Recovery and resolution scenarios are still of importance for
European institutions. Banks perform functions which are critical
for economic activity to take place. They collect funds (deposits
and other forms of debt) from private persons and businesses,
provide loans for households and businesses, allow savings to be
allocated for investment and manage payment systems that are
crucial for various sectors of the economy and society as a
Banks operate on the basis of public trust. If confidence in
them is lost, depositors and other creditors may quickly withdraw
their funds, which may lead to their failure. As well as depriving
their customers of access to the socially valuable banking
functions mentioned above, the failure of a large bank may
undermine confidence in other banks, affect their finances and
create instability across the financial system as a whole. Thus,
through this contagion effect, the value and viability of other
banks could be rapidly eroded and the entire financial system
In normal insolvency proceedings, the primary objective is to
maximise the value of assets of the failed firm in the interest of
creditors. However, these proceedings may take years, in particular
for complex institutions, leading to uncertainty, with a knock-on
effect on confidence. By contrast, the primary objective of bank
resolution is to respond in a rapid and decisive manner to a bank
in financial distress to maintain financial stability and minimise
losses to the public, in particular taxpayers, while ensuring a
similar outcome to that under normal insolvency proceedings in
terms of the allocation of losses to shareholders and
With this in mind, a legal regime for European bank recovery and
resolution is crucial for more integrated bank oversight and crisis
management within the European Union's banking union.
Frankfurt banking partner Simon Grieser and Munich associate
Anselm Reinertshofer consider the recovery and resolution
requirements for institutions (including the minimum required for
own funds and eligible liabilities) in a contribution to the
Banking Restructuring handbook published by C.H.BECK, the
largest publishing house in Germany – find
out further information on the handbook here (in German).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR")...
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