Early Intervention, Resolution Preparation and Triggers: The Case for Reforming Crisis Management’s Twilight Zone

Abstract

The Crisis Management and Deposit Insurance (CMDI) framework needs repair, and the “twilight zone” of early intervention measures (EIMs), resolution preparation and triggers, is the most obvious and unobjectionable. This paper explains why, and what should be done. EIMs overlap with supervisory measures, or are mired in legal uncertainty, and thus are not used. The law does not acknowledge the need of preparation for resolution. Resolution triggers make the system rigid and slow. Lack of coordination can leave entities in legal limbo. The logic of early and preparatory measures (facilitating orderly resolution) conflicts with that of market abuse, based on transparency and disclosure. The Commission’s CMDI reform proposal addresses most of these flaws. It eliminates overlaps and enhances consistency between EIMs and supervisory measures, it acknowledges the need to prepare resolution, and allows the triggering of resolution with a sensible combination of framed discretion, cooperation between supervisors and resolution authorities, and a Public Interest Assessment (PIA) that compares resolution and insolvency-based liquidation more fairly. These amendments do not sufficiently acknowledge the relevance of market forces, and do not suffice to have a functioning Banking Union, but are needed if other reforms are to yield their promised benefits. 

Keywords: early intervention, supervisory measures, preparation, triggers, public interest assessment, PIA

JEL Classification: H12, G21, G33