The EU bank insolvency framework: could less be more?

Giovanni Majnoni (), Gabriele Bernardini (), Andreas Dal Santo () and Maurizio Trapanese
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Giovanni Majnoni: Banca d'Italia
Gabriele Bernardini: Banca d'Italia
Andreas Dal Santo: Solidus Capital Group

No 594, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The framework for bank crisis management in the Banking Union (BU) complies with multiple criteria. Each of these criteria is based on a sound policy rationale; however, when combined, they can generate unintended consequences that undermine the effectiveness of the system, highlighting a case of fallacy of composition. This paper suggests that a piecemeal reform is not adequate to tackle the framework’s shortcomings. A broader effort is required to streamline the current criteria into a single rulebook, achieving effectiveness through simplification. The successful experience of the US framework for bank failure management provides a useful benchmark. It shows that the generalized, if not exclusive, reliance on a single, clearly defined, easily measurable and quickly actionable criterion – the Least Cost Test – makes it possible to offer full protection to taxpayers and to contain the destruction of value caused by bank failures, thereby safeguarding the economy. We suggest that its adoption by the BU would help to frame a common approach to failing banks of all sizes and would provide a unifying force and a solution to the geographic and institutional fragmentation of the current set-up.

Keywords: financial crises; international regulation (search for similar items in EconPapers)
JEL-codes: F53 G01 G20 (search for similar items in EconPapers)
Date: 2021-02
New Economics Papers: this item is included in nep-cba and nep-mon
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