The European Commission Issues Communication on the Funding of Bank Resolution Scheme

The European Commission has issued a communication titled Bank Resolution Funds (communication), which deals with funding for a European bank resolution scheme. The communication supports the establishment of ex ante resolution funds, funded by a levy on banks, to facilitate the resolution of failing banks in ways which avoid contagion, which allow the bank to be wound down in an orderly manner and in a timeframe which avoids the "fire sale" of assets. The Commission believes that resolution funds are a necessary part of the toolbox of several different measures that will be included in the new EU crisis management framework seeking to mitigate the burden on taxpayers and minimize – or better still eliminate - future reliance on taxpayer funds to bail out banks. 

The communication sets out the European Commission's thinking on how the financial sector could contribute to the cost of financing the resolution of failing banks. It also explains where bank resolution funds fit within the overall set of tools which should be made available in the area of crisis prevention and management of banks. This Communication also sets out the Commission's broad ideas on a number of important issues, such as the purpose of funds, their potential size, as well as the conditions under which they might be used.  
 
The setting up of resolution funds raises a number of challenges – in particular with respect to moral hazard concerns, which have been fuelled by actions taken during the crisis. The Commission recognises that this is a major concern which needs to be addressed by making it clear and unambiguous that shareholders (up to the value of their investment) and creditors (excluding depositors which are guaranteed by deposit guarantee schemes) must be the first to face the consequences of a bank failure and that resolution funds must not be used as an insurance against failure or to bail out failing banks, but rather to facilitate an orderly failure. In short, bank resolution funds should, as the IMF suggests, be tied strongly to the future resolution regime.  

 

Links: 
The European Commission Issues Framework on the Funding of Bank Resolution Scheme
Originally Published: 
26/05/2010