15 July 2019

BIS: How to improve crisis management in the banking union: a European FDIC?

Speech by Mr Fernando Restoy, Chairman, Financial Stability Institute, Bank for International Settlements, in which he discusses the pros and cons of the various options for addressing the current deficiencies and sketches the steps of the gradual establishment of a common FDIC-like insolvency regime for the banking union.

The creation of the Single Resolution Mechanism (SRM) has been a substantive step towards facilitating the orderly resolution of significant institutions with minimal or no taxpayer involvement. Yet experience so far shows that there is still room to improve the current framework in order to effectively break the link between banks and sovereigns and thereby fully accomplish the objectives of the banking union.

Mr Restoy firstly describes a few relevant (and quite unique) characteristics of the bank crisis management framework in the banking union. Secondly, he stresses the adverse implications of those singularities for the effective management of banking crises in the euro zone. Thirdly, he summarises a few options to address the identified weaknesses in the current context. Finally, he sketches a phased-in approach that could help facilitate a gradual establishment of a common framework to deal more effectively with crises affecting a wide variety of banks within the euro zone.

The current crisis management framework needs to be further developed in order for it to contribute more effectively to maintaining financial stability and to ensuring the functioning of the banking union. That requires putting in place effective regimes to deal with a crisis affecting all types of institutions. What appears unavoidable (while somewhat counterintuitive) is that the regime for non-systemic institutions may need to be more flexible than the current resolution regime for systemic banks.

An FDIC-like formula, managed by the SRB, implying the creation of a unified bank-specific insolvency regime, looks to be the ideal option for the full development of the banking union. A less ambitious phased-in approach, based initially on a partially harmonised insolvency framework with an enhanced role for the DGS, could also deliver substantive benefits.

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