The Banking Union’s resolution or liquidation approach

This paper argues that the Banking Union increased bank capital requirements and tightened crisis response policy instruments, favoring bank resolutions or liquidations, while hindering bank bailouts. This framework had significant fiscal costs and redistributive effects, as it led to the application of resolution or liquidation measures to technically solvent or even adequately capitalized banks, sometimes contributing to bank runs. The paper argues that the resolution instrument results in arbitrage opportunities that might discourage market-driven acquisitions of failing banks. Finally, it argues that this issue could be partly addressed through a well-designed public bailout instrument.