What is a bank resolution?

Resolution is the restructuring of a bank by a resolution authority through the use of resolution tools in order to safeguard public interests, including the continuity of the bank’s critical functions, financial stability and minimal costs to taxpayers.

 

Effective resolution

Banks provide vital services to citizens, businesses, and the economy at large.

In the past, because of the vital role played by banks, and in the absence of effective resolution regimes, authorities have often had to put up taxpayers' money to restore trust and avoid a contagion effect of failing banks on the real economy.

In view of the critical intermediary role that banks play in our economies, financial difficulties inbanks need to be resolved in an orderly, quick and efficient manner, avoiding undue disruption to the bank's activities and to the rest of the financial system.

 While for most banks this can be achieved through the normal insolvency proceedings applicable to any company in the market, some banks are too systemically important and interconnected to allow for their liquidation through a normal insolvency process.

Rather than relying on taxpayers to bail these banks out, a mechanism is needed to put an end to potential domino effects. It should allow public authorities to distribute losses to banks' shareholders and creditors – rather than on the taxpayers.

 

Resolution, also through its preventative effects, is essential to making banks safer and less likely to fail. In some cases, resolution rather than normal insolvency proceedings will be applied for banks when it is necessary, in the public interest, safeguards financial stability, and protects taxpayers. The new resolution regime increases financial stability.

 

Such restructuring can provide for an orderly wind-down of the bank or restore the viability of all or part of the institution and is used only in cases where a bank cannot be resolved through normal insolvency proceedings without inflicting damage on the real economy and causing financial instability.

Resolution occurs at the point where the authorities determine that a bank is failing or likely to fail, that there is no other supervisory or private sector intervention that can restore the institution to viability (for example by applying measures set out in a so-called recovery plan, which all banks are required to draft) within a short timeframe and that normal insolvency proceedings would cause financial instability while having an impact on the public interest.

If it is decided to resolve a bank facing serious difficulties, its resolution will be managed efficiently, with minimum costs to taxpayers and the real economy. In extraordinary circumstances, the Single Resolution Fund (SRF), financed by the banking sector itself, can be accessed. The SRF will be set up under the control of the SRB. The total target size of the Fund will equal at least 1% of the covered deposits of all banks in Member States participating in the Banking Union.