A bank resolution occurs when authorities determine that a failing bank cannot go through normal insolvency proceedings without harming public interest and causing financial instability.
To manage the bank's failure in an orderly manner, authorities use resolution tools that
- ensure continuity of the bank's critical functions
- maintain financial stability
- restore the viability of parts or all of the bank
Meanwhile, any part of the bank that cannot be made viable again goes through normal insolvency proceedings.
After the recent financial crisis, the EU adopted a number of measures to harmonise and improve the tools for dealing with bank crises in its member countries.
Bank recovery and resolution directive
The bank recovery and resolution directive (BRRD) was adopted in spring 2014 to provide authorities with
- comprehensive and effective arrangements to deal with failing banks at national level
- cooperation arrangements to tackle cross-border banking failures
The directive requires banks to prepare recovery plans to overcome financial distress. It also grants national authorities powers to ensure an orderly resolution of failing banks with minimal costs for taxpayers.
The directive includes rules to set up a national resolution fund that must be established by each EU country. All financial institutions have to contribute to these funds. Contributions are calculated on the basis of the institution's size and risk profile.
The EU's bank resolution rules ensure that the banks' shareholders and creditors pay their share of the costs through a "bail-in" mechanism. If that is still not sufficient, the national resolution funds set up under the BRRD can provide the resources needed to ensure that a bank can continue operating while it is being restructured.