Ignatowski, M. & Korte, J. (2014) “Resolution threats and bank discipline“, VoxEU Organisation, 20 May.
Can a tightening in the bank resolution regime introduce more prudent bank behaviour? This column reviews some arguments for why this could be the case. It presents evidence linking changes in bank resolution regimes with bank behaviour. Tightening of US bank resolution significantly decreased the overall risk-taking of the most affected banks. This effect, however, does not hold for the largest and most systemically important banks. Too-big-to-fail seems to be unresolved.
In spring 2014, the European Parliament adopted key steps towards completing the proposed banking union for Europe – the EU Bank Recovery and Resolution Directive and the Single Resolution Mechanism – that strengthen bank resolution in the Eurozone. Hopes are high that the implementation of this tightened resolution regime will help not only to better resolve a crisis situation, but also to discipline banks ex ante by increasing the resolution threat in case of failure. Commissioner Michel Barnier underlines this hope by claiming that ‘taxpayers will no longer foot the bill when banks make mistakes’ and that this improvement to bank resolution will help avoiding future crises.
Can a tightening in bank resolution regimes induce more prudent bank behaviour? In this column, we review some of the key arguments why this could be the case and present recent empirical results that investigate the effects of improved bank resolution in the US on bank risk-taking.
Relevant posts:
- Gordon, N. J. & Ringe, G. (2014) “How to save bank resolution in the European banking union“, VoxEU Organisation, 30 April.
- Huertas, T. & Nieto, J. M. (2014) “How Much is Enough? The Case of the Resolution Fund in Europe“, VoxEU Organisation, 18 March.
- Masciandaro, D. & Passarelli, F. (2013) “Single supervision and resolution rules: Is ECB independence at risk?“, VoxEU Organisation, 21 December.