Proceedings of the 47th International Academic Conference, Prague

TOOLS FOR THE RESCUE OF BANKS IN CRISIS

ZSÓFIA KENESEY, TAMÁS KOVÁCS

Abstract:

The financial crisis of 2008 drew attention to the insufficient regulation of banks. Due to the bank failures taking place at different places of the world, the crisis significantly decreased the budgetary funds of the countries. Banks too big to fail that had extensively grown due to the previously used practice expected the governments of the countries in which they were established to save them from the money of the taxpayers. However, this process was not sustainable on a long term and mainly after the crisis, and induced the operators to develop a new solution. Not only new legislation was necessary, but new institutions had to be also set up. In the framework of the European Union, the reform was named banking union, and two of its three components, i.e. banking supervision and resolution, are intended to prevent bank failures, and one, i.e. deposit guarantee, is intended to mitigate the damages caused by the failure. This study presents the economic tools used to prevent the failure of banks in crisis, with special regard to the institutional system of resolution. Resolution is a tool for the restoration of the operation of an institution that is becoming or has become insolvent, with the intention to prevent the spread of the problem in order to make sure that the involvement of the institution paying funds in the case of the bank failure is not necessary and the society is affected by the situation to the minimum extent. The national resolution funds as well as the Single Resolution Fund of the EU have been established mainly to reduce the system risk caused by the so-called banks too big to fail, ensuring thereby the stability of the financial system.

Keywords: banking union, bank failures, too big to fail, resolution

DOI: 10.20472/IAC.2019.047.009

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