The 2007–08 crisis revealed regulatory failures that had allowed the shadow banking system and systemic risk to grow unchecked. This column evaluates recent proposals to reform the banking industry. Although appropriate pricing of risk should make activity restrictions redundant, there may nevertheless be complementarities between these two approaches. Ring-fencing may make banking groups more easily resolvable and therefore lower the cost of imposing market discipline.
Xavier Vives, 17 March 2015
Georg Ringe, Jeffrey N. Gordon, 28 January 2015
Bank resolution is a key pillar of the European Banking Union. This column argues that the current structure of large EU banks is not conducive to an effective and unbiased resolution procedure. The authors would require systemically important banks to reorganise into a ‘holding company’ structure, where the parent company holds unsecured term debt sufficient to cover losses at its operating financial subsidiaries. This would facilitate a ‘single point of entry’ resolution procedure, minimising the risk of creditor runs and destructive ring-fencing by national regulators.
Charles A.E. Goodhart, 24 December 2014
The Financial Stability Board’s recent consultative document proposes dividing global systemically important banks into holding companies and operating subsidiaries so as to insulate the latter from a major loss. This column poses the question of what will happen after the holding company is liquidated or written down in order to recapitalise the operating subsidiary – a question as yet unanswered by the Financial Stability Board.
Thorsten Beck, 10 November 2014
The ECB has published the results of its asset quality review and stress tests of Eurozone banks. This column argues that, while this process had clear shortcomings, it still constitutes a huge improvement over the three previous exercises in the EU. Nevertheless, the banking union is far from complete, and the biggest risk now is complacency. A long-term reform agenda awaits Europe.
Stefano Micossi, 05 June 2014
The European banking union is in pressing need of a unified banking resolution mechanism, but public bail-in has become increasingly unpopular. This column details new legislation towards a single resolution mechanism in the EU that minimises public exposure. The shareholders of an insolvent bank will be the first to take the hit, followed by creditors, before the public. This has the advantage also of mitigating moral hazard.
Lev Ratnovski, Luc Laeven, Hui Tong, 31 May 2014
Large banks have grown and become more involved in market-based activities since the late 1990s. This column presents evidence that large banks receive too-big-to-fail subsidies and create systemic risk, whereas economies of scale in banking are modest. Hence, some large banks may be ‘too large’ from a social perspective. Since the optimal bank size is unknown, the best policies are capital surcharges and better bank resolution and governance.
Thomas Huertas, María J Nieto, 18 March 2014
The European Resolution Fund is intended to reach €55 billion – much less than the amount of public assistance required by individual institutions during the recent financial crisis. This column argues that the Resolution Fund can nevertheless be large enough if it forms part of a broader architecture resting on four pillars: prudential regulation and supervision, ‘no forbearance’, adequate ‘reserve capital’, and provision of liquidity to the bank-in-resolution. By capping the Resolution Fund, policymakers have reinforced the need to ensure that investors, not taxpayers, bear the cost of bank failures.
Donato Masciandaro, Francesco Passarelli, 21 December 2013
During the Great Moderation, central banks focused on price stability, and independence was seen as crucial to limit inflation bias. Since the Global Financial Crisis, emergency support measures for banks, and central banks’ increasing involvement in supervision, have called central bank independence into question. This column argues that the literature has overlooked the distributional effects of the tradeoff between monetary and financial stability. In a political economy framework, heterogeneity in voters’ portfolios can cause the degree of central bank independence to differ from the social optimum.
Stefano Micossi, 30 November 2013
Of the three pillars of the nascent European banking union, establishing a unified bank-resolution mechanism is the most pressing issue. This column suggests some changes to the existing Single Resolution Mechanism proposals. The decision to initiate resolution should be left to the ECB and national resolution authorities. Debt automatically convertible into equity when capital thresholds are violated could partially replace liabilities subject to bail-in. The Single Bank Resolution Fund must be supranational to ensure the credibility of the mechanism.
Xavier Freixas, 07 September 2012
Xavier Freixas talks to Viv Davies about the recent changes in the European banking resolution regime. They discuss the tension between ex ante incentives and ex post efficiency in banking. Freixas argues that the best way to analyse a bank resolution situation is to think of it as a bargaining game between the bank's shareholders and the treasury. The interview was recorded by phone on 6 September 2012.
Xavier Freixas, 01 September 2012
Before 2007, the widely accepted view was that systemic banks had to be bailed out no matter what. This column argues that views are changing – and for the better.
Iman van Lelyveld, Marco Spaltro, 27 October 2011
The dissent brewing throughout Europe hinges on the question of whether the financial burdens of the Eurozone crisis should be shared between weak and strong. This column presents a new paper arguing that the wealthier, more stable economies don’t have much choice.