The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe?

34 Pages Posted: 23 Jul 2012

See all articles by Maria Nieto

Maria Nieto

Banco de España

Gillian Garcia

GGH Garcia Associates

Date Written: July 1, 2012

Abstract

This paper analyzes the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union’s (EU) decentralized safety net. As compared to pure micro and macro prudential regulation, BRRF’s objective is to limit losses given financial institutions´ default while allowing for a balanced share of costs between private investors and tax payers. Most important, BRRFs contribute to shifting the government’s tradeoff between bailing out and restructuring in favor of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks´ contributions to BRRFs aim at discouraging their excess systemic risk creation particularly through financial system leverage. The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions´ effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions.

Suggested Citation

Nieto, Maria J. and Garcia, Gillian Glenys, The Insufficiency of Traditional Safety Nets: What Bank Resolution Fund for Europe? (July 1, 2012). Paolo Baffi Centre Research Paper No. 2012-117. Available at SSRN: https://ssrn.com/abstract=2115451 or http://dx.doi.org/10.2139/ssrn.2115451

Maria J. Nieto (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Gillian Glenys Garcia

GGH Garcia Associates ( email )

2407 Highland Green Court
Alexandria, VA 22312
United States
1-703-354-6065 (Fax)

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