Resolution: National or European?

Dirk Schoenmaker, dean

2 October 2012, EESC Hearing, Brussels

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Resolution proposals

• Bail-in: yes, but be specific which debt instruments (markets want predictability)

• Approach: national or European; not halfway (mutual assistance between national funds)

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The Challange

Problem:

• Failure of large banks poses national and cross-border externalities

• Cross-border externalities are ignored by national authorities

Why?

• Accountability to national politics (i.e. domestic taxpayers)• National legislation/procedures for insolvency

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Nationalism“My country is my castle”

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Theory

How to address asymmetries in national interests?

Financial trilemma – 3 policy objectives:

1. Maintain global financial stability

2. Foster cross-border banking

3. Preserve national authority

Only 2 out of 3 objectives can be obtained!

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Financial trilemma

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Banking Union

• He who pays the piper, calls the tune

• So, resolution determines incentives supervision

• Resolution (and deposit insurance) and banking supervision at same geographic level

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Integrated approach

• Same geographic level • Keep it simple: one deposit insurance and

resolution fund (banks pay once a proper risk based premium)

• One authority: European Deposit Insurance and Resolution Authority (EDIRA)

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EC ECB ECB EDIRA ESM

Fiscal

Backstop Rule

Making Supervision

Lender

of Last

Resort

Deposit

Insurance &

Resolution

Figure: European Institutions for financial supervision and stability in Banking Union

Summing up

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• Schoenmaker, D. and Gros, D. (2012), “A European Deposit Insurance and Resolution Fund – an update”, Duisenberg school of finance Policy Paper no 26

Source

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