Resolving Small and Mid-Sized Bank: Resolution Versus Liquidation and the Transfer Tools

Abstract

As part of the broader reform agenda, the European Commission’s proposals for a comprehensive reform of the European Crisis Management and Deposit Insurance (CMDI) framework include a recalibration of the conditions for the initiation of resolution actions with a view to expanding the scope of resolution actions to smaller and medium-sized banking institutions. The core element in this regard is a new definition of the so-called Public Interest Assessment (PIA), whereby the initiation of resolution actions is permissible only if resolution is ‘in the public interest’. Under the original BRRD/SRMR regime, this test required that the objectives of resolution could not equally be accomplished through the winding-up of the relevant bank under traditional liquidation regimes. With a new wording, both the European Commission and the European Parliament have proposed to lower that threshold, moving towards the application of resolution procedures as the standard approach to dealing with failures also in this market segment. The present article presents a critical analysis of these proposals and their potential implications in the light of the rationale of the original PIA criteria and a functional comparison between resolution and liquidation. 

Keywords: EU, BRRD, Single Resolution Mechanism, bank resolution, winding-up, public interest assessment

JEL Classification: G01, G18, G21, G28, K22, K23