How to Make Cross-border Bank Resolution More Effective

Bank resolution is key to avoiding a repetition of the global financial crisis in which failing financial institutions had to be bailed out with taxpayers’ money. It permits the recapitalisation of banks, or alternatively allows them to be wound down in an orderly fashion without creating systemic risk. Resolution measures, however, suffer from a structural weakness. They are taken by nation-states with territorially limited powers, yet they target entities or groups with global activities and assets in many countries. Under traditional rules of private international law, these activities and assets are governed by the laws of other states, which are beyond the remit of the state undertaking the resolution.

I address this problem in a recent paper. I illustrate the conflict between resolution and private international law by using the example of the European Union, where the limitations of cross-border issues are most acutely felt. I explain the techniques and mechanisms provided in the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism (SRM) Regulation to make resolution measures effective in intra-Eurozone cases, in intra-EU conflicts with non-Euro Member States and in relation to conflicts with third countries. Besides this, I also throw light on the divergences and flaws in the BRRD’s transposition into national law. In this context, I discuss two recent cases, Goldman Sachs International v Novo Banco SA [2015] EWHC 2371 (Comm), and BayernLB v Hypo Alpe Adria (HETA case) Regional Court, Munich I, judgment of 8 May 2015, that have dealt with the recognition of foreign resolution acts. A brief overview of third-country regimes furthermore highlights the problems in obtaining recognition of EU resolution measures abroad.

I posit that regulatory cooperation alone is insufficient to overcome these shortcomings. I stress that the effectiveness of resolution will ultimately depend on the courts. Therefore, mere soft law principles of regulatory cooperation are insufficient. In my opinion, a more stable and uniform text on bank resolution is required, which could either take the form of a legislative guideline or, ideally, a model law. I submit that such a text could pave the way for greater effectiveness of cross-border resolution.

Matthias Lehmann is Professor at the University of Bonn (Germany) where he serves as Director of the Institute of Private International and Comparative Law.