25 Feb 2015

Closing financial institutions on both sides of the Atlantic: Are there differences in approach?

Michael Krimminger / María J. Nieto

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In the aftermath of the Great Financial Crisis both the EU and the US have implemented resolution procedures for their largest and most systemic financial institutions. This Commentary examines the main differences between the two frameworks. The EU framework allows, inter alia, action to prevent the failure of a credit institution, while the US regulatory framework requires that all systemic banks subject to resolution must be closed and resolved. The greater flexibility under the EU resolution framework allows action to be taken to preserve a credit institution without putting it through an insolvency process, which makes limiting moral hazard less obvious. Moreover, the scope of the EU framework is still narrow, since it does not allow the recovery of non-bank financial institutions, whereas the US framework does.

Michael Krimminger is a partner based in the Washington, D.C. office of Cleary Gottlieb. María J. Nieto, Associate to the Director General of Banking Regulation and Financial Stability, Banco de España, Madrid.