By placing a lid on the Resolution Fund, the BRRD and SRM may in fact be reinforcing the need to develop a blueprint that will ensure that investors, not taxpayers, bear the cost of bank failures.
During the crisis, individual institutions such as Hypo Real Estate required public assistance of €100 billion or more. So how can a European Resolution Fund of only €55 billion possibly suffice for all banks in the eurozone?
It could, provided the Fund is part of a well-designed architecture for regulation, supervision, and resolution, that makes banks not only less likely to fail but also safe to fail – meaning that they can be resolved without cost to the taxpayer and without significant disruption to financial markets or the economy at large.
This architecture rests on four pillars:
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Prudential regulation and supervision,
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‘No forbearance’,
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Adequate ‘reserve capital’, and
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Provision of liquidity to the bank-in-resolution.
In concept, these four pillars can be found in EU legislation: the Capital Requirements Directive/Regulations (CRD IV), the Banking Recovery and Resolution Directive (BRRD), and the Single Resolution Mechanism (SRM). But much remains to be done. The EU Bank Regulator has to turn BRRD concepts into ‘blueprints’ (binding technical standards), the ECB has to establish a rigorous supervisory approach, and the EU has to finalise arrangements for the SRM. This column reflects on how they can do so in a manner that ensures that the Resolution Fund is large enough.
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