Resolution Regimes in the Financial Sector: In Need of Cross-Sectoral Regulation?

Abstract

Conceptually, the ‘resolution’ of financial intermediaries does not merely refer to instruments and procedures for the management of insolvencies in the financial sector generally. Rather, ‘resolution’ is conceived as a functional alternative to, and substitute for, traditional means of insolvency management (in particular, liquidation procedures), to be applied specifically in cases where such traditional means cannot be activated in view of potentially disastrous implications for professional counter-parties, depositors, market infrastructures – in short, for systemic stability. While the scope of these legal instruments is not expressly restricted to systemically relevant institutions, care has been taken to restrict the use of the innovative toolbox to cases where the public interest in the prevention of contagious effects, in light of the size of the institution in question, its market share, complexity and/or connectedness with other parties, outweighs the disadvantages (e.g., the detrimental effects on creditors, as well as potentially higher costs of resolution compared with traditional insolvency liquidation). Although it is now widely agreed that systemic relevance is not a phenomenon confined to any particular type of financial institution but depends on factors such as size, market share, and interconnection with other market participants, the emergence of resolution regimes has thus far been characterised by the traditional boundaries between banks, investment firms, insurance companies, and financial market infrastructures. Against the backdrop of a growing body of international standards and European legislation on resolution frameworks, most of which have been sectoral in scope and content so far, the present Chapter analyses the rationale of, and perspectives for, a move towards cross-sectoral regulation in the area of financial institutions’ insolvency management.