Featured Product

    ESRB Examines Bank Resolution and Public Backstop in Banking Union

    August 16, 2018

    ESRB published a working paper examining bank resolution and public backstop in an asymmetric banking union. The authors analyze the optimal bank resolution decisions and the design of a fiscal backstop in a banking union. The findings highlight the importance of establishing country-specific resolution policies for heterogenous countries to benefit from a banking union.

    EC recently issued a communication that identifies a last resort common fiscal backstop for the single resolution mechanism as a critical missing element to complete the banking union. The June 2018 Euro Summit agreed that by the end of the year the Eurogroup would have prepared the terms of reference for the use of the European Stability Mechanism as a common fiscal backstop. This raises several questions: How should a common fiscal backstop be articulated? How should bank resolution decisions be conducted? How much risk-sharing can countries achieve through a banking union? The authors address these questions in a model that takes into account two asymmetries that are prevalent in the Euro Area context.

    The paper characterizes the optimal banking union with endogenous participation in a two-country economy, in which domestic bank failures may be contemporaneous to sovereign crises, giving rise to risk-sharing motives to mutualize the funding of bail-outs. It was found that raising public funds to conduct a bail-out entails the dead-weight loss of distortionary taxation. Bank bail-ins create disruption costs in the economy. When country asymmetry is large, resolution policies exhibit reduced contributions to the public backstop and forbearance in early bank intervention in the fiscally stronger country, facilitating bail-outs in this country. 

     

    Related Link: Working Paper (PDF)

    Keywords: Europe, Banking, Systemic Risk, Banking Union, Bank Resolution, Public Backstop, Bail-in, ESRB

    Featured Experts
    Related Articles
    News

    EBA Updates List of Validation Rules for Reporting by Banks

    EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.

    September 10, 2020 WebPage Regulatory News
    News

    EBA Responds to EC Call for Advice to Strengthen AML/CFT Framework

    EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).

    September 10, 2020 WebPage Regulatory News
    News

    NGFS Advocates Environmental Risk Analysis for Financial Sector

    NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.

    September 10, 2020 WebPage Regulatory News
    News

    MAS Issues Guidelines to Promote Senior Management Accountability

    MAS published the guidelines on individual accountability and conduct at financial institutions.

    September 10, 2020 WebPage Regulatory News
    News

    APRA Formalizes Capital Treatment and Reporting of COVID-19 Loans

    APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.

    September 09, 2020 WebPage Regulatory News
    News

    SRB Chair Discusses Path to Harmonized Liquidation Regime for Banks

    SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.

    September 09, 2020 WebPage Regulatory News
    News

    FSB Workshop Discusses Preliminary Findings of Too-Big-To-Fail Reforms

    FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.

    September 09, 2020 WebPage Regulatory News
    News

    ECB Updates List of Supervised Entities in EU in September 2020

    ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.

    September 08, 2020 WebPage Regulatory News
    News

    OSFI Identifies Focus Areas to Strengthen Third-Party Risk Management

    OSFI published the key findings of a study on third-party risk management.

    September 08, 2020 WebPage Regulatory News
    News

    FSB Extends Implementation Timeline for Framework on SFTs

    FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.

    September 07, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5796