Bank Resolution and Mutualization in the Euro Area

Abstract

This article analyses the reform of the European institutional framework for bank supervision and crisis resolution in the aſtermath of the Euro area bank and sovereign crises. The reform aimed at centralizing the decision making structures for bank prudential supervision and resolution. Mutualization of bank risk is a cornerstone to ensure financial stability and to lend credibility to the Banking Union. To this purpose, the European Stability Mechanism (ESM) – preceded by the European Financial Stability Facility (EFSF) - was created as a mechanism of mutualisation of sovereign risks in the Euro area, which was followed soon aſter by a clear push toward the centralization of the decision-making structures of bank prudential supervision and crisis resolution. The Single Resolution Fund (SRF), and the single euro area deposit insurance scheme (EDIS) were created as two further Euro area private mutualisation mechanisms in the context of the Banking Union, to cover all banks in the euro area and in future participating countries. Neither the SRF nor the EDIS have the ESM as a fiscal backstop in the steady state as yet. In order to limit moral hazard, mutualization takes place hand-in-hand with burden-sharing with bank private investors in crisis resolution as per the Bank Recovery and Resolution Directive (BRRD). This article also compares the European and US regulatory frameworks based on the ultimate objectives of limiting moral hazard and preserving market discipline in bank resolution.