Remarkable progress has been made in the setting-up of the first pillars of Banking Union. However, its incompleteness poses renewed challenges that policymakers need to address. Absent stabilisation mechanisms – a fully-fledged EDIS, the provision of liquidity in resolution, etc. – in the short to medium term, banks will continue to be ‘European in life but national in death’. While supervisory and resolution decisions are mostly European, the ultimate guarantor of financial stability remains national. This unstable balance prevents economic agents from fully reaping the expected benefits of economic integration via a single market for wholesale and retail financial services.

As stressed, among others, by Fernando Restoy, whereas MREL and bail-in requirements may work for larger banks, it is not clear whether such requirements are suited for a middle class of institutions that operate on a more traditional business model and which may be of no public interest at EU level but still have systemic relevance at local level.

Solutions thus need to be found for the orderly exit of traditional medium-sized deposit-taking banks without disrupting financial stability. Otherwise, Member States will continue to be accused of circumventing the existing rules when adopting solutions whose ultimate objective is to safeguard financial stability and mitigate the economic impact of potential disorderly liquidations or resolution actions.

Recent experience has shown the current framework might not be appropriate to address such cases. As an alternative, the topic of harmonising EU banks’ liquidation regimes has been put on the agenda. But what does bank liquidation mean? And do we have the tools to ensure its orderliness in the current context? Let us acknowledge that this is not a silver bullet. In the absence of an appropriate legal framework, liquidation might imply the immediate interruption of lending support, as well as the suspension of payments; it may have disruptive effects for creditors, depositors and other stakeholders, with the ensuing impact on the real economy, ultimately reinforcing the sovereign-bank doom loop.

Instead of moving immediately towards the harmonisation of EU banks’ liquidation regimes, efforts must be made towards the establishment of an enabling framework for the orderly management of failing locally systemic relevant banks, combining elements of the resolution and liquidation frameworks – akin to the FDIC approach in the USA – while minimising losses and protecting relevant creditors and non-financial borrowers. Such enabling framework should include the definition of high level principles to be agreed by all Member States and applicable at national level. Possible paths might include:

• The establishment of special insolvency proceedings, with recourse to administrative options, assigning to a liquidating authority some of the instruments currently envisaged in the BRRD, as an alternative to the court-led liquidation regime. The liquidating authority and the funding sources available would need to be identified.
• The use of DGSs for deposit transfers abiding by the least cost principle. For that, a revision of the applicable State aid rules and of the national transpositions of the DGSD would be required.
• The liquidating authority having the option to offer guarantees or enter into profit and loss sharing regimes.