SAFE Policy Center: Proposal for a Layered Bank Resolution Scheme with Limited Joint Liability

Jan Pieter Krahnen, Program Director of the SAFE Policy Center, and Jörg Rocholl, President of the European School of Management and Technology (ESMT), present a compromise for the planned European bank resolution scheme (Single Resolution Mechanism (SRM)). In case of a bank resolution the liability for losses should first be allocated to a national fund. If losses exceed the national fund’s capacity, a European fund should come into play and provide additional funds up to a maximum amount. On the next layer the national budget should bear further losses which can be supported by the European Stability Mechanism (ESM) as a guarantor of last resort. This four-layer system ensures that, on the one hand, states are liable for their banks but, on the other hand, a European backstop is available if national funds are exhausted.

In its today’s issue, the German business daily “Handelsblatt” reported on the proposal by Krahnen and Rocholl: “Kompromiss für Bankenabwicklung – Finanzwissenschaftler schlagen eine Haftungskaskade vor“. The full proposal is available as SAFE White Paper No. 10.