Challenges and prospects of the new banking resolution regime : report on the executive seminar on banking resolution, organized by the Florence School of Banking & Finance. Issue 2016/01, November 2016.
Date: 2016-11-14
Institutions: Robert Schuman Centre for Advanced Studies
Subjects: banking policy, banking supervision, banking system, economic governance (EU), euro area, financial institution, financial market, investment policy

Issue 2016/01 
November 2016

Challenges and prospects of 
the new banking resolution 
regime

Report on the Executive Seminar on Banking 
Resolution, organized by the Florence School of 
Banking & Finance 
14-15 July 2016

Author: Matteo GATTI

Highlights

The  consequences  of  the  new  banking  resolution  regime  on 
the  evolution  of  the  European  financial  system  were  discussed 
at  a  Chatham  House  ‘Executive  Seminar  on  Banking  Resolu-
tion’  organized  by  the  Florence  School  of  Banking  and  Finance 
and held in Florence on 14-15 July 2016. The executive seminar 
brought  together  academics,  EU  policy-makers,  investors,  and 
industry  practitioners  to  discuss  the  impact  of  the  new  resolu-
tion regime on banks, regulators and investors. Participants also 
exchanged  views  on  liquidity  support  and  exit  strategies  in  the 
upcoming resolution phase.

The  main  conclusions  stemming  from  the  interaction  among 
panelists are the following:

1.  Most of the systemic institutions still need to improve their 
internal governance in order to be in line with what is consid-
ered international best practice;

2.  Despite some criticisms and unresolved issues, bail-in repre-
sents a clear and radical improvement from the government 
bail-outs that followed the Eurozone crisis;

3. 

Information disclosure to large investors is a major upcoming 
challenge posed by resolution;

4.  A deeper assessment of the liquidity available for resolution 

needs to be carried out.

BRIEFPOLICYFLORENCE SCHOOLOF BANKING & FINANCEBackground

Following  the  disorderly  government  bail-outs  of  trou-
bled  banks  during  the  Eurozone  crisis,  the  EU  adopted 
the  Bank  Recovery  &  Resolution  Directive  (BRRD)  in 
2014  to  resolve  systemically  important  banks  that  were 
failing or likely to fail.

The adoption of the BRRD sets new standards in the way 
bank  failure will  be  dealt  with  in the  immediate future, 
putting an end to the disorderly bail-outs era and making 
shareholders fully responsible for their investment deci-
sions. The disruptive effects of bail-outs on the financial 
system, on the one side, and their spill-over effects to the 
real economy, on the other, have, in fact, highlighted the 
urgency  to  respond  to  the  inefficiencies  and  costs  that 
bail-outs impose on excessive risk-taking, on the sudden 
stops  to  credit  intermediation,  as  well  as  on  the  public 
finances of EU-countries.

Equipped with tools for precautionary and early interven-
tion, the BRRD has thus been designed to attain two main 
goals: first, to restructure failing or likely to fail banks to 
“ensure  the  continuity  of  their  critical  functions”  in  the 
economy while they are being restructured; second, and 
contemporaneously,  to  limit  through  market  discipline 
the moral-hazard effects on banks’ risk-taking decisions.

Enforced as of 1st January 2016 by the Single Resolution 
Board  (SRB)  and  National  Resolution  Authorities,  the 
BRRD has been designed with the two-handed scope of 
increasing  both  financial  markets’  ex-ante  and  ex-post 
efficiency. On the one hand, regulators claimed that bail-
in  will  change  banks’  risk-taking  decisions,  which  will 
no  longer  be  affected  by  the  implicit  and  unsustainable 
government guarantee that taxpayers’ money will be used 
to  bail-out  troubled-banks.  On  the  other  hand,  regula-
tors also acknowledged that resolution prevents orderly 
liquidation and interruption of critical functions in sys-
temically important banks, limiting disruptive effects to 
the  financial  system  and  possible  spillovers  to  the  real 
economy.

Implications of Resolution for Internal 
Governance of Financial Institutions 

The  first  panel  highlighted  the  implications  and  chal-
lenges that new resolution regimes entail for internal gov-
ernance  of  financial  institutions  and,  more  specifically, 
for  the  way  financial  institutions  manage  their  business 
models  and  target  their  risk  appetite.  The  main  points 
raised by participants concerned the necessity of greater 
information and transparency, and the need for the inclu-
sion of other stakeholders than investors in banks’ deci-
sion making processes as a precondition for resolution.

