BRSC - Bank resolution frameworks in systemic crises

An efficient banking system is critical for modern market economies. When banks fail, however, the negative repercussions go beyond their stakeholders; systemic banking crises have severe negative effects for economies and societies, as we observed both during the Global Financial and Eurodebt Crises and in many crises in emerging and developing countries. What are the appropriate legal and regulatory frameworks to deal with failing banks, and are they the same that can help deal with individual bank failures fit for purpose when dealing with widespread systemic banking distress?

The experience of the Global Financial Crisis has led to a major overhaul of bank resolution frameworks across the world, based on a number of global best practices aimed at providing authorities with sufficient powers and control over the resolution of banks, and focusing on bail-in rather than bailout of failing banks by taxpayers. While such frameworks have been used successfully for idiosyncratic bank failures, it is unclear whether more comprehensive resolution regimes are able to reduce risk in a systemic crisis.

BRSC assesses the ability of bank resolution frameworks to deal with systemic banking fragility, combining novel data on bank resolution regimes in 22 member countries of the Financial Stability Board and bank-level measures of systemic risk. This research project focuses on positive and negative shocks of systemic and idiosyncratic nature to gauge how systemic risk changes across banks in countries with different bank resolution frameworks and different types of shocks. The findings of this research are critical for Widening Countries, given the inherent instability of their banking systems and the fact that many of them are still building up bank resolution frameworks.

For more information about the EUI Widening Europe Programme, please visit the official webpage.