Resolution: National or European? Dirk Schoenmaker, dean 2 October 2012, EESC Hearing, Brussels

2 Resolution proposals Bail-in: yes, but be specific which debt instruments (markets want predictability) Approach: national or European; not halfway (mutual assistance between national funds)

3 The Challange Problem: Failure of large banks poses national and cross-border externalities Cross-border externalities are ignored by national authorities Why? Accountability to national politics (i.e. domestic taxpayers) National legislation/procedures for insolvency

4 Nationalism My country is my castle

5 Theory How to address asymmetries in national interests? Financial trilemma – 3 policy objectives: 1. Maintain global financial stability 2. Foster cross-border banking 3. Preserve national authority Only 2 out of 3 objectives can be obtained!

6 Financial trilemma

7 Banking Union He who pays the piper, calls the tune So, resolution determines incentives supervision Resolution (and deposit insurance) and banking supervision at same geographic level

8 Integrated approach Same geographic level Keep it simple: one deposit insurance and resolution fund (banks pay once a proper risk based premium) One authority: European Deposit Insurance and Resolution Authority (EDIRA)

9 Figure: European Institutions for financial supervision and stability in Banking Union Summing up

10 Schoenmaker, D. and Gros, D. (2012), A European Deposit Insurance and Resolution Fund – an update, Duisenberg school of finance Policy Paper no 26 Source

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