Guest lecture Flashcards
What were the major shifts in the treatment of banks during the financial crisis starting in 2008?
Before 2007, minimal state aid to the financial sector existed, but this drastically changed after the crisis erupted.
Governments intervened with taxpayer money to prevent the collapse of financial institutions, which were deemed critical to the functioning of the economy.
How did the sovereign bank spiral loop contribute to the interconnectedness of banking and sovereign debt crises?
The sovereign bank spiral loop describes a scenario where a bank in trouble receives support from the state, leading to increased sovereign debt.
This, in turn, raises the cost of borrowing for the government, which impacts the bank’s balance sheet due to its holdings of sovereign debt.
Consequently, this cycle perpetuates financial instability and can exacerbate both banking and sovereign debt crises.
What were the primary objectives behind the establishment of the Banking Union’s three pillars?
The Banking Union aimed to achieve several key objectives, including :
- Preventing fragmentation within the single market,
- breaking the link between banking and sovereign debt crises,
- restoring confidence,
- avoiding taxpayer-funded bailouts.
Additionally, it sought to address issues such as moral hazard and “too big to fail” by implementing a comprehensive regulatory framework.
How does the Single Resolution Mechanism (SRM) contribute to the resolution of failing banks within the Banking Union?
The SRM focuses on crisis preparation, prevention, and resolution of failing banks. It establishes a central authority, the Single Resolution Board (SRB), which works alongside national resolution authorities.
The SRB assesses banks’ resolvability, drafts resolution plans, and determines the application of resolution tools, such as bail-in, asset separation, and bridge banks, aiming to ensure financial stability and protect public funds.
What are the key components of a bank’s resolvability assessment?
A bank’s resolvability assessment involves analyzing its loss-absorbing capacity, separability of critical functions, and preferred resolution strategy.
Additionally, it includes evaluating financial and operational continuity in resolution, establishing information and communication plans, and soliciting the bank’s opinion.
This comprehensive assessment informs the development of a resolution plan tailored to the bank’s specific circumstances.
How does the use of precautionary recapitalization differ from liquidation aid within the Banking Union’s framework?
Precautionary recapitalization involves injecting capital into a solvent bank facing financial distress to stabilize its capital position and preserve financial stability.
This measure is subject to strict conditions and aims to address a serious disturbance in the economy while ensuring temporary and proportionate assistance.
On the other hand, liquidation aid is provided to facilitate the orderly wind-down of a failing bank, aiming to minimize disruption and protect depositors and creditors.
