The Financing of Problem Banks: Critical Issues and Challenges Ahead

Problem banks are those facing a crisis. In order for them to stand the negative impact of a crisis, some form of external support is typically needed. The legal framework provides different alternatives to finance a problem bank depending on the stage of the crisis, its seriousness, the size of the bank concerned and the availability of external resources. Among the main sources of financing are: (i) central bank’s emergency liquidity assistance (ELA) and, (ii) deposit guarantee schemes’ (DGSs) support. This chapter analyses these two main options looking at the legal framework in force in the European Union and pointing to the restrictions limiting the deployment of such sources of funding. In so doing, it tries to advance some ideas for reform proposals.