The  panel  opened  with  a  remark  on  the  first  in-depth 
assessment carried out by the Single Supervisory Mecha-
nism (SSM)1 on two main issues:

a) 

the  compliance  of  banks’  internal  governance  with 
both the national and the European legislation; 

b) 

its consistency with the best international practices. 

Participants discussed the results of this SSM assessment 
and    converged  on  agreeing  that  future  developments 
of the BRRD will be needed to carry out improvements 
in  three  main  areas:  the  removal  of  information  asym-
metries  that  still  characterize  the  information  flow  in 
decision-taking  organs;  the  optimal  design  of  govern-
ment  bodies’  characteristics,  which  should  reflect  inde-
pendence,  dedication,  and  professional  qualification  of 
its  members;  the  harmonization  and  integration  of  the 
EU regulations with national laws. 

Participants moved then to discuss some legal aspects of 
resolution, addressing the urgency of greater clarity in the 
context of financial support between banks and subsidi-
aries within cross-borders banking groups. Panelists sug-
gested that, although the BRRD (art. 19 and seq.) foresees 
the possibility, and not the obligation, of banks’ financial 
support to a failing subsidiary – an approach known as 
“Rozenblum Doctrine” – the rules on consolidated super-
vision and capital requirements suggest a possible future 
shift towards an outright duty to support failing subsidi-
aries.  Panelists  stressed  that  this  shift  could  potentially 
lead  to  backfiring  effects  on  the  stability  of  the  whole 
financial system, as an outright duty to support a failing 

1. 

 SSM supervisory statement on governance and risk appetite, ECB, June 
2016. https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm_su-
pervisory_statement_on_governance_and_risk_appetite_201606.
en.pdf

2 ■  FBF | November 2016

subsidiary  could  trigger  even  greater  bankruptcy  risks 
that would be scaled up to the parent bank. Furthermore, 
the panel discussed whether the BRRD has changed the 
balance of powers between banks, their shareholders and 
creditors. Participants claimed that bail-in has put credi-
tors into a much more likely possibility of losing part of 
their  money,  shifting  negotiations  between  banks  and 
their creditors in the shadow of a less friendly law. 

Panelists finally highlighted that the future challenge of 
the  BRRD  will  be  to  raise  the  convergence  of  interests 
between  shareholders  and  other  banks’  stakeholders  in 
order to ease resolution. They argued that this could be 
carried out in three steps: 

a)  by reducing the failures of knowledge or comprehen-

sions within the internal governance of banks;

b)  by dealing with the failures of banks’ willingness to 

comply with the resolution authority;

Implications of the New Resolution 
Regimes for Regulators 

The second panel shifted its focus from the internal gov-
ernance issues to the challenges that the BRRD left to reg-
ulators. The two main points considered were the bail-in/
bail-out dichotomy and the issue of credibility within the 
current resolution framework.

The  panel  started  with  a  discussion  on  the  reasons  that 
brought the BRRD to include bail-in rules in banking res-
olution, as a response to the massive bail-outs witnessed 
in the recent Eurozone crisis. The need for a change came 
from  the  widespread  consideration  that  “bail-outs  have 
been an economic success, but a political failure”2, which 
urged the authorities to respond by means of a new set of 
regulations. The challenges that the new bail-in scheme, 
embedded within the BRRD, had to address were to:

c)  by  coping  with  the  failures  of  banks’  capacity  to 

comply with the resolution authority.

a)  deal  with  the  perverse  effects  of  using  tax-payers’ 
money to subsidize banks’ excessive risk-taking; 

As for the failure of knowledge within the internal gov-
ernance,  participants  stressed  the  urge  to  align  banks’ 
business areas with their legal entities, by implementing a 
clear booking model, as well as clear intragroup relation-
ships. Furthermore, they highlighted the need to remove 
the presence of asymmetric information between share-
holders  and  credit  holders  when  it  comes  to  defining 
banks’ risk appetite and, more generally, to include credit 
holders in the decision making process of banks. Indeed, 
in order to be effective, the inclusion of creditors’ inter-
ests needs to be timely and efficient. As for the concerns 
over  the  failures  on  the  willingness  to  comply,  instead, 
participants stressed the need for an independent board 
composition  and  an  incentive-consistent  capital  struc-
ture  within  groups,  both  geared  towards  a  government 
structure characterized by debt investors playing the new 
role of market discipline providers. Finally,  participants 
agreed that failures of banks’ capacity to comply with res-
olution authorities cries for the need of defining adequate 
internal  loss-absorbing  capacity  (TLAC),  greater  skills 
for the board of directors, and a more detailed scenario 
testing. 

b)  endeavor to break the unsustainable sovereign/bank 

“doom-loop”; 

c)  avoid the social costs of liquidating systemic banks.

