The Resolution of Banking Crises in Europe

DEVLHON Consulting Decodes: The Resolution of Banking Crises in Europe: A Unified Framework Facing Financial Challenges

The European Union (EU) narrowly avoided the wave of banking failures that struck Switzerland and the United States in the spring of 2023, demonstrating the resilience of its banking sector. Since the 2008 financial crisis, the EU has implemented a resolution framework, a cornerstone of the Banking Union, to efficiently manage banking crises and prevent taxpayers from having to bail out failing banks. This regulatory framework has proven effective, but it still faces several challenges, particularly the fragmentation of the European banking sector and the diversity of national bankruptcy regimes.

The Foundations of the European Resolution Framework

Created in 2014, the European resolution framework aims to manage banking crises by minimizing negative impacts on the economy and avoiding the use of public funds to save struggling banks. One of the major innovations of this framework is the bail-in mechanism, where losses are primarily borne by investors and creditors rather than taxpayers.

The framework also provides alternative solutions, such as the sale of activities to another institution or the creation of a bridge bank to temporarily manage the critical functions of the failing bank.

Achievements and Challenges After a Decade of Implementation

Over the past ten years, the resolution framework has been tested several times. Banks like Banco Popular in Spain or Sberbank in Slovenia and Croatia have been successfully resolved, often through the sale of activities to a new owner. However, challenges remain. One of the main difficulties is finding a balance between the need to protect depositors and ensuring that losses are borne by creditors.

Another issue is the harmonization of national bankruptcy regimes. In the absence of a fully integrated Banking Union, banks continue to operate within fragmented legal frameworks, complicating cross-border resolution operations. Additionally, the establishment of a European deposit guarantee, which would constitute the third pillar of the Banking Union, remains pending, limiting the potential for banking consolidation across the continent.

Emerging Risks

The management of banking crises is evolving with the emergence of new risks, such as climate change or cyberattacks. For example, assets linked to fossil fuels could quickly lose value due to a disorderly ecological transition, leading to bank failures. The resolution framework must therefore be adapted to address these new threats, particularly by strengthening the authorities’ ability to combine different resolution tools to effectively manage complex crises.

Conclusion

While the European resolution framework has proven its worth, there are still obstacles to overcome to ensure truly European banking crisis management. Completing the Banking Union, notably through the creation of a European deposit guarantee, as well as strengthening the Capital Markets Union, would enable better management of future crises and ensure long-term financial stability.

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