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Reset required: The euro area crisis management and deposit insurance framework

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  • Huertas, Thomas F.

Abstract

The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. Although its policy objectives remain valid, the means of achieving them do not. As the euro area comes the end of the long transition period taken to implement the BRRD/SRMR, it should take the opportunity to reset expectations about resolution. Above all, resolution should be for the many, not just the few. There should be a single presumptive path for dealing with failed banks: the use of bail-in to facilitate orderly liquidation under a solvent-wind down strategy. This will protect deposits and set the stage - together with the backstop that the European Stability Mechanism provides to the Single Resolution Fund (SRF) -- for the transformation of the SRF into the Single Deposit Guarantee Scheme (SDGS). To avoid forbearance, responsibility for emergency liquidity assistance (ELA) should rest, not with national central banks, but with the ECB as a single lender of last resort. Finally, national deposit guarantee schemes should function as institutional protection schemes and become investors of last resort in their member banks. Together, these measures would complete Banking Union, promote market discipline, avoid imposing additional burdens on taxpayers, help untie the doom loop between weak banks and weak governments, strengthen the euro and enhance financial stability.

Suggested Citation

  • Huertas, Thomas F., 2021. "Reset required: The euro area crisis management and deposit insurance framework," SAFE White Paper Series 85, Leibniz Institute for Financial Research SAFE.
  • Handle: RePEc:zbw:safewh:85
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    References listed on IDEAS

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    1. Franke, Günter & Krahnen, Jan Pieter & von Lüpke, Thomas, 2014. "Effective resolution of banks: Problems and solutions," SAFE White Paper Series 19, Leibniz Institute for Financial Research SAFE.
    2. Emmanuel Farhi & Jean Tirole, 2018. "Deadly Embrace: Sovereign and Financial Balance Sheets Doom Loops," Review of Economic Studies, Oxford University Press, vol. 85(3), pages 1781-1823.
    3. Angeloni, Ignazio (ed.), 2020. "Beyond the Pandemic: Reviving Europe’s Banking Union," Vox eBooks, Centre for Economic Policy Research, number p327, July.
    4. Martin F. Hellwig, 2018. "Valuation reports in the context of banking resolution: What are the challenges?," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2018_06, Max Planck Institute for Research on Collective Goods.
    5. Huertas, Thomas F., 2020. "Plug the gap: Make resolution ready for corona," SAFE White Paper Series 73, Leibniz Institute for Financial Research SAFE.
    6. Thomas F. Huertas, 2011. "Crisis: Cause, Containment and Cure," Palgrave Macmillan Books, Palgrave Macmillan, edition 2, number 978-0-230-32135-9, November.
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    Keywords

    Deposit Insurance; Crisis Management; BRRD; Resolution;
    All these keywords.

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