Management and Resolution of Banking Crises: Lessons from Recent European Experience

Several European countries endured severe and costly banking collapses in the past decade. Central banks (both within the euro area and outside) provided extensive liquidity to keep the payments system running smoothly in most—but not all—of these countries. The policy approaches to resolve the banking crises across European countries were remarkably different, reflecting the lack of administrative and legislative preparation for bank resolution. As banking systems that had been allowed to enlarge suffered in the face of the global downturn, the scale of bank failures that swept Europe overwhelmed existing policy structures. Not all the policy choices made seem wise in retrospect; a new policy approach was clearly needed. Along with new institutional arrangements for early warning of systemic instability and a single bank supervisor in the euro area, the European Union has adopted a new policy framework for managing and resolving banking crises in euro area countries. Honohan examines the new regime, which has been in operation since the beginning of 2016, and concludes that despite improvements, more needs to be done to ensure the safety of European financial institutions and prevent future banking crises.