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Crisis management in the banking sector - 20/10/2010

Part of a building with the word “bank” above the door © istock/ilbusca

New EU framework for crisis management in the financial sector for managing problems before they spiral out of control.

In the wake of the global financial crisis, the EU has to put in place measures to prevent a similar situation happening again. One area of reform is the banking sector, which needs to remains stable if a failure occurs and should not rely on bailouts.

During the crisis it became clear that a problem with one bank can spread to the entire financial sector – and to more than one country. In many cases EU governments had to spend taxpayers’ money to shore up some of the bigger banks.

At the time, these were considered to be so large that their failure would lead to worse problems – including financial harm to millions of customers. State aid to support banks during the recent crisis amounted to 13% of the EU’s gross domestic product.

As part of the reforms, the commission proposes a system of supervisory coordination among the EU’s regulators and governments to identify and deal with struggling banks. No bank should be “too big to fail” or too interconnected to fail.

Banks operating in more than one EU country would fall under greater scrutiny. The new European Banking Authority would assist national regulators during a crisis situation.

To pay for the cost of managing bank failures, banks would be required to pay into a national fund. Other measures include:

  • requiring both financial institutions and governments to have plans to deal with serious financial difficulties or failures.
  • giving regulators powers to force a problem bank to replace its top managers, implement a recovery plan or reduce operations that pose an excessive risk.
  • allowing authorities to order the takeover of a failing bank or firm by another, or to transfer all or part of its business to a temporary “bridge bank”. This measure allows a bank’s essential services to continue while managing its failure properly.

The proposals form part of a package of legislation planned for spring 2011 for managing a future crisis in the banking and investment sectors.

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