EU leaders have pledged to break “the vicious cycle between sovereigns and banks” by establishing a European banking union. A pivotal pillar of the new regulatory architecture will be its resolution regime, i.e., the centralization of decision-making processes and competences for the forced resolution of insolvent or near-insolvent banking institutions via the Single Resolution Mechanism (SRM).
This project will contribute to the analysis and evaluation of the evolving resolution regime. It will embrace insights from research on bank resolution in economics and conduct comparative legal analyses. It will thus have a broad and interdisciplinary basis to contribute to both the academic and the policy debate.
Tröger (2017/SAFE Working Paper 179) analyses the bail-in tool under the Bank Recovery and Resolution Directive (BRRD) and predicts that it will not reach its policy objective. To make this argument, this paper first describes the policy rationale that calls for mandatory private sector involvement (PSI). From this analysis the key features for an effective bail-in tool can be derived. These insights serve as the background to make the case that the European resolution frame-work is likely ineffective in establishing adequate market discipline through risk-reflecting prices for bank capital. The main reason for this lies in the avoidable embeddedness of the BRRD’s bail-in tool in the much broader resolution process which entails ample discretion of the authorities also in forcing private sector involvement. This paper synthesized the prior analysis by putting forward an alternative regulatory approach that seeks to disentangle private sector involvement as a precondition for effective bank-resolution as much as possible from the resolution process as such.
The current design of the European bail-in tool supplies resolution authorities with undue discretion. According to Tröger (2015/SAFE Working Paper 109) this feature which also afflicts the SRM imperils the key policy objective to re-instill market discipline on banks’ debt financing operations. The latter is also called into question because the nested regulatory technique that aims at preventing bail-outs unintendedly opens additional maneuvering space for political decision makers.
The creation of the Banking Union is likely to come with substantial implications for the governance of Eurozone banks. According to Binder (2015a/SAFE Working Paper 96) the European Central Bank, in its capacity as supervisory authority for systemically important banks, as well as the Single Resolution Board, under the EU regulations establishing the Single Supervisory Mechanism and the SRM, have been provided with a broad mandate and corresponding powers that allow for far-reaching interference with the relevant institutions’ organizational and business decisions. Starting with an overview of the relevant powers, this paper explores how these could – and should – be exercised against the backdrop of the fundamental policy objectives of the Banking Union.
In the aftermath of the global financial crisis, both resolution planning, i.e. contingency planning by both regulated institutions and public authorities in order to prepare their actions in financial crisis, and concepts for structural bank reform have been identified as possible solutions to ending “Too Big To Fail” and foster market discipline among bank owners, bank managers and investors in bank debt. As argued in Binder (2014/SAFE Working Paper 81), both concepts thus complement the global quest for reliable procedures and tools for bank resolution that would minimize systemic implications once large and complex financial institutions have reached the stage of insolvency. Given the complex task of orchestrating swift and effective resolution actions, especially with regard to cross-border banking groups and financial conglomerates, planning ahead in good times has since been widely recognized as crucial for enhancing resolvability. At least part of the impediments to resolution will be found in organizational, financial and legal complexity that has evolved in banks and groups over time. To remove these impediments, interference with existing corporate and group structures is all but inevitable. However, in both international standard setting and at the European Union level, issues related to resolution planning (within the context of bank resolution reform) and structural banking reforms to date have been discussed rather separately. This lack of consistency is questionable, given the obvious need to reconcile both approaches in order to facilitate effective implementation and enforcement especially with regard to large, complex banking groups. Based on an analysis both of the Bank Recovery and Resolution Directive and the SRM Regulation, this paper explores how these problems could be dealt with within the context of the European Banking Union.
|Jens-Hinrich Binder||To Ring-Fence or Not, and How? Strategic Questions for Post-Crisis Banking Reform in Europe|
forthcoming in European Banking Regulation (CH Beck)
|Jens-Hinrich Binder||Komplexitätsbewältigung durch Verwaltungsverfahren?|
Zeitschrift für das gesamte Handels- und Wirtschaftsrecht
|Tobias Tröger||Regulatory Influence on Market Conditions in the Banking Union|
European Business Organization Law Review
|2015||Financial Intermediation||banking union, macro-prudential supervision, real estate lending, bail-in, market discipline|
|109||Tobias Tröger||Regulatory Influence on Market Conditions in the Banking Union||2015||Financial Intermediation||banking union, macro-prudential supervision, real estate lending, bail-in, market discipline|
|179||Tobias Tröger||Too Complex to Work: A Critical Assessment of the Bail-in Tool under the European Bank Recovery and Resolution Regime||2017||Financial Intermediation||bail-in, private sector involvement, precautionary recapitalization, cross-border insolvency, market discipline|
|81||Jens-Hinrich Binder||Resolution Planning and Structural Bank Reform within the Banking Union||2015||Financial Intermediation||Bank Resolution, Resolution Planning, Living Wills, Structural Bank Reform, Banking Union|
|96||Jens-Hinrich Binder||Banking Union and the Governance of Credit Institutions - A Legal Perspective||2015||Financial Intermediation||Banking Union, Single Supervisory Mechanism, Single Resolution Mechanism, Banking Regulation, Bank Corporate Governance|