Download publication

Policy Contribution

Bank liquidation in the European Union: clarification needed

Critical functions and public interest. What role do they play in Member States’ decision to grant liquidation aid? The author of this paper looks at how resolution and liquidation differ substantially when it comes to the scope of legislation applicable to the use of public funds and how the diversity in national insolvency regimes is a source of uncertainty about the outcome of liquidation procedures.

By: Date: January 10, 2018 Topic: European Macroeconomics & Governance

This material was originally published in a paper titled ‘Critical functions and public interest in banking services: Need for clarification?’ provided at the request of the European Parliament Committee on Economic and Monetary Affairs, commissioned by the Directorate-General for Internal Policies of the Union and supervised by its Economic Governance Support Unit (EGOV). The original paper is available on the European Parliament’s website. © European Union, 2017

Under the current European Union frameworks for dealing with banking problems, resolution of banks is seen as an exception to be activated only if liquidation under national insolvency proceedings would not be warranted. This is most notably the case when the bank provides critical functions to the economy, or when its liquidation might threaten financial stability.

The two options – resolution and liquidation – differ substantially when it comes to the scope of legislation that is applicable to the use of public funds. The EU Bank Recovery and Resolution Directive (2014/59/EU) covers resolution, while liquidation is regulated by national insolvency laws. The liquidations of Veneto Banca and Banca Popolare di Vicenza in Italy highlight how this two-tier framework raises important questions in the context of EU banking union.

The first question is whether the definitions of critical functions and public interest – key elements in the context of liquidation – should be clarified. A second question is whether the current legal and regulatory situation within banking union ensures that similar banks can expect predictable equal treatment in case of failure.

The author argues that there should be more clarity over the role that the concepts of critical functions and public interest play in Member States’ decision to grant liquidation aid, as the current framework might give rise to situations in which the views of national authorities seem to contradict the Single Resolution Board’s assessment.

While the purpose of this Policy Contribution is not to provide a comprehensive overview of different national insolvency regimes, the author argues that the current diversity is a source of uncertainty about the outcome of liquidation procedures, for all participants. For banking union to function effectively, the framework should be changed to provide the same level of certainty in liquidation as there is expected to be in resolution.

View comments
Read article Download PDF More on this topic

External Publication

The EU’s Multiannual Financial Framework and some implications for CESEE countries

Bruegel scholars Zsolt Darvas and Guntram Wolff contributed to the September 2018 edition of the OeNB's Focus on European Economic Integration.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 12, 2018
Read article More on this topic More by this author

Opinion

Should central European EU members join the euro zone?

Eurozone membership (or the use of a fixed exchange rate) was not a factor determining economic success in Central Europe. There were both good and bad macroeconomic performances in both the flexible and the fixed exchange rate regimes of Central European countries. The implication is that Central European “outs” could be economically successful both with and without the euro, yet the EU is not only about economic benefits.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: September 11, 2018
Read article More on this topic More by this author

Podcast

Podcast

Backstage: Next steps towards banking and capital markets union in Europe

Bruegel senior fellow Nicolas Véron talks with Jörg Kukies, state secretary at the German finance ministry, about the next steps to the banking union project in Europe, as well as the potential challenges that lie ahead.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 4, 2018
Read article More on this topic More by this author

Opinion

Overcoming the hurdles to Italian Growth

Is the time for refining recommendations and for a serious political debate on how best to overcome bottlenecks and improve the economic prospects of Italians.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 4, 2018
Read article More on this topic More by this author

Blog Post

Fighting fear with factfulness – and engagement

Margrethe Vestager, European Commissioner for Competition, delivered the keynote speech at Bruegel's Annual Dinner 2018, held on 3 September 2018.

By: Margrethe Vestager Topic: European Macroeconomics & Governance Date: September 3, 2018
Read article Download PDF More on this topic

Policy Contribution

Should we care about central bank profits?

The authors investigate the ECB’s profit-making activity of the last 20 years, assessing how this was achieved and the reasons why we should care more broadly about central banks generating profits.

By: Francesco Chiacchio, Grégory Claeys and Francesco Papadia Topic: European Macroeconomics & Governance Date: August 30, 2018
Read article More on this topic

Opinion

The ECB is compromising the attractiveness of euro-area sovereign bonds

The ECB should refine its collateral framework in order to continue protecting its balance sheet without putting at risk the safe-asset status of sovereign bonds of the euro area.

By: Grégory Claeys and Inês Goncalves Raposo Topic: Finance & Financial Regulation Date: August 29, 2018
Read article More on this topic More by this author

Blog Post

Criteria for entry into the ERMII and the banking union: the precedent from Bulgaria

In its bid to join the single currency Bulgaria has made commitments on financial supervision but also wider structural reform which set a precedent for future applicants for participation in the exchange rate mechanism ERMII. Most conditions, though not all, are justified by the additional demands of the banking union. But the envisaged timeline seems ambitious, and verification will not be straightforward.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: August 29, 2018
Read article More on this topic

Blog Post

What should the EU do about the Turkish currency crisis?

The Turkish lira has been under significant pressure in recent weeks; in this blog post, the authors discuss the EU’s exposure to possible crisis in Turkey and how the EU should react.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: August 14, 2018
Read article

Parliamentary Testimony

European Parliament

The role of independent expertise in legislative process

Testimony before the European Parliament Committee on the Internal Market and Consumer Protection (IMCO).

By: Zsolt Darvas and J. Scott Marcus Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: July 18, 2018
Read article More on this topic More by this author

Opinion

Ubu ou Machiavel?

L'administration Trump veut imposer une approche transactionnelle des relations économiques gouvernée par le rapport de force bilatéral en lieu et place du contrat multilatéral. Un défi d'une ampleur inédite pour l'Europe.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 6, 2018
Read article More on this topic More by this author

Blog Post

EU income inequality decline: Views from an income shares perspective

Over the past decade, the income share of low earners has increased in the EU while that of top earners has slightly declined. Although the upward convergence of the impoverished central European population is impressive, the southern European poor have faced a major setback while the southern European rich have hardly suffered.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 5, 2018
Load more posts