14 November 2011

Vítor Constâncio: A European solution for crisis management and bank resolution

Mr Vítor Constâncio, Vice-President of the European Central Bank, focused in his speech on the ongoing reforms aimed at enhancing the mechanisms with which authorities can handle problems in banks and reduce the potential impact of failures, should they occur.

The main shortcomings of the current frameworks

First, letting financial institutions fail was often not a feasible alternative from a legal perspective. Second, even if a well-designed special bank resolution or insolvency regime is in place in a particular country, this does not guarantee that cross-border banks can also be dealt with effectively. Third, and closely linked to the previous two points, the lack of private financing arrangements also poses a significant barrier to effective resolution.

Initiatives at the global level

The Financial Stability Board’s (FSB) new standard, “Key Attributes of Effective Resolution Regimes”, adopted by the G20, is a point of reference for the reform of our national resolution regimes. The FSB key attributes also strengthen the group resolution concept by envisaging that recovery and resolution plans also have a global perspective.

The new bank resolution regime in the EU

First, it covers not only resolution, but rather all phases of a bank crisis, including preventive measures and early intervention powers. Second, a forward-looking element of the new framework is the concept of intra-group financial support, which could reduce the current legal uncertainty that surrounds asset transferability within groups. Third, the involvement of the European Banking Authority (EBA) is also considered as a very promising element of the EU plans. Finally, the design of bank levies, which could usefully be collected into resolution funds, is also a delicate area.

The seeds of an integrated EU resolution framework are already there today, but it is an open question whether the EU will have the audacity, and, in particular, the political will, to move towards that. To preserve the benefits of integrated cross-border banks in Europe and globally there is the need to build a European resolution regime that enhances market discipline by mitigating moral hazard, maintains stability by ensuring continuity of basic services of unwinding institutions, orderly allocates losses and protects taxpayers.

Based on these preconditions and building on the practical operation of cross-border stability groups, it is necessary to move gradually towards a stronger coordination of cross-border resolution, with the ultimate vision of a single EU resolution authority and an integrated EU resolution regime.

Full speech

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