The  failure  and  liquidation  of  troubled-banks  would 
result,  in  fact,  in  spillovers  to  the  real  economy,  ampli-
fying  the  initial  effects  of  a  financial  crisis.  Although 
many  participants  agreed  on  the  necessity  of  a  change 
from bail-out practices, different voices raised when par-
ticipants discussed issues that the current bail-in regula-
tion poses to regulators. 

A  first  set  of  issues  concerned  the  contagion  effects 
that  bail-in  might  lead  to.  Participants  suggested  that, 
although  bail-in  increases  credit  holders’  monitoring 
efforts,  bail-inable  debt  could  be  dangerously  accumu-
lated  by  pension  funds,  insurance  companies  or  other 
undercapitalized banks which, if resolution is triggered, 
could  encounter  solvency  problems,  leading  to  a  con-
tagion  effect  throughout  the  whole  financial  system.  In 
other words, unless clear rules are set on whom can hold 
bail-inable debt and to which extent, the current resolu-
tion framework might destabilize financial markets. 

3 ■  Challenges and prospects of the new banking resolution regime

2.  Although many participants agreed that the bail-outs carried out during 
the  Eurozone  crisis  have  been  widely  recognized  as  a  political  failure, 
fewer agreed on the extent to which bail-outs were an economic success.

 
A  second  set  of  issues  focused  on  the  credibility  of  the 
bail-in scheme. The matter of credibility arises from a rel-
evant discretion over the decision to put a bank into reso-
lution and it increases financial markets’ uncertainty. On 
the one hand, participants claimed that excessive political 
discretion  might  lead  to  time-inconsistent  behaviours 
of  governments  in  the  absence  of  a  credible  liquidity 
backstop. On the other hand, though, a mandatory bail-
in  according  to  an  established  waterfall  and  rigid  rules 
would neither be desirable nor credible as the framework 
would have to account for systemic exceptions.

A  third  set  of  issues  concerned  asset  valuation  and  the 
related  time  frame  that  the  assessment  of  non-per-
forming-loans  (NPL)  would  have  to  take.  Participants 
suggested that traded financial market instruments, such 
as bail-inable debt, ask for a rapid response to informa-
tion  flow  and  to  higher  uncertainty,  while  valuation  of 
NPL would take a much longer time frame (months prob-
ably) which would, in turn, decrease the value of equity. 
Moreover,  a  longer  time  horizon  needed  for  valuation 
and  greater  uncertainty  would  result  in  higher  funding 
costs for banks.

Participants  also  added  that  bail-outs  in  the  future  will 
still  be  possible  and  desirable,  although  bail-in  would 
have to be implemented first. The system moved from a 
bail-out-only regime to a bail-in-only one, although par-
ticipants believe that a future convergence to a mix of the 
two,  given  the  difficulties  to  fully  implement  the  latter 
one, will be possible and desirable. 

Finally, participants claimed that regulators and authori-
ties  should  consider  an  additional  possible  way  of 
reducing  resolution  costs,  that  is  implementing  higher 
capital requirements. Providing banks with a larger buffer 
of equity to weather against losses constitutes a third and 
less explored solution.

Implication of the new resolution regime 
for investors 

The third panel discussed the effects that the new resolu-
tion regime had on investors and was mainly focused on 
the key role played by information disclosure.  As losses 
can by no means be legislated away, but at most shared 
within a resolution framework, participants highlighted 

the importance of reducing asymmetries and increasing 
disclosure of information affecting those rules that dictate 
how losses should be shared among banks’ stakeholders. 
The  panel  thus  stressed  how  investors  are  aiming  for 
clearer  and  greater  information  as  a  compelling  condi-
tion for their investment decisions in the next future. The 
discussion covered different types of additional informa-
tion required, which can be declined in three main areas: 

a)  greater information over the resolution hierarchy;

b)  greater predictability of resolution;

c)  greater harmonization of rules.

