7 Jun 2012
JRC analyses the effects of the bank resolution reform proposal
On 6 June 2012 the Commission proposed a new framework for bank crisis management aiming to minimise the possible impact of closing out or restructuring banks facing difficulties and to avoid that taxpayers would need again to bail out financial institutions. The JRC's Institute for the Protection and Security of the Citizen (IPSC) quantitatively evaluated the potential effects of the proposed measures on European public finances and their impact on the economy.
The proposed framework provides credible resolution tools and coordination mechanisms that allow regulators to intervene in a quick and coordinated way before problems in a bank become critical and risk endangering the whole financial system. In order to achieve these objectives effectively, the framework focuses on early intervention and on assuring the existence of appropriate resources for financing resolution in cases where continuity of critical functions must be ensured.
Among the other elements, the package introduces a European framework for the creation of resolution funds and for the use of the bail-in tool. The latter would allow regulators, under a set of clearly defined circumstances, to impose losses on bank creditors without the need to stop bank operations first. It should offer an alternative to regulators to shutting down troubled banks and risk systemic consequences, or having to bail them out using taxpayers’ money.
On behalf of the Directorate-General for Internal Market and Services (DG MARKT), the JRC conducted an extensive analysis aimed at evaluating the effects of introducing resolution funds and the use of the bail-in tool. The work was largely based on the SYMBOL (Systemic Model of Banking Originated Losses) model, developed by the JRC in cooperation with DG MARKT and academia.
This analysis shows that the proposed measures, when applied on top of the new capital requirements proposed by the Commission (currently under negotiation in the Council and Parliament), would yield a total reduction in the size of the public finances intervention in case of a crisis comparable to the recent one by more than 94%. Moreover, it is estimated that the probability of a systemic banking crisis happening in the future should be reduced by more than 90%.
The JRC also offered a major contribution to the estimation of the possible cost of these measures. The Commission estimates the annual net benefits from the package to be equivalent to at least 0.76% of European GDP.
Some of the methods used by JRC to evaluate these policy measures make the object of scientific publications which are going to be presented at the International Risk Management Conference (IRMC) and the International Finance and Banking Society (IFABS) conference in Rome and in Valencia.