Recovery and resolution scenarios are still of importance for European institutions. Banks perform functions which are critical for economic activity to take place. They collect funds (deposits and other forms of debt) from private persons and businesses, provide loans for households and businesses, allow savings to be allocated for investment and manage payment systems that are crucial for various sectors of the economy and society as a whole.
Banks operate on the basis of public trust. If confidence in them is lost, depositors and other creditors may quickly withdraw their funds, which may lead to their failure. As well as depriving their customers of access to the socially valuable banking functions mentioned above, the failure of a large bank may undermine confidence in other banks, affect their finances and create instability across the financial system as a whole. Thus, through this contagion effect, the value and viability of other banks could be rapidly eroded and the entire financial system destabilised.
In normal insolvency proceedings, the primary objective is to maximise the value of assets of the failed firm in the interest of creditors. However, these proceedings may take years, in particular for complex institutions, leading to uncertainty, with a knock-on effect on confidence. By contrast, the primary objective of bank resolution is to respond in a rapid and decisive manner to a bank in financial distress to maintain financial stability and minimise losses to the public, in particular taxpayers, while ensuring a similar outcome to that under normal insolvency proceedings in terms of the allocation of losses to shareholders and creditors.
With this in mind, a legal regime for European bank recovery and resolution is crucial for more integrated bank oversight and crisis management within the European Union’s banking union.
Frankfurt banking partner Simon Grieser and Munich associate Anselm Reinertshofer consider the recovery and resolution requirements for institutions (including the minimum required for own funds and eligible liabilities) in a contribution to the Banking Restructuring handbook published by C.H.BECK, the largest publishing house in Germany – find out further information on the handbook here (in German).