The insufficiency of traditional safety nets: what bank resolution fund for Europe?

Abstract

Purpose

The purpose of this paper is to analyze the rationale for Bank Recovery and Resolution Funds (BRRFs) in the context of the present European Union's (EU) decentralized safety net.

Design/methodology/approach

The paper makes some reflections on the governance aspects of BRRFs that would require minimum harmonization in the EU, emphasizing that BRRFs are only one institutional component of financial institutions' effective and credible resolution regime. This paper focuses on depository institutions, but the rationale of BRRFs could be extended to other credit institutions.

Findings

BRRFs contribute to shifting the government's trade‐off between bailing out and restructuring in favour of restructuring, to the extent that there is also an effective bank resolution legal framework. In turn, banks' contributions to BRRFs aim at discouraging their excess systemic risk creation, particularly through financial system leverage.

Originality/value

The paper provides input in the current regulatory debate to develop new measures for the reform of the regulatory framework of financial services in the EU.

Citation

Nieto, M.J. and Garcia, G.G. (2012), "The insufficiency of traditional safety nets: what bank resolution fund for Europe?", Journal of Financial Regulation and Compliance, Vol. 20 No. 2, pp. 116-146. https://doi.org/10.1108/13581981211218261