Legal Issues of Cross-border Bank Resolution in the EU Context

This paper analyses how the European Union (EU) dealt with its banking crisis specifically in the aspect of cross-border banking resolution. The first part of the paper presents that currently, there is a mismatch between the level of financial integration amongst cross-border EU banks and the fragmented regulatory setting it adheres to. However, there were at the very least, some form of harmonisation in terms of regulation and supervision in the EU. What was completely missing from the picture was any form of harmonisation for a resolution framework. In a highly fragmentised setting, it is hardly surprising that the response to the cross-border banks have been largely nationally dealt with as depicted by the case of Fortis. It looks at the problems that the EU is facing in the absence of a common framework for cross-border banking resolution and then studies the UK Banking Act which incorporates the Special Resolution Regime (SRR) which would allow it to take the necessary action in a swift manner in pursuance of maintaining financial stability. There are legal issues that have to be addressed especially since powers under the SRR would warrant an interference with shareholders’ and creditors’ right to property. To balance between the right to interfere and the protection of financial stability, this paper presents few safeguards which may counterbalance the nature of such intervention. For the second part, the paper will discuss the principles and designs of the framework taking into account experiences and relevant practical concerns. In the third part of the paper, the desirabilities of such a framework is discussed. Next, it moves on to the analysis of whether such a pan-European framework is feasible. This paper then attempts to address the practical and operational concerns (such as the institutional architecture, issues of funding and the concept of living will) for such a framework, taking into account the most recent development in the EU sphere. The fourth part of the paper addresses the possible steps to implementation and the cost of not having a pan-European framework. Lastly, before the paper is concluded, a short perspective on international experience is given, to discuss if any lessons maybe derived from the Asian Financial Crisis and in particular, the Malaysian experience. Finally, this paper concludes that the possibility of making this framework a reality will be highly dependable on political leadership and direction, as the concept of burden-sharing cannot work in the absence of discussing the issue on funding and an effective coordination mechanism.