Cross-border resolution of failed banks in the EU: A search for the second-best policies

This paper analyzes the reasons for the failure of the multilateral resolution of EU cross-border banks such as Fortis. We argue that the pre-crisis regime based on soft law and voluntary coordination was unable to align the incentives of national authorities acting under the time pressure and uncertainty of a banking crisis. We ask whether this experience induced the Commission to propose reforms that would close the regulatory gap between integrated cross-border banks and national resolution regimes. Although, the Commission proposals submitted within a year of the crisis considered the more radical reform options, such as shifting the regime to the EU level or reorganizing cross-border banks so that they could be resolved on the national level, in the end the Commission supported the traditional reform path of deepening soft law and strengthening pre-crisis governance arrangements. At the same time, the new financing mechanisms introduced to stabilize the Eurozone can pave the way for the introduction of an EU-level bank resolution regime, when the next reform opportunity arises.