The European Commission has published a Communication which sets out its thinking on how the financial sector could contribute to the cost of financing the resolution of failing banks. The Communication also explains where bank resolution funds fit within the overall set of tools which should be made available in the area of crisis prevention and management of banks.

The Communication also sets out the Commission’s broad ideas on a number of important issues, such as the purpose of bank resolution funds, their potential size, as well as the conditions under which they might be used.

The Communication does not deal with any levies or taxes that seek to recoup the public funds committed during the financial crisis to stabilise the banking system or to tackle excessive risk-taking or speculation. The examination of such measures should continue in parallel as a useful complement to the preventive funds that are considered in the Communication.

The Commission notes that the setting up of bank resolution funds raises a number of challenges, in particular in relation to moral hazard concerns, which have been fuelled by action taken during the financial crisis. The Commission recognises this and makes it clear that shareholders (up to the value of their investment) and creditors (excluding depositors which are guaranteed by deposit guarantee schemes) must be the first to face the consequences of a bank failure and that bank resolution funds must not be used as an insurance against failure or to bail out failing banks. Instead bank resolution funds should be tied strongly to the future resolution regime.

The Commission states that bank resolution funds should not be considered in isolation and should be understood as part of a range of broader initiatives aimed at strengthening the financial system in light of the financial crisis. Reforms are currently underway to strengthen the regulation and supervision of financial markets. This includes reforms to European supervisory architecture and the strengthening of capital requirements. Furthermore, the Commission will soon launch a wide-ranging consultation with a view to strengthening the corporate governance of financial institutions, in particular banks.

View Commission sets out vision for bank resolution funds, 26 May 2010

View Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank - Bank Resolution Funds, 26 May 2010

View Bank Resolution Funds - Frequently Asked Questions, 26 May 2010