The financial crisis has taught us two important lessons so far. The first lesson is that public intervention in banks cost taxpayers substantial sums of money and even put some Member States’ public finances at risk. During the crisis, the Commission approved € 4.5 trillion in state aid measures to financial institutions. It is clear that these measures impose a heavy burden on present and future generations.
The second lesson is that the financial markets within the EU have become interdependent to such an extent that domestic failures of banks can have an immediate effect on businesses and markets in other countries and even on the financial stability. Furthermore, while the operation of banks has become cross-border oriented and therefore highly integrated, the authorities’ power to intervene has remained national. As a consequence, if a cross-border bank fails, supervisors only apply their own national regimes for facilitating bank recovery and resolution and concentrate only on operations within their own territories. This complicates cross-border cooperation, as national objectives may differ, and this leads to suboptimal results on the EU level. The Commission has sought to tackle these problems and on 6 June it presented a proposal for a Crisis Management Directive (CMD) to develop such a common framework for the recovery and resolution of banks and investment firms.
The proposal consists of three key elements. The first element is the focus on prevention before cure. European regulators are required to establish a harmonised regime for recovery and resolution planning. The second element is that the proposal facilitates decisive intervention. It empowers regulators and supervisory authorities to intervene at an early stage to recover (parts of) viable banks and other financial institutions and facilitates cross-border cooperation and deposit guarantee funds. Thirdly, it reallocates the cost of bank failure and ensures that shareholders and creditors share the cost of such a failure instead of the taxpayers. This should stimulate the institutions to enhance market discipline to governance and risk management practices.\
The proposed intervention tools are divided into three categories of measures. The first category, i.e. the preventive measures, relates to the enforcement of the obligation for institutions to create so-called ‘living wills’, i.e. recovery and resolution plans with measures when a financial institution encounters financial problems. Secondly, early intervention measures enable authorities to implement the measures set out in the aforementioned plans. If the preventive and early intervention measures fail and no alternative action is likely to help prevent failure of the financial institution and the public interest is at stake, the supervisory authorities can take control of the institution and initiate the decisive resolution plans.
These harmonised recovery and resolution tools or powers will ensure a common toolkit and roadmap for supervisors in all Member States and will enable cooperation between those authorities managing the failure of cross-border banks. In this way, the economic reality, i.e. the cross-border operations of banks, becomes aligned with the crisis management powers of national supervisors. A lesson seems to have been learned.