Bank failure management in the European banking union: What's wrong and how to fix it

The European banking union's current framework for bank failure management does not guarantee that bank failures can be handled without significant support from taxpayers. Reform efforts should focus on the inefficiency of current options for dealing with the failures of small and medium-sized banks and on the inconsistencies between national insolvency regimes and the EU resolution framework. Some benefits could be gained by facilitating greater use of resources from deposit guarantee schemes to fund transfer transactions (sale of business) in resolution and insolvency. A more robust approach, however, would require two more far-reaching changes. The first is the creation of a European Deposit Guarantee Scheme with (sensibly constrained) powers to provide financial support for the orderly market exit of failing banks. The second is to expand the remit of the Single Resolution Board to make it responsible for decision-making for all failing banks in the banking union, regardless of size and systemic importance. 

Keywords: European FDIC, bail-in, bank resolution, bank insolvency, transfer, sale of business, purchase and assumption, P&A 

JEL classification: G01, G18, G21, G33.