On Friday, senior members of the International Monetary Fund (IMF) released a working paper entitled “Crisis Management and Resolution for a European Banking System”. The working paper, while not expressing the views of the IMF, proposes an integrated crisis management and resolution framework for the EU’s single banking market.

 

The working paper begins by detailing how the recent economic crisis brought to the forefront the inherent tension between the increasingly transnational financial institutions and the financial stability efforts of individual nations. In discussing the challenges highlighted by the recent turmoil, the working group cites the most notable of these challenges as being the creation of a “establishing a sound prudential basis for the single banking market and the single passport, establishing effective market discipline, and reducing the mutual exposures between banks and taxpayers.”

 

To this end, the paper proposes an integrated framework, imposed at the level of the European Union, for crisis prevention and management, crisis resolution, and depositor protection. The development of this framework, according to the authors, would resolve the “problematic institutional mismatch” between transnational European banking groups and crisis management and resolution by national authorities. The proposed framework would include:

 

  • A European Resolution Authority armed with the mandate and the tools to resolve large cross-border banks cost-effectively;
  • A European Deposit Insurance and Resolution Fund that is pre-funded by the industry through deposit insurance premiums and systemic levies; and
  • A legal framework established a specific bankruptcy framework for cross-border banks.

In a related speech on Friday, IMF Managing Director Dominique Strauss-Kahn argued at a European Commission banking conference that an integrated banking system, including the "single banking passport," which allows banks to operate across borders, requires such an integrated framework for crisis prevention, management and resolution. In his view, such a framework requires self-discipline, sound regulation and a new supervisory culture where the regulators "worry no less about the neighborhood than about their own house." He emphasized that a European resolution authority, "armed with the mandate and the tools to deal cost-effectively with failing cross-border banks," is necessary. Banks subject to such a regime should, at a minimum, encompass major cross-border banking groups, as well as all banks with large-scale cross-border operations. Finally, the IMF chief concluded that any EU resolution authority "needs access to financing and a fiscal back-up mechanism for any net resolution costs" and preferably should be "prefinanced by the industry" through deposit insurance fees and levies on covered financial institutions.

 

The working paper proposes that the regulatory regime would have a focus on cost-efficient crisis management and resolution and provide an element of insurance against asymmetric financial shocks. However, the authors acknowledge that the obstacles to the adoption of a EU wide regulatory scheme such as they propose are significant, and admit that, ultimately, “[p]olitical leadership will be the key to success.