November 01, 2017

ESRB published a working paper proposing a macro approach to bank resolution. The paper aims to investigate the impact of resolution measures in calm times and during crises. The paper claims that a macro approach to resolution that complements the micro rules is needed, although it might not always be possible to avoid a conflict of objectives between the micro and macro approaches.

The proposed approach should consider the contagion effects of bail-in and the continuing need for a fiscal backstop to the financial system. For bail-in to work, it is important that bail-in-able bank bonds are largely held outside the banking sector, which is currently not the case. Stricter capital requirements could push them out of the banking system. The organization of the fiscal backstop is crucial for the stability of the global banking system. Single-point-of-entry resolution of international banks is only possible for the very largest countries or for countries working together, including in terms of sharing the burden of a potential bank bailout. The euro area has adopted the latter approach in its Banking Union. Other countries have taken a stand-alone approach, which leads to multiple-point-of-entry resolution of international banks and contributes to fragmentation of the global banking system.

 

Related Link: Working Paper (PDF)

Keywords: Europe, EU, Banking, Bank Resolution, Bail-in, Systemic Risk, ESRB

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