As  for  point  a),  participants  claimed  that  investors  are 
in  desperate  need  for  clearer  information  regarding  the 
level on which they position themselves within the debt 
hierarchy,  should  the  bank  fall  under  resolution.  This 
would  allow  them  to  price  risks  more  clearly,  lowering 
the  premium  they  require  on  lending  and  simplifying 
transactions when debt securities are traded. Moreover, 
as mentioned already in the previous panels, participants 
also stated how crucial it is for investors to have a greater 
predictability of when and under what conditions bail-in 
can be triggered by the authorities. Although participants 
agreed  that  leaving  some  discretionality  to  the  resolu-
tion authorities can be indeed desirable, they also believe 
that one of the BRRD’s future challenges will be to reduce 
investors’  uncertainty  by  lowering  the  current  level  of 
resolution unpredictability. On this same topic they also 
stressed  that  by  no  means  discretion  should  be  guided 
by  political  interest,  but,  rather,  by  the  only  purpose  of 
providing  greater  financial  stability.  Finally,  as  of  point 
c), participants supported the undoubted relevance of the 
harmonization  of  rules  across  EU  countries,  especially 
for cross-border operating banks. 

The  trade-off  between  authorities’  discretion  and  inves-
tors’  predictability  was  also  addressed  when  discussing 
the  risk  of  potential  financial  instability  given  by  the 
BRRD.  Participants  admitted  the  presence  of  possible 
unforeseeable consequences coming out of direct appli-
cation of the BRRD, such as financial contagion. On this 
point,  clearer  rules  regarding  limits  on  TLAC  held  by 
other financial institutions should be clearly specified so 
as to guarantee the effective functioning of firebreaks in 
case of contagion. 

4 ■  FBF | November 2016

 
Other participants expressed their concerns on whether 
the existing measures to deal with liquidity shocks are, in 
fact, usable when necessary. They argue that tools such as 
the liquidity covering ratio (LCR), for example, might not 
be used without causing panic reactions.

Finally, participants stressed the importance of using pri-
vate sources of funding that minimize moral hazard costs 
and to rely on the public sector as a backstop mechanism 
only  when  private  money  is  not  available  and  with  the 
aim  of  providing  market  confidence  and  of  promoting 
more stable funding to systemic institutions.

An  additional  reason  for  more  precise  information  was 
identified in the distinction between MREL and TLAC.  
While some of the participants suggested that a reconcili-
ation among the two would benefit financial markets by 
reducing  uncertainty  and  possibility  of  regulatory  arbi-
trage, others did not fully support this view and acknowl-
edged important differences between the two. 

One  final  comment  that  was  raised  suggested  the  need 
for  a  greater  disclosure  of  information  regarding  how 
BRRD  should  operate  when  the  economy  is  not  in 
steady state. Some participants stressed that some recent 
BRRD failures might not be completely imputable to the 
lack  of  information,  but,  rather,  to  the  transitory  phase 
that  the  resolution  regime  is  still  undergoing  and  to  an 
environment  characterized  by  markets  that  are  still  not 
completely operating. Banks’ balance sheets are still not 
completely recovered from the financial crisis and some 
banks are still building up their equity buffer. 

Liquidity Support and Exit Strategy in the 
New Resolution Phase

The fourth and last panel of the conference highlighted 
regulators’ growing concerns over the liquidity issues that 
could  arise  following  the  introduction  of  banking  reso-
lution standards. Participants claimed that, while bail-in 
requirements such as MREL and TLAC address solvency 
concerns,  they  might  have  backfire  effects  on  banks’ 
liquidity, especially when it cannot cover its needs using 
the Eurosystem as a liquidity backstop. 

Participants stressed that the liquidity planned for reso-
lution and implemented by the BRRD might not be suf-
ficient to address all of banks liquidity needs, both when 
the  system  gets  at  its  full  regime,  and  especially  now 
during its ad-interim process, when the amount of non-
performing  assets  are  still  consistent  and  the  resolution 
funds  is  yet  to  be  completed.  Participants  stressed  that, 
if  banks  lack  collateral,  they  cannot  resort  to  the  Euro-
system monetary policy operations and governments are 
left with more intrusive solutions to their liquidity needs, 
depending on how systemic the crisis is and on the shape 
of the involved banks. These measures may vary from the 
Emergency Liquidity Assistance, to fiscal backstop, reso-
lution fund and all the way down to capital controls.

5 ■  Challenges and prospects of the new banking resolution regime

 
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The Florence School of Banking & Finance is a European platform bringing together practitioners and academics from the 
Banking and Finance sector to develop a common culture of regulation and supervision in the European Union. It does so 
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doi:10.2870/789886
ISSN:2443-8006
ISBN:978-92-9084-438-9

6 ■  FBF | November 2016

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