The EU Bank Insolvency Framework: Could Less Be More?

32 Pages Posted: 16 Apr 2021

Date Written: February 10, 2021

Abstract

The framework for bank crisis management in the Banking Union (BU) complies with multiple criteria. Each of these criteria is based on a sound policy rationale; however, when combined, they can generate unintended consequences that undermine the effectiveness of the system, highlighting a case of fallacy of composition. This paper suggests that a piecemeal reform is not adequate to tackle the framework’s shortcomings. A broader effort is required to streamline the current criteria into a single rulebook, achieving effectiveness through simplification. The successful experience of the US framework for bank failure management provides a useful benchmark. It shows that the generalized, if not exclusive, reliance on a single, clearly defined, easily measurable and quickly actionable criterion – the Least Cost Test – makes it possible to offer full protection to taxpayers and to contain the destruction of value caused by bank failures, thereby safeguarding the economy. We suggest that its adoption by the BU would help to frame a common approach to failing banks of all sizes and would provide a unifying force and a solution to the geographic and institutional fragmentation of the current set-up.

Keywords: financial crises; international regulation

JEL Classification: F53, G01, G20

Suggested Citation

Majnoni d'Intignano, Giovanni and Trapanese, Maurizio and Bernardini, Gabriele and Dal Santo, Andreas, The EU Bank Insolvency Framework: Could Less Be More? (February 10, 2021). Bank of Italy Occasional Paper No. 594, Available at SSRN: https://ssrn.com/abstract=3827499 or http://dx.doi.org/10.2139/ssrn.3827499

Giovanni Majnoni d'Intignano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Maurizio Trapanese (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Gabriele Bernardini

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andreas Dal Santo

Solidus Capital Group ( email )

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