06 Dec 2016

The different legal and operational structures of banking groups in the euro area and their impact on banks’ resolvability

Willem Pieter De Groen

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The Single Resolution Mechanism, which started in January 2016, must ensure that even the largest, most interconnected and complex bank in the euro area can fail. One critical element in making this feasible is to enhance the resolvability of banks. In general, systemic banking groups are highly complex institutions composed of many different legal entities that are interconnected not only in a juridical sense but also operationally and financially. To carry out this analysis, the author assessed the 125 banks that were under the direct supervision of the European Central Bank as of May 2016, of which almost three-quarters are internationally active and more than a third of which are owned or controlled by one or more other banks. This paper looks at the critical elements in the resolvability of these internationally active and bank-owned banking groups and reaches two main findings. First, resolution authorities need to introduce closer coordination and cooperation in order to lower the costs of resolution (e.g. bail-in costs and negative financial stability effects). Secondly, decision-makers within bank-owned banking groups need to change their system of governance to allow for orderly resolution (e.g. to allow prompt capital and asset transfers for loss absorption in resolution).

Willem Pieter de Groen is Research Fellow at CEPS. This material was originally published in a paper provided at the request of the Committee on Economic and Monetary Affairs of the European Parliament and commissioned by the Directorate-General for Internal Policies of the Union and supervised by its Economic Governance Support Unit (EGOV). The opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament. This document is also available on Economic and Monetary Affairs Committee homepage at: http://www.europarl.europa.eu/RegData/etudes/IDAN/2016/587378/IPOL_IDA%282016%29587378_EN.pdf

© European Union, 2016

Series: Externally Commissioned Research       No. of pp: 33