Table of Contents

Research Handbook on Crisis Management in the Banking Sector

Research Handbook on Crisis Management in the Banking Sector

Research Handbooks in Financial Law series

Edited by Matthias Haentjens and Bob Wessels

In this timely Handbook, over 30 prominent academics, practitioners and regulators from across the globe provide in-depth insights into an area of law that the recent global financial crisis has placed in the spotlight: bank insolvency law.

Chapter 12: Bank structural reform: Too big to fail, too big to save and too complex to manage, supervise and resolve?

Alexandria Carr

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

Extract

Bank structural reform is the result of a global financial crisis which developed in the summer of 2007 and became obvious in the EU in the latter part of 2008. The EU Member States that share an economic and monetary union (‘the Eurozone’) began to appear particularly vulnerable: the Greek sovereign debt crisis became apparent in early 2010 and serious economic problems emerged in Ireland, Portugal, Italy and Spain. Fearing possible defaults, markets began demanding substantially higher interest rates for the bonds of these Member States with Spanish 10-year yields topping 7.5 per cent in the summer of 2012. A negative feedback loop between banks and their sovereigns began to be seen as the principal cause of the crisis: as banks are the major purchaser of sovereign debt, banking problems can jeopardise the fiscal position and sovereign debt problems can put banks at risk. As a result of this inter-connection, governments intervened to provide State aid to banks that were at risk of failing in an attempt to restore confidence in the financial sector and avoid a systemic crisis. Between 1 October 2008 and 1 October 2013 the European Commission took more than 400 decisions authorising State aid measures to the financial sector. Between 2008 and 2012, the overall volume of aid used for capital support (recapitalisation and asset relief measures) amounted to €591.9 billion. The guarantees and other forms of liquidity supports reached their peak in 2009 with an outstanding amount of €906 billion.

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