A European Roadmap towards a Common Resolution Approach

Abstract

The current framework of voluntarily cooperation in Europe fails to produce the public good of financial stability. The paper identifies coordination failures and argues for European arrangements. An integrated approach is proposed. The starting, and politically most controversial, point is a binding burden sharing agreement to resolve cross border banks in difficulties. This would be the key element of a common resolution approach.The quest for financial stability in Europe should also look at the incentive structure to give information. Currently, a supervisor has no incentive to provide other EU supervisors or central banks with up to date information about potential difficulties in financial institutions. Moreover, national supervisors and central banks do not always timely share stability concerns in their domestic financial system with the newly envisaged European bodies. The introduction of a European mandate for financial supervision and stability replacing national mandates could resolve the incentive problem.