Bank Failure and Pre-Emptive Planning: The Special Requirements of a Bank Resolution and a 'Default Resolution Option'

Abstract

When companies fail, they enter bankruptcy proceedings to reorganise their finances and business or liquidate their assets. When banks had failed prior to 2009, they were supposed to undergo the same proceedings in most EU Member States. However, the financial crisis that followed the bankruptcy of Lehman Brothers Holdings Inc. proved that state leaders and government authorities were not willing to repeat a Lehman scenario by using insolvency proceedings to handle failing banks and other financial institutions in their respective states. Instead, they prevented troubled banks from failing by financing their reorganisation or resolution with public funds (the “bail-out” strategy). This experience has spurred special legislation on bank resolutions in some Member States (such as Germany or the UK), while in others there has been no comparative action. In 2012, the EU Commission proposed a Directive to ensure a minimum harmonisation of bank resolution tools across the EU. This paper will assess the tools and mechanisms of the Directive proposal. It will first outline the special needs of a bank resolution regime and where it differs from the principles of common insolvency proceedings (II). Following a close assessment of the proposed mechanism of pre-emptive planning, authorities’ intervention, and bank resolution tools (III), the paper will briefly discuss recovery planning and early intervention by supervisors (IV.) in addition to the special needs of banking groups (V.). It will then conclude with an evaluation of the proposed regime (VI) and considerations concerning a model bank resolution (VII.).