Crisis Management and Bank Resolution: Quo Vadis, Europe?

Abstract

Crisis management in the financial sector is currently at the top of the reform agenda at national, European and international level. Well-designed bank resolution regimes are essential not only to meet the acute need of a credit institution in crisis but also to ensure that proper incentive structures operate in the market prior to any crisis. Existing regimes are inadequate and incentive structures have proven to be fundamentally destructive. The lack of workable crisis resolution tools has had an adverse effect on crisis prevention and imposed enormous costs on the taxpayer. This paper summarizes the main legal challenges for crisis management of ailing credit institutions and identifies the key features of an effective bank resolution regime. Effective crisis management demands the ability to manage. In the aftermath of the financial crisis, two leading EU Member States (the United Kingdom and Germany) adopted special resolution regimes, providing for tools and powers to manage the resolution of banks. The paper assesses and compares these two approaches. In addition, the paper analyses the emerging response at European and international level, focusing in particular on bail-ins, the suspension of netting and other rights, treatment of groups and systemically important financial institutions. At the international level, the Financial Stability Board’s recently published ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ constitute a breakthrough in the development of a global resolution regime. At the EU level, the European Commission’s proposal for an EU crisis management regime is expected to be an even more ambitious step. The European financial sector reforms have the potential to achieve a quantum leap in the efficient cross-border management of key issues, in particular in the field of bank resolution and insolvency law. This may evolve into a whole new dimension of efficient cooperation and economic and political convergence. In the field of crisis management, the fact cannot be ignored that we need more Europe, not less.