EU bank resolution regime suffers from structural flaws
The European Single Resolution Mechanism faces procedural complexity, legal fragmentation and strict funding limits that undermine its efficiency. Speaking at Unidroit's centenary, the Financial Stability Institute urged legislative reforms to insolvency rules and resolution funding.
Three institutional bottlenecks
The Single Resolution Mechanism (SRM) exhibits three main structural inefficiencies.
First, resolution decisions require coordination among the Single Resolution Board, the European Central Bank, the European Commission, the Council and national authorities due to EU legal limits on delegated powers.
Second, the coexistence of EU rules and unharmonised national bank insolvency frameworks complicates creditor safeguards and the public interest assessment.
Third, access to the Single Resolution Fund requires shareholders and creditors to absorb losses of at least 8 percent of total liabilities before external funds, capped at 5 percent, can be tapped.
Consequently, the regime relies heavily on complex minimum requirements for own funds and eligible liabilities (MREL).
The single authority contrast
Compared to the United Kingdom and the United States, where single authorities like the Bank of England and the FDIC handle bank failures with flexible systemic risk backstops, Europe remains fragmented.
Recent reforms under the EU Crisis Management and Deposit Insurance (CMDI) framework expand resolution scope but do not eliminate national liquidation incentives or simplify MREL.
Completing the banking union requires common deposit insurance and mutualised external funding.
No shortcuts around political will
Technical fixes to resolution planning cannot remedy structural flaws rooted in resistance to mutualised burden-sharing.
Without common deposit insurance and harmonised insolvency laws, European banking integration will remain paralyzed.
Effective crisis management requires political courage rather than regulatory tinkering.