Bank Resolution Financing in the Banking Union

40 Pages Posted: 27 Mar 2015

See all articles by Christos Hadjiemmanuil

Christos Hadjiemmanuil

London School of Economics & Political Science (LSE); University of Piraeus

Date Written: March 25, 2015

Abstract

In early 2012, the Spanish state came under strong market pressure due to its engagement in round after round of large-scale bank bailouts. The country’s joint sovereign-bank crisis shed new light on the nature of the euro area’s crisis. European decision-makers were forced to openly recognize the non-fiscal – that is, the banking and monetary – causes of sovereign distress and to accept the need for drastic policy solutions. The policy shift soon took concrete form with the launch of the Banking Union project in June 2012. The principal intention was to break the bank-sovereign link and to relieve the euro area’s weaker economies from the almost impossible burden of having to finance bank bailouts out of national fiscal resources. The mutualization of bailout costs through a common ‘fiscal backstop’ was, in other words, the key objective of the Banking Union as originally conceived. Subsequent policy choices, however, have marked a relaxation, if not partial abandonment, of this objective. The policy approach eventually adopted with regard to resolution financing in the context of the Banking Union’s Single Resolution Mechanism (SRM) is based on the burden-sharing norms of the Bank Recovery and Resolution Directive (BRRD), the instrument harmonizing bank resolution regimes across the EU. This guarantees the legal consistency of resolution frameworks within and outside the euro area. It is less certain, whether the chosen approach can insulate national state finances from the costs of bank bailouts and/or ensure the full equalization of the financial conditions for bank resolution everywhere in the euro area. The sufficiency of the planned common financial instruments is a particular concern.

Suggested Citation

Hadjiemmanuil, Christos, Bank Resolution Financing in the Banking Union (March 25, 2015). LSE Legal Studies Working Paper No. 6/2015. Available at SSRN: https://ssrn.com/abstract=2575372 or http://dx.doi.org/10.2139/ssrn.2575372

Christos Hadjiemmanuil (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

University of Piraeus ( email )

Karaoli and Dimitriou 80
80 KARAOLI & DIMITRIOU STREET
Piraeus, Attiki 18534
Greece

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