Table of Contents

Financial Crisis Containment and Government Guarantees

Financial Crisis Containment and Government Guarantees

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Financial Crisis Containment and Government Guarantees analyses the international community’s commitment to forging enhanced, well thought-out, mechanisms for containing systemic risks in the context of a highly interconnected global financial framework which incorporates ongoing financial innovation.

Chapter 8: Extraordinary measures for extraordinary times and the need for effective bank resolution laws in Europe

Gillian G. Garcia and Maria J. Nieto

Subjects: economics and finance, financial economics and regulation, money and banking, law - academic, finance and banking law

Extract

In the fall of 2011, when this chapter was being prepared, a number of EU member states were struggling to overcome problems with their sovereign debt. Many of those problems were attributed to measures that they felt compelled to take during the financial crisis that began in 2007. During the two years beginning in October 2008, member states committed 39 per cent and expended 9.3 per cent of 2009 GDP levels in rescuing their banking systems. At the same time the crisis revealed an inadequacy of financial system safety nets, notably legal frameworks for resolving failed banks along with arrangements for funding bank resolutions. In Section I we analyse bank support operations by member states whose final cost to taxpayers is still to be determined. Section II summarizes the legal reforms that were undertaken in two EU countries that were seriously harmed by the financial crisis – Germany and the UK. The measures enacted were designed to better protect the public interest when banks fail in the future. Those countries led reform efforts whose spirit was eventually enshrined in the European Commission’s (EC) proposal for an EU framework for bank recovery and resolution laws, which explicitly sets out the following objectives: maintenance of financial stability and public confidence and a reduction or elimination of costs to taxpayers.

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