Cross-Border Resolution of Failed Banks in the EU: Search for the Second-Best Policies

Abstract

The response to failures of transnational banks within the European Union (EU) has been distinctly national. The EU institutional framework for cross-border bank resolution proved too weak to sustain coordination and prevent open intergovernmental conflicts. This paper summarizes reasons for this failure and reviews structural, political and legal constraints restraining acceptability of various reform alternatives within the EU. The first-best solution would be either a development of an EU-level bank resolution regime for cross-border banks or turning the transnational banks into a string of independent national subsidiaries backed by national resolution regimes. However, both of these alternatives would require amendments of fundamental EU treaties and they face strong opposition from various stakeholders so they are unlikely to be acceptable in the Council and European Parliament. Ultimately, the introduction of a new governance mechanism is the most likely EU response to the failure of the cross-border resolution regime. The emerging governance arrangements rest on newly created European System of Financial Supervisors and ex ante burden sharing arrangements prepared by the new colleges of supervisors overseeing about 40 of the systemically important financial groups in the EU. The banks are likely to be drawn into the new framework by an obligation to prepare ex ante resolution plans ('living wills'). The new governance arrangements represent a politically feasible second-best solution, as they increase the likelihood that the cooperation will be sustained in crisis, while not impinging on the fiscal sovereignty of member states or restraining the internal market freedoms.