The directive provides national authorities with common powers and instruments to preempt bank crises and resolve any financial institution in an orderly manner in the event of failure, whilst preserving essential bank operations and minimising taxpayers' exposure to losses.
EU financial markets have become increasingly integrated, to the extent that domestic shocks in one member state can rapidly spread to other member states. Because of this risk and the important economic functions that banks provide, normal insolvency proceedings may not be appropriate in some cases. Since the onset of the financial crisis in 2007-08, the absence of effective instruments for the resolution of banks has often led to the use of public funds to restore trust in even relatively small banking institutions, so as to prevent a domino effect of failing institutions from causing real damage to the economy.
The directive accordingly establishes a policy framework for managing bank failures in an orderly manner and to avoid such contagion, without resorting to taxpayers' money. It establishes a range of instruments to tackle potential bank crises at three stages: preparatory and preventative, early intervention, and resolution. Member states will be required, as a general rule, to set up ex-ante resolution funds to ensure that the resolution tools can be applied effectively.
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