolution, National Competent Authorities, Supervisory Forbearance

JEL Classification: G21, G33, K23