European Bank Insolvency and Liquidation Proceedings

This chapter assesses the link between insolvency and liquidation, focusing on the orderly protection of depositors. There are differences in approach to safeguard the public interest at the regional and domestic levels. The misalignment of domestic insolvency-liquidation law and depositor protection mandates is likely to lead to wider techniques being needed to effectuate an orderly insolvency-liquidation proceeding and payout to banks’ depositors. This means the competent authority, the resolution authority, and the management of the bank, or administrator-liquidator will need to coordinate their responsibilities through a court-based process during the timeframe of failing or likely to fail to achieve an orderly payout to depositors. The potential coordination risks would need to be factored into the process of a failing or likely-to-fail timeframe.

The EU Home and Home-Host Dilemma

This chapter looks at the relationship between the home and host when it comes to resolution of banks. Specifically, it analyses the responsibilities of each when it comes to branches and subsidiaries. This essentially leads to two potential outcomes: group resolution and entity level resolution. The resolution colleges play an important part in informing resolution decisions. However, a significant level of discretion exists and the home resolution authority can play a role that influences the way information is shared. The chapter then explores the role of the ECB and the Single Resolution Board (SRB) in forming the decision of whether a bank is failing or likely to fail. It specifically considers the ability to intervene in the restructuring of banks inside resolution.

The EU Home and Home-Host Dilemma

This chapter analyses the issues from the perspective of home country control and host responsibilities, and the role of the ECB as a single supervisor to minimize the potential conflicts between home and host participating Member States. From a cross-border dimension, the use of consolidated supervision is traditionally the starting point to configure the relationship between home and host, and in the EU context it is clearly positioned on home country control. However, it is evident that there is a potential threat with the lack of reciprocity within the consolidated supervisory relationship. This is particularly acute for those supervising group subsidiaries where the criteria for cooperation is not as clear as it is for branches. It is argued that this can potentially lead to conflicting interests between the parent and the subsidiary since risks on either side may not be visible to each other. Supervisory colleges and recovery planning are principal mechanisms to form a consensus for group perspectives and host perspectives. However, the level of administrative discretion that exists within the current mechanisms can lead to home country bias. Since the ECB is in the shoes of the group consolidated supervisor, it will really need to demonstrate that it truly reflects both sides.

The ECB’s Supervision and SRB Resolution—Participating and Non-Participating Member States

This chapter examines how the Single Supervisory Mechanism opens the door to non-Eurozone Member States to participate and have credit institutions supervised by the European Central Bank (ECB) that fulfil the criteria of significance within the Member State and have cross-border activities. The ECB is required to work closely with both participating and non-participating Member States , since a significant proportion of credit institutions will invariably have business activities in both participating and non-participating Member States. The participating and non-participating Member States will be expected to allow the ECB to take the lead and/or cooperate with the ECB as the competent home supervisor to ensure appropriate cooperation and coordination of supervision and information sharing to inform supervisory decisions. The aim of the ECB in this respect is to safeguard financial stability and facilitate sustainable market integration. The chapter looks at the procedures set out to explain how a non-Eurozone Member State enters a close cooperation agreement with the ECB to come under the umbrella of the Single Supervisory Mechanism.

EU Non-Performing Loans and Loan Loss Provisioning

This chapter focuses on the issue of non-performing loans (NPLs), which is critical in the home and host dilemma because of the significant level of cross-border banking that exists at the European level. Indeed, the NPL problem is one of the negative consequences of the push and pull factors of cross-border banking. The move towards consistent practices in the management of NPLs is exemplified by regulatory measures concerning loan loss provisions. In particular, the interlinkages between loan loss provisioning and capital requirements and how they interact with banks and their balance sheet combine a multitude of regulatory decisions directly and indirectly at the accounting and prudential supervisory level. The dynamics of private and public forms of regulation require a systematic discussion of how best to combine and interpret the reforms at European level.

EU Financial Crisis Management and Containment

This concluding chapter explores the decentralized and centralized mechanisms to support financial crisis management. The decentralized mechanisms reside at the national level. Meanwhile, the centralized mechanisms reside at the Eurozone level for participating and Eurozone Member States. The chapter first addresses the role of national powers to provide assistance through recapitalization initiatives and/or liquidity assistance. It then examines the formal centralized mechanisms to fund resolution as well as the proposal for the European Deposit Insurance Scheme (EDIS). The EDIS is critical to the success of the Banking Union, especially if liquidation is the option of first resort. Indeed, the EDIS and the Single Resolution Fund (SRF) are considered as principal measures to address home and host dilemmas. The funding of these initiatives through private means is an important contributing factor. It is an important step to minimize moral hazard risks through levies calibrated according to bank risk.

European Cross-Border Banking

This chapter discusses the interconnected nature of cross-border banking between European Union (EU) Member States in terms of counterparty credit risk exposure at both country and institutional level. The Bank for International Settlements (BIS) consolidated data shows how inflows and outflows of loans and deposits are impacted by events over time. The potential impact of the bank legal form is also important: significant assets held by a branch, as opposed to a subsidiary, lead to different levels of exposure to the home and host Member State. The chapter then shows that cross border banking integration across the EU Member States is not homogenous. The size of the foreign bank presence in each Member State is distinct and can potentially give rise to the risk of contagion. Notably, the size of branch presence rather than subsidiary presence in a respective member state offers an indication of the extent it’s financial system is exposed to systemic spillovers from either the home or host state.