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Bank recovery and resolution

The EU provides a framework for authorities to manage bank failures effectively.

What the EU is doing and why

The EU has adopted a number of measures to harmonise and improve the tools for dealing with bank crises.

To manage the bank's failure in an orderly manner, authorities can use harmonised resolution tools that

  • ensure the continuity of the bank's critical functions
  • maintain financial stability
  • restore the viability of parts or all of the bank – or transfer them to another bank

Meanwhile, any part of the bank that cannot be made viable again goes through normal insolvency proceedings.

A bank resolution occurs when authorities determine that, contrary to normal insolvency proceedings, resolution would better protect financial stability, depositors and minimise the recourse to public funds (so called public interest assessment).

The EU has implemented the international consensus (G20, Financial Stability Board decisions) that banks should never again be bailed out with public money, but instead should be bailed‑in. In this context, the resolution framework requires from EU banks that are meant to be dealt with in resolution once they fail, to build their internal loss absorbing capacity and ensure that they can cover the cost of their failure with their own resources. As a second line of defence, safety nets funded through the EU banking sector contributions can be used, if needed, as opposed to public bail outs.

The current resolution framework emerged after 2008 financial crisis, where many EU banks encountered financial difficulties and EU governments stepped in and saved them with taxpayer’s money (bailed them out). At the time, the EU governments intervened with public support, due to the lack of appropriate tools to deal with the failure of complex banks in an orderly manner (instead of letting them go bankrupt under standard insolvency proceedings) and to avoid the negative repercussions that such uncontrolled failure would entail, for financial stability, the real economy and depositors.

Policy making timeline

  1. 18 April 2023
    Legislative proposal - Bank recovery and resolution
  2. 20 May 2020
    Legislation - Bank recovery and resolution
  3. 23 November 2016
    Legislative proposal - Bank recovery and resolution

Relevant